Fast-Food Chains In For Job-Loss Pain

Continuing job losses spell bad news for the entire restaurant industry, as consumers become more reluctant to spend, but some analysts say fast-food chains may be in for an extra helping of pain.

More so than sit-down eateries, fast-food restaurants cater to customers steeped in routine, whether they're picking up an Egg McMuffin at McDonald's Corp. (MCD) for breakfast on the way to work or downing a Burger King Holdings Corp. (BKC) Whopper sandwich during a lunch break. As those customers lose jobs, routines are shucked as those once reliable diners stay at home.

"There's a lot of folks that had a pattern of driving to the office, factory or plant who aren't doing that anymore," said Morgan Keegan & Co. analyst Robert Derrington.

Job losses are slowing, with Wednesday's Automatic Data Processing and Macroeconomic Advisers reporting the private sector shed 532,000 jobs in May, fewer than economists had expected. That's still over half-a-million people no longer making their commutes, creating a dreary employment picture and one factor restraining shares of fast-food chains this year.

Burger King and Wendy's/Arby's Group Inc. (WEN) are two of the worst- performing chains among restaurant companies so far this year, with shares down 29.6% and 18%, respectively. Both companies are struggling as they lose market share to category leader McDonald's, whose shares have lost a modest 2.2% so far this year.

The fast-food chains' share-price performance comes as their casual-dining counterparts are rallying, many off multi-year lows.

Operators of full-service restaurants, which include Brinker International Inc. (EAT) and DineEquity Inc. (DIN), felt the sting of job losses first, as consumers pared back higher-priced meals. Now that sales and traffic in their dining category have stabilized, fast-food is beginning to suffer, seeing its first quarterly traffic decline since 2003.

Fast-food operators are responding with value, with Burger King most recently starting to promote value items more heavily several months earlier than anticipated.

"In their defense, they have more robust value and dollar menus, which could protect them in this environment," Telsey Advisory Group restaurant analyst Tom Forte said