The golden arches of McDonald’s symbolize one of the greatest success stories in the history of franchising, and the quick-service restaurant category it spawned has grown to become a $170 billion business worldwide.
For a time, the fast food industry and its first cousin, the casual dining industry, seemed boundless, routinely clocking 14 percent growth per year. But this is the best of times and the worst of times for fast food restaurants as well as the broader franchised restaurant industry.
The problems are two-fold: One is economic, related in part to the recession and in part to an overexpansion of fast food and casual dining segments when the economy was good. The second, far more ominous problem, is political.
As the debate over health care reform heats up on Capitol Hill, the fast food industry has come under increasing scrutiny for its role in the health care crisis. The battle is not new. Consumer advocates and nutritionists have been waging a war against fat- and calorie-laden burgers and french fries for more than a decade.
For the most part, the industry has been able to contain the conflagration. When the industry was hit by a rash of class action “obesity lawsuits” in the earlier part of this decade, the Republican Congress quickly generated a bill banning the legal actions, which actually passed in the House.
Most of the lawsuits were settled out of court, and the industry paid lip-service to critics by offering a few more healthful menu choices, such as salads and apple slices. But the emphasis remains on food packed with fat and salt.
Meanwhile, industry-friendly Bush administration regulators didn’t lift a finger while obesity and diabetes rates soared — especially among children — and the nation consumed an avalanche of 1,200-calorie burgers. One burger alone contains almost the full daily allowance of fat and salt.
But the health care debate, Democratic control of Congress, and the arrival of Barack Obama in Washington have turned the tables on the industry. Lawmakers are seriously discussing taxes on unhealthful fast food and soda, restrictions on fast food advertising, and even a ban on fast food restaurants near schools.
To make matters worse, the Obama Federal Trade Commission is gearing up for another study of fast-food industry marketing to children. This month, the FTC asked for public input on the study’s parameters. The results will almost surely lay the groundwork for new legislation.
The debate seemed to hit a watershed two weeks ago, when The New York Times published a blistering attack on the industry by long-time critic Michael Pollan, a contributing writer for The New York Times Magazine and a professor of journalism at the University of California, Berkeley.
“One of the leading products of the American food industry has become patients for the American health care industry,” he acidly charged. He noted that the nation is spending $263 billion a year to treat obesity and diabetes and “hundreds of billions more” on cardiovascular disease and cancers linked to diet.
For far too long, Pollan argued, there has been a disconnect between diet and health. Indeed, the fast food industry has always had powerful special interest allies, mainly farmers and big agribusiness, to help it fight regulation in Congress.
But consumer advocates and nutritionists believe they now also have a big gun on their side — the health insurance industry. They see it playing the same role in the fast food debate as it did in the fight against the tobacco industry.
A patient with Type 2 diabetes adds $6,600 a year to their medical costs and as much as $400,000 over a lifetime, Pollan noted. “Insurers will quickly figure out that every case of Type 2 diabetes they can prevent adds $400,000 to their bottom line. Suddenly, every can of soda or a Happy Meal or chicken nugget on a school lunch menu will look like a threat to future profits.”
The political threat is the most serious the industry has ever faced. Even so, fast food franchises would still have a good chance of limiting the damage — in good times. But the recession has driven the industry into what one Wall Street analyst calls a “vicious, competitive, zero-sum game.”
While quick-service restaurants, or QSRs, such as McDonald’s, Wendy’s, and Burger King have held up as consumers trade down to save money on food, the recession has ignited frenzied, almost desperate competition in the franchised casual restaurant segment. Bennigan’s, Steak and Ale, and Village Inn have gone bankrupt, and Wall Street analysts expect a rash of other closures. Ruby Tuesdays, Chili’s, and TGI Friday’s are said to be facing “desperate times.”
To save itself, the casual dining segment, which has been hardest hit by the downturn and overexpansion, is increasingly encroaching on QSR territory. They are cutting prices, offering specials, and ramping up their burger menus. Other chains, such as Subway and Starbucks and even grocery stores, are trying to take a bite out of the QSR segment.
McDonald’s and other fast food franchises have had no choice but to fire back by offering up even bigger, juicer, and more calorie-laden “premium” burgers. McDonald’s has even armed its stores with espresso machines, serving McCafe coffee to counter Starbucks’ vast coffee selection.
McDonald’s rolled out its Angus Third Pounder Burger nationwide this summer. Burger King now offers a similar Steakhouse XT Burger, and according to reports, Wendy’s plans to launch its answer, a massive “Bacon Deluxe” premium bacon cheeseburger, in the near future.
The burgers are designed to counter casual dining’s encroachment, and frankly to give customers what they want. But McDonald’s Angus Bacon & Cheese Burger contains 790 calories with 145 mg of cholesterol and 2,070 mg of sodium, according to USAToday. The Steakhouse XT Burger contains 970 calories, 135 mg of cholesterol, and 1,930 mg of sodium.
In other words, when push comes to shove on the economic front, the industry’s only answer is to double down on fat and calories, all of which can not bode well in its fight against regulation on Capitol Hill.