BY Momei Qu:

Contributor, Stock Traders Daily

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(La Jolla, CA)  There were some that didn’t mind seeing money-tight consumers think twice before making a trip to an upscale sit-down restaurant. The fast food sector has done quite well throughout the economic downturn as consumers traded in 5-course meals for dollar menus – until now. With rising unemployment this quarter and continued instability in the overall market, fast food restaurants are finding out that their low prices aren’t low enough. And existing customers are heading towards competitors that are trying to outdo one another with price promotions.

McDonald’s Corporation (NYSE: MCD) announced last week that it plans to offer a new $1 menu for select breakfast items following recent sluggish sales. On Tuesday, the fast food giant reported that sales at U.S. restaurants fell 0.6% as competitors Burger King and Wendy’s / Arby’s launch their new items such as the $1 double cheeseburger and the $2.99 deluxe meal, respectively. Sales were also hurt by the overall economy. Breakfast, where McDonald’s leads in market share, is often the first to be cut out of the customer’s eat-out budget. This marks the second straight month that McDonald’s has seen a drop in established U.S. restaurant sales.

They are not the only ones struggling. Yum Brands (NYSE: YUM), which owns numerous fast food restaurants including KFC, Taco Bell, and Pizza Hut, announced Friday that sales trends across all regions have worsened. U.S. sales are expected to fall 0.8% in the fourth quarter, with their top three restaurants mentioned above all expected to underperform the industry and experience single to double digit declines.

Burger King (NYSE: BKC) has seen traffic improve substantially since launching their $1 double cheeseburger promotion in October, accordingly to several Wall Street analysts. However, their increased popularity has come at the price of decreased margins and discontent from franchises who say Burger King has no right to set maximum prices. Nevertheless, analysts believe that the add-on purchases generated by the promotion combined with a decrease in beef prices will push Burger King towards profitability.

Wendy’s / Arby’s (NYSE: WEN), who has been trying out new ways to emerge as a leader among the fast food giants, are testing 14 new products including wraps, salads, and burgers. They are also planning to bring back their breakfast offerings after extensive product testing. The restaurant’s latest offer on low price items is a twist on the traditional dollar menu – the Deluxe Value Menu. By offering customers the choice of a double cheeseburger or crispy chicken sandwich with a small fry and drink for $2.99, Wendy’s / Arby’s is hoping to boost sales of side items instead of only the $1 individual selections.

So what should you as an investor do in light of these new price wars among fast food restaurants? For the short term, margins will be tight and there will be pressure to continue launching new products and promotions to keep on top of competitors. If you do decide to invest in the fast food industry, it is important to do your research on the specific company. For example, McDonald’s and Yum Brands may have suffered declines in U.S. restaurant sales, but their global markets appear more promising. McDonald’s reported global store sales increased 0.7% and Yum Brands expects its restaurants to grow 15% in China, where KFC and Pizza Hut are fast food leaders. The dependence on foreign sales also means that the weakening dollar is favorable to their bottom line. Burger King and Wendy’s / Arby’s have gained significant traction with their new product offerings and promotions, and both trade at a discount according to Wall Street analysts. This may be a good time to invest, however whether or not they can build up their brand to compete with market leader McDonalds remains to be seen. There are risks and upsides in every investment, and investors should thoroughly evaluate the opportunity. Our free trading reports can be one resource to help you in your decision. To view trading reports on any of the companies mentioned in this article and more, click on the company’s ticker here: MCD, YUM, BKC, WEN.

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