Fast food returns to playing offense
Aggressive words such as arsenal, ammunition, entrench often pop up in business discussions, but read through the recent quick-service restaurant earnings calls and it’s clear the segment is again marching to war. Now, however, QSR is on the offensive, taking share back from fast casual and further eroding casual dining traffic.
Since peaking in the first quarter of 2015, the restaurant industry overall has gotten soft—really soft. Both comparable sales and traffic trends have fallen to levels not seen even in the months ahead of the Great Recession.
Many factors contributed to the decline. Analysts point to a changing consumer who has less time and too many restaurant options (and more every day). There’s also increased competition from grocery and convenience players as they elevate their food and look to increase their own traffic. And then there are the disrupters of meal kits and delivery that are chipping away at traditional on-premise dining.
The traditional quick-serve restaurant segment has been one of the few bright spots during the decline, showing yet again it has the staying power, the clout and a huge amount of power over the restaurant industry at large.
Strong legacy players
Same-store sales for QSR overall hovered around 0.8 percent. Although that’s nothing special, it’s well above the industry average of negative 0.4 percent seen in business services and benchmarking firm BDO’s quarterly Restaurant Scorecard for the third quarter of 2017.
When digging in, the legacy players are well above that. Burger King reported same-store sales growth of 3.9 percent in the third quarter and a 10.6 percent overall sales growth. Yum saw same-store sales grow 3 percent across Taco Bell, KFC and Pizza Hut.
Those players are growing even as the overall industry stays flat. If the industry is growing at just 1 percent (according to research firm The NPD Group) market share is coming from elsewhere in the industry, namely fast casual and casual dining.
The first reason for that performance is convenience.
“The new currency is time. No matter what kind of restaurant you are, table service or counter service, you need to be able to work on the customer expectations of time,” said Wallace Doolin, founder and chairman at research firm TDn2K. “I think QSR players are doing a better job of automating and leveraging technology than others.”
While kiosks might not be clicking, automation in the back of house, drive-thru technology and digital ordering are speeding things up depending on the market.
With very low unemployment and rising wages, the workforce is changing.
Bonnie Riggs, director and analyst in NPD’s foodservice practice, said more women in the workforce drives the desire for convenience even further.
“You saw it in the ‘80s and ‘90s going up, up, up; there was such a close correlation with that and the growth of takeout and drive-thru traffic,” said Riggs. “Now it’s beginning to surge again. That will provide a greater need for convenience.”
Convenience and real estate go hand in hand. While everyone else fights for an OK location, traditional QSR players are generally already in great locations. Large, sophisticated QSR operators also have the money and clout to find a spot in all the new developments happening across the country.
While every franchise has remodeling schedules built into the franchise agreements, those of sophisticated (and well-funded) consolidators among legacy brands speeds things up.
Many acquisition deals include aggressive remodel schedules and new-store development.
Burger King is largely finished with a remodeling push, and Wendy’s, Yum and Del Taco and others are in the midst of major renovations. And McDonald’s demonstrated that no restaurant is sacred, razing the iconic “Rock and Roll” McDonald’s in Chicago and the very first franchise in Des Plaines, Illinois, to modernize the brand.
Some may mourn the nostalgic vinyl seats and drab exteriors, but the general consumer thinks the highway-adjacent drive-thru is looking pretty attractive.
“People that had written them off in the past are thinking about revisiting them. And they are providing a better experience than before,” said Dustin Minton, co-lead of the restaurant practice at BDO, about fast food places. “So I think the perception has changed a bit.”
A 10 percent rise
Consumers bring a lot of money back to those renovated restaurants. After a redesign, locations see sales rise from around 10 percent all the way to the 25 percent rise in volumes seen at freshly renovated Wendy’s restaurants. It’s much more than a fresh coat of paint. Remodels put speed, convenience and inviting design at the forefront. Most newly remodeled McDonald’s and Burger Kings include dual drive-thrus, kiosks and other convenient perks such as reserved mobile-ordering parking spots—all of which enhance the convenience.
Innovation is another longtime QSR tactic, but one just has to look at Arby’s or Taco Bell’s line of unique and attention-grabbing options to see how the QSR segment has pushed innovation further.
“I think innovation is huge, just to keep things interesting. A lot of people like the same thing; they go to their favorite places. But there are people that want to try the new thing, so innovation keeps that person coming back,” said Minton.
And it’s not just Fruity Pebble Shakes or Doritos taco shells; QSR continues to innovate across the menu, sourcing better ingredients that further blur the line between QSR and fast casual.
‘A big tailwind’
Liz Williams, current CFO and soon-to-be president of Taco Bell International, said the blend of value and innovation is something few brands can do well. “I think that’s a big tailwind, there are very few people who can go capture value and innovation and really build upon both,” said Williams.
Of course, the most powerful weapon in the QSR arsenal is price. Value is something that consumers are gravitating to more and more according to TDn2K’s Doolin.
“As we’ve gone through this year, the value scores have become much more correlated with sales and traffic winners. So there’s something going on with the consumer about value that the QSRs are tuning into and doing quite well with,” said Doolin.
As fast casual exploded, the big brands took a small step back from deep discounting to upscale their offerings. But not anymore. The segment has already outlined the strategy for 2018: all-out blitz.
“QSR strayed away from that strong value and moved to trying to compete with fast casuals. But in the meantime they ignored lighter buyers and middle-income diners who can’t afford to go out as much as they’d like to,” said Riggs. “We hadn’t even reached 2018 and the shoe had already dropped in terms of the value wars beginning.”
That’s not to say QSRs didn’t raise prices, though. Menu prices ticked up just behind inflation numbers—2 percent here and 2 percent there—allowing fast-feeders to capitalize on regular and premium offerings as discounts bring in traffic. Now they’re ready to take even more.
‘Others will have to follow’
McDonald’s fired the warning shot for 2018 with its $1 $2 $3 Menu consisting of 12 items with a tiered price point. Taco Bell announced it now has 20 items on its $1 menu.
Wendy’s announced plans to expand its popular 4 for $4 menu, too.
KFC and Popeyes Louisiana Kitchen already feature combos for around $5. But the industry can expect all those deals to get more aggressive as the brands fight for traffic.
“To compete, others will have to follow suit,” said Riggs.
This year may prove to be a banner year for QSR’s oldest players and a good reminder that just when QSR looks to be on the ropes, the category bounces back.
Discounts rile Subway operators
The consumer may be the only real winner in the coming price war. A large group of Subway franchisees is even trying to stop the company from running a $4.99 Footlong Faves discount, a deeper discount than the typical $6 Footlong and the well-known $5 Footlong discounts.
More than 900 franchisees have signed a petition criticizing the deal slated to run in January and February.
While many of the traditional QSR players are largely consolidated, with most restaurants in the hands of a few operators, Subway is not. Despite having more than 26,000 locations, the brand’s largest franchisee controls about 400 locations. That’s a few hundred fewer locations than the largest Burger King or McDonald’s operator and there’s only a handful of such large operators. So while a 600- or 700-location operator in a traditional QSR can make discount margins work across many locations, it’s much harder for small operators in the Subway system.
Franchisees behind the petition believe that “this constant deep discounting has been detrimental to the brand—as well as restaurant profitability—as it has caused customer confusion over the lack of a consistent value message, has devalued our product, has conditioned our customers to become even more price sensitive, and has contributed to the erosion of other brand attributes such as “Health” and “Product Quality,” according to the petition.
Subway fired back with a detailed note, rationalizing the discount as the “best short-term option” to reinvigorate traffic, which has fallen 24.5 percent since 2012. After traffic stabilizes, the brand seeks to look to innovation around a new wraps platform to keep customers coming back.
In the note, signed by Subway North America Regional Director Jack Luttrell, Subway called out McDonald’s as the chief competitor in pricing.
According to the note, because of the recent discounting by “primary competitor” McDonald’s, Subway’s perceived competitive price has fallen dramatically. The new QSR discounts could erode that further, along with Subway franchisee profits.