Applebees, McDonalds, Fast Casual and Cheaper Lattes

For whatever reason -- not because I like the food, not because I hang out in restaurants located in shopping mall parking lots -- I've been following Applebee's attempt to rise out of the current casual dining slump. And that has me following the trials and tribulations of the fast casual restaurant segment. Weird, huh?

A little background: Earlier this year, Applebees agreed to acquired by IHOP. There has been some recent news about that deal closing. One proxy advisory firms recommended that shareholders approve the deal. Another one recommended shareholders to reject the deal. Finally, on October 30th, Applebees shareholders approved a $1.9 billion sale to IHOP.

A few weeks back, the New York Times carried an article about Applebees' new ad campaign. The chains' comeback, says the Times, "starts with a sass-talking apple." The apple is a plain apple with the voice of comedian Wanda Sykes. There are a bunch of video shorts on YouTube -- mock apple spokesperson auditions, for example -- and the Applebees website has a page dedicated to the auditions.

As I read the article, my initial thought was that Applebees needed something more than a new ad campaign. What about the menu? The Times has some info. The new menu will "retake ownership of grill and bar classics." Employee uniforms will be updated to look more modern and nearly all of the chain's 2,000 locations will be renovated. IHOP just announced a new menu yesterday: BBQ chicken and ribs, grillied tilapia hollandaise and some pancake-related items.

Interesting comment from an analyst at RBC Capital Markets about Applebees' main competiton: "Fast food has become what we are calling ‘fast casual. They’ve stretched the top end of their check average with better, healthier products and better environments, and it’s really eating into the casual-dining lunch period."

But fast casual has a big problem: Revenues are slipping and the competition is heating up. (The result of higher gas costs says this report at NPR.) Just yesterday I saw a report that some fast casual chains are giving out coupons/discounts to get people in the door while they're out shopping for Christmas presents. (It was on CNN, and I can't find a link to an article.) Interpretation: The scramble for fast casual dining dollars is so intense that restaurants are willing to get into a pricing battle...and those rarely have a happy outcome.

Where are all those former fast casual diners going? If an article in today's Wall Street Journal is any indication, they're going back to McDonalds. An since an expensive item at McDonalds is still cheaper than a reasonably priced item elsewhere, McDonalds sees some room for prices to creep upward and will introduce high-margin coffee drinks to not only bring in some Starbucks customers but to soak up some of those dollars that have migrated away from the likes of Applebees.

"Cash-strapped diners who have cut back on sit-down meals are defecting to the Golden Arches for $1.49 chicken snack wraps and $1 sundaes. ...

In 2008, the food chain plans to significantly increase drink offerings at its U.S. locations, a move that could put lattes, cappuccinos and smoothies in thousands of its restaurants. Janice Fields, chief operating officer for McDonald's U.S. restaurants, says it will be its largest single menu initiative since introducing breakfast in the 1970s.

The program amounts to a bet that middle-class consumers still want to splurge. In test markets, McDonald's has priced espresso drinks including caramel lattes and iced mochas near $3. That is cheaper than at Starbucks, but higher than much of the rest of McDonald's beverage offerings."