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Are the Days of Kids' Meals Numbered?

Posted
8/1/2013 1:50:00 PM
By: Minyanville
Referenced Stocks:BKW;COKE;MCD;WEN;YUM

Taco Bell ( YUM ) recently announced its intention to discontinue kids' meals, effective immediately at some locations and in early 2014, at others. Though some health food advocates are applauding Taco Bell's move, the shift isn't actually an attempt to make a health statement -- kids' meals are simply not lucrative.

In the press statement, Taco Bell said that "kids' meals are not part of Taco Bell's long-term brand strategy and have had an insignificant impact on system sales." USA Today reports that kids' meals accounted for just .05% of Taco Bell's annual sales.

Regardless of the reason, Taco Bell is one of the first major fast food chains to move away from the very big business that is fast food kids' meals. According to the Federal Trade Commission report "Marketing Food to Children and Adolescents: A Review of Industry Expenditures, Activities, and Self- Regulation" quick service restaurants (QSRs) spend about $583 million marketing to youth each year. The return on investment? The data confirms that about $1.2 billion meals are sold annually to kids under the age of 12, accounting for 18% of all QSR visits.

Clearly, there's a profitability aspect to kids' meals. But exactly what role do kids' meals play in growth strategies for QSR brands?

Richard Yoo, the VP & Innovation Manager at Mattson, the largest independent developer of new products for the food and beverage industry, consulted with McDonald's ( MCD ) on its menu items for more than a decade. He explains that, although the initial idea behind McDonald's kids' meals was to provide a menu item that was both enjoyed by children and affordable for parents, it was a pioneer move to include a toy with a Happy Meal, and doing so took the brand to the next level. According to the FTC data noted above, 56% of fast food restaurants now include a toy with kids' meals, though McDonald's and Burger King ( BKW ) are the clear market leaders in the premium space. One of the challenges QSRs face in the battle to offer the best toy, is of course, cost: About $341 million per year is spent on child-directed premiums and licensing deals associated with kids' meals.

For that reason, Yoo sees the role of the kids' meal toy at a tipping point; he explains that although McDonald's is actually the largest distributor of toys in the world -- even beating out Toys R Us -- the tactic isn't a slam dunk. Wendy's ( WEN ), for example, once included educational toys with its kids' meals, but eventually walked away from that strategy.

In light of the economic downturn, Yoo says the QSR industry must meet the demands of value-oriented post-recession customers who have realized that they can buy the same food sold as a "kids' meal" from single items on a value menu, often for a lower cost. When the difference is $1 or more, the toy simply isn't enough to lure them to purchase the kids' menu. (In the case of Taco Bell, eliminating the kids' menu is to the brand's advantage: Its kids' meals cost about $2.84. The same items, sold à la carte, cost about $3.17.)

Yoo also notes the QSR industry faces heightened pressure in light of statistics around childhood obesity, and the comparatively unhealthy nature of fast food kids' meals. McDonald's and Burger King, for example, are the only two fast food brands that have voluntarily made a committment to the Children's Food and Beverage Advertising Initiative (CFBAI) to restrict their marketing to children to only messages that direct toward healthier items. (Non restaurant companies like Coca-Cola ( COKE ), PepsiCo (PEP), General Mills (GIS) have done the same.)

But now that fruit, yogurt, and milk are more commonly offered as part of kids' meal choices, QSRs have the added challenge of remaining appealing not only to children and parents, but to their own internal cost strategies. The simple fact is, it's cheaper to offer a processed potato product versus fresh produce. To solve the problem, Yoo says some brands move to a offer a smaller fry size, for example, to boost the nutritional perspective, and offset the incremental costs associated with adding dairy and produce choices. Others may boost menu prices elsewhere.

Ultimately, Yoo says kids' meals are at an interesting point of challenge. Parents are more aware of what kids eat, and kids' tastes are changing.

In the case of Chipotle (CMG), for example, the brand message is "food with integrity." That message prevails in their kids' menu, which includes the option of a "build your own taco kit" with a choice of three fresh ingredients, a cheese quesadilla with a side of rice and beans, or a taco with a side of rice, in addition to fresh chips, and juice or organic milk. The brand also backs its commitment to wellness with philanthropic efforts like "Veggie U," a classroom garden partnership. So far, the sparse menu and focus on quality appears to be successful.

Yoo says the kids' meal will continue to be a "dual decision" between child and parent, and indeed, can be a critical step in a QSR's ability to build return visits, and loyalty. While he doesn't see the end of the kids' meal toy coming to a complete end, he does predict that food may become a greater draw over novelty, and that QSR kids' meals, which have long suffered from a "sea of sameness," will begin to break out of the mold.

Twitter: @WellnessOnLess