As I mentioned earlier, CKR has said that it will not respond to the current value menu movement and stated on its last conference call that it will in most cases stay away from the bottom feeder $0.99-product person, which isn't [their] bailiwick.

In conjunction with that comment, the CEO said that he is more focused on driving sales than he is on traffic as traffic is not a measure of customers. It's not a customer count mechanism. It just tells you how many transactions you had during the day or the year so if you and I go into lunch together and I say, I'll buy, that's one transaction although it's two customers.

He went on to say, I think transactions are really not all that relevant and almost a misnomer. I am more concerned with how many people we have in the restaurants and how many transactions we ring up on the register. By the time, the CEO ended his longwinded response, we were not exactly clear on what he was saying, but in our view, it is never a good idea to move your focus away from driving traffic, and in today's current economic environment, that might mean driving more transactions at lower price long as the customers keep coming!

Taking the other side transaction counts is MCD. MCD senior management said on its last conference call that MCD took market share, and we measure that on traffic, as you know, not on sales. And our focus is on traffic, because that's the critical component. If we get them in the restaurants, we'll figure out how to get the successful average check from them down the road.

We understand that there needs to be a balance between driving traffic and discounting (and protecting margins), but we think MCD wins this argument with significantly higher average unit volumes.

CKR - Hardee's - Thumbing Its Nose

The current restaurant environment can be summarized by aggressive promotional activity from both the QSR and casual dining. As I noted yesterday, the trend continues into 2Q and appears to be intensifying, with deeper absolute discounts (buy-one get-one free) and now a number of free food offers (see previous nugget posting). I believe this level of promotion will continue, given the challenges restaurant operators have holding guest traffic.

With this thought in mind, CKE Restaurants put out a press release yesterday that said - Hardee's(R) announced that it is thumbing its nose at the current value menu movement by rolling out the ultimate premium burger, the Prime Rib Thickburger(R).

We've never been ones to follow the fast-food herd mentality! (It should be noted at this point that Hardee's has one of the lowest AUV in the industry).

So, while other places are hopping on the value bandwagon and, thus, promoting their smallest and lowest-quality menu items, we'll keep doing what we do best by giving our customers what they really crave: big, delicious, premium-quality burgers.
The small size Prime Rib Thickburger combo featuring Hardee's Natural-Cut Fries and a drink will be sold at participating restaurants for $6.49. Prices may vary.

Research Edge thought......

The industry is a zero sum game and every restaurant company is in a battle for market share. Currently, Hardee's is losing market share. How is this going to help? At a $6.49 price point, Hardee's is priced in line with casual dining, with less value

For nearly the same price here are two examples of what you can get at casual dining:

Chili's - The Bottomless Express lunch - your choice of soup and salad, served with house-made chips & salsa as soon as you order, and all with unlimited refills.

Olive garden - Lunch entrees are priced between $6.00 and $9.00 and you get freshly baked garlic bread sticks and your choice of homemade soup or garden-fresh salad.

No wonder the big boys are all emphasizing value and convenience!

I can't wait to see how this one ends!

Champion/Sam's = Land Grab in Sporting Goods?

In yet another sign that mediocre apparel brands just can't cut it in this new environment, our sources suggest that Russell Athletic (owned by Berkshire/Hathaway) inked a deal to sell Sam's Club (WMT). While not a material event for either parent company, this does have implications for Russell's existing channels of distribution, and the brands with whom they compete.

Though not known to most Wall Street types as a performance brand of choice, we'd note that Russell has 5% market share of apparel in the sporting goods channel. This compares to Champion at 2%, 5% for The North Face, and 16% and 14% for Under Armour and Nike, respectively.

This smells a bit like when Liz Claiborne went down market to JC Penney with its 'Liz & Co' brand and then Macy's cut floorspace for the core Liz Brand by a third. Not a good trade.

We could see some brand rotation here, and suspect that Hanesbrands (owner of Champion) is licking its chops.

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Discounting - It feels like the early 1990's

We may be from the old school, but the move to value pricing is generally not a good trend...

What we learned today :
(1) Taco Bell's answer to its rat and E. Coli issues - discounting - Taco Bell on Thursday is rolling out its "Why Pay More?" value menu with 10 products

MCD - Trading Down

McDonald's senior management is on record saying that they are seeing more activity on the Dollar Menu, but it still remains consistent at 13-14% of sales. However, average unit volumes have improved significantly over the past four years so senior management's comments imply that there are significantly more customers using the Dollar menu.

It would also appear that management is very comfortable in the current environment growing traffic in its restaurants by using a value strategy. Management thinking here is that it's much harder to get customers to come back (from the likes of Wendy's, Jack in the Box, etc) than it is to keep them in the restaurant.

The question becomes at what cost?

This is where the friction between the franchisees and franchisor arise. Incremental Dollar menu transactions help revenues and transaction counts, but depress margins. Under this scenario the franchisors win at the expense of franchisees.

Since December 2007, McDonald's U.S. has seen a significant slowdown in reported same-store sales. Given the slowing sales trends and the increase in Dollar menu transactions, it's important to understand the components driving same-store sales. Until recently, menu prices were increasing faster than transactions. It's not inconsistent to think that the current economic environment coupled with the emphasis on value is causing transactions to grow faster than the average check.



German press printed an interview this morning of Nike Brand President Charlie Denson, who commented that a Nike 'takeover' in China could indeed happen.

While not a sensationalistic quote by any means, it was taken out of context. First off, the word 'takeover' has a different connotation in the US as opposed to Europe (also note that Germany is Adidas and Puma home turf). Nike does not do 'takeovers' as defined by a US audience. It might go hostile on offense from a brand and marketing perspective, but not from a strategic and fiscal perspective.

Also, Nike's strategy is to buy brands that get them to consumers that it can not touch (or does not want to touch) with its own Brands. I can't imagine that with the Nike Brand, Converse, Umbro, and Cole Haan, that Nike can't tap into its share of the 2.8 billion feet in China without having to add to its arsenal.

Could lower-end Li-Ning make sense strategically? Yes, perhaps given the delta in price points as Li-Ning price points are about half those of Nike. But the only reason Nike would do this now would be a defensive move to the extent that Adidas/Reebok attempted to scoop it up first. And even then I'm not convinced they'd go for it.

The punchline here is that the probability of Nike buying anything in China right now is very low in my humble opinion.

Clip below courtesy of StreetAccount.


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