SUBWAY GOES EXPRESS

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Chain restaurant brands are fighting an intense share battle and younger chains are gaining fast. Consequently, the industry's biggest players are being forced to find better ways to spend their marketing budgets.

Sales in the $278.9 billion restaurant industry grew 3.7% last year, but the 23.2% share held by the top 10 chains is the same as it was five years ago, according to Technomic's Top 100 report. But within the top tier, Subway Restaurants and Starbucks Coffee Corp. screamed up the ranks in 2002 to fourth and ninth place, respectively.

In 2002, Subway, owned by Doctor's Associates, jumped from seventh, eclipsing Yum Brands' Taco Bell, Pizza Hut and KFC. Starbucks last year made its debut in the top 10, up from 13th the prior year and passing Domino's Pizza, Triarc Co.'s Arby's, Berkshire Hathaway's Dairy Queen and Allied Domecq's Dunkin' Donuts. The coffeehouse chain was the eighth-fastest growing brand among all U.S. restaurants. Five years earlier, Starbucks was ranked 28th in the Technomic Top 100, when Dairy Queen and CKE Restaurants-owned Hardee's Food Systems were ranked Nos. 8 and 9.

TRYING TO STABILIZE YUM

While Starbucks' amazing success is inexplicable to many observers, the woes of Taco Bell, Pizza Hut and KFC were evident by their rankings. Pizza Hut, outflanked by competitors, over the five years fell to sixth place from fourth, while its fried chicken sibling dropped one place to seventh on encroachment in the chicken game by rivals from burger joints to pizza players. All three Yum Brand chains are getting more ad dollars this year to help turn the tide and Pizza Hut and KFC will focus on families.

Of the biggest brands, McDonald's, Burger King and Wendy's, each have held onto their first, second and third-place positions, but only Wendy's has taken a bigger bite of the market. Since 1997, as it struggled with a host of operations and marketing problems, McDonald's dominance in the category has eroded a half point to 7.3%. Burger King, whose former parent Diageo milked the chain to fund liquor acquisitions before selling it to Texas Pacific Group, showed a net decline in U.S. sales; its share fell to 3% from 3.6%. Conversely, Wendy's share has inched up steadily to 2.4% from 2.1% on smart marketing and new salads.

Over that same five-year period, Subway's sales have gained control of 1.9% of the category from 1.3%. Starbucks has nearly tripled its share to 1.1% from 0.4%. With each 1/10th of a percent of share worth $278 million, that's a lot of subs and coffee.

Surprisingly, few trends were evident in the leading restaurants' ad spending patterns.

Not surprisingly, the patterns of media spending as a percent of sales for the top 10 mimicked their market share trends. Restaurant marketers typically allocate between 1.5% and 5% of sales to their advertising budgets.

Where it gets interesting is in the chains' total advertising spending. In the period between 1996 and 1998, many of the leading restaurant chains saw their advertising spending reach all time highs, followed by a sharp drop in spending the year following their peak. Four chains showed dramatic increases in their media spending since 1997. KFC boosted its media by 33%, Wendy's by nearly 60%, Subway by 150%, and No. 8 Applebee's more than tripled its budget, up 244% over the five years.

WILD AD SWINGS

However, as they've given up market share, McDonald's and Burger King have shown wild swings in measured media spending in recent years. The Golden Arches spending in 2001 grew 9% over four years to its $635 million measured media peak. But last year, McDonald's spending fell 13% to $548 million, while its ad spending as a percent of sales has steadily declined to 2.7% from 3.4% five years ago. Burger King in 2001 cut spending by 30% to $298 million, but as it dressed up for sale last year, the chain upped its spending 12% to $335 million. Both McDonald's and Burger King say ad spending will be flat in 2003.

"It's curious to see that the companies that are struggling are the most erratic at marketing," says Alan Hickok, restaurant analyst for U.S. Bancorp Piper Jaffray. "For investors accustomed to looking at short-term trends, that kind of volatility is never rewarded by investors," he says. "It's the steady Eddies that let you sleep better at night."

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