Fast-Food Price Wars

I'm sure you know that prices have been rising lately. Stocks are slumping in the sputtering economy -- Citigroup (NYSE: C) and Boeing (NYSE: BA), for example, have each fallen more than 20%, year to date. Even fast-food establishments are feeling the pain, because the economic climate is having an effect on how many people dine at them.

Consumers are looking for relief, and restaurants want to deliver compelling values. That's nothing new -- it's the reason many of them created "value" menus some years back -- but as the costs of ingredients rise, it's hard to keep a double cheeseburger priced at $0.99. So here's what some establishments are doing these days to scratch out an advantage:

• Yum! Brands' (NYSE: YUM) Taco Bell unit is now offering more items -- such as the Big Taste Taco and Cheesy Double Beef Burrito -- for $0.79, $0.89, and $0.99. Those prices significantly undercut the dollar menus at McDonald's (NYSE: MCD) and Burger King (NYSE: BKC).
• Wendy's (NYSE: WEN) is also saying "Take that!" to its bigger burger rivals by offering a new "Double Stack" cheeseburger for $0.99.
• Yum! Brands unit KFC recently unveiled a new value menu in some parts of the country. The menu features various items costing $0.99 to $1.99.
• There are also efforts afoot to steal some market share from competitors. Burger King and McDonald's are touting coffee drinks, for example, while Starbucks (Nasdaq: SBUX) is offering breakfast fare.
• Restaurants are also tweaking their existing menu items to shave off some of their costs. McDonald's, for example, has been experimenting by cutting the number of cheese slices in its double cheeseburger from two to one.

So what should you do as an investor? Look for companies that defend their profitability as they compete effectively against their rivals. Burger King, for example, has been posting solid revenue gains for awhile now, and it has extended its hours, too. Along with McDonald's, it has been reporting strong same-store-sales figures globally. Starbucks, meanwhile, has been struggling. It's shutting hundreds of stores and laying off thousands of employees.

Smart investors will watch how companies react to a changing -- and challenging -- economic environment. If you do that, you'll already have an advantage. The fates of fast-food companies, and their reactions to the current climate, can tell you quite a bit about the best investment opportunities in this sector.