For leading restaurant chains, the past year was somewhat of a mixed bag. The overall foodservice industry didn’t perform as well in 2014 as it had in 2013, with declines partly attributed to the harsh weather that kept consumers out of restaurants. The good news is that the industry has continued to rebound from economic dips and is expected to gradually improve further in the coming years.
Growth within “Technomic’s Top 500 Chain Restaurants” list (ranked by U.S. sales) outpaced the growth of the restaurant industry overall, with cumulative 2014 US sales for the 500 largest chains rising by 4% and exceeding overall restaurant sales of 3.8%. In the $466 billion restaurant industry, unit growth was up 1.3%, while units were added within Technomic’s Top 500 ranked chains at a rate of 2.1%. A major positive is that overall growth in 2014 was higher than in 2013 (4 vs. 3.3%, respectively), illustrating the ability of the industry’s top players to steadily build on this foundation, as the economy continues to improve.
One contributing factor to the industry’s growth is consumers’ optimism about their economic futures, particularly those aged 18–34. These restaurant-goers continue to hold out hope for a thriving economy and their own financial situations in 2015, according to a semi-annual Technomic survey of 1,000 consumers. Compared with 2013, a larger proportion of consumers expects to spend more at restaurants and bars in the coming year. More than two-fifths of consumers expect their finances to improve in 2015, and nearly a third of consumers say their household will be able to spend more when they dine out.
These shifting sentiments translate into sales and traffic gains for restaurants that are specifically targeting a middle- to upper-income customer base. These companies are generally faring better, as they attract consumers who are in a prime position to spend more when dining out.
The patronage pattern of “trading up” from quick-service to fast-casual is still in play, and Technomic expects fast-casual’s success to continue for at least the next five years. At the same time, in the full-service arena, polished-casual and fine-dining concepts also have been flourishing as the economy has improved for the higher-income consumer set.
Limited Service Successes
When it comes to which restaurant segment is most sought by consumers, fast-casual’s grip is airtight, with continued progression and on-going interest from investors. According to the latest data from “Technomic’s Top 500 Chain Restaurants” report, fast-casual continues to be the industry’s bright spot.
Overall, the limited-service segment of the Top 500 makes up $200.6 billion in sales, 15% of which comes from fast-casual chains; fast-casual’s share of units is about 12% of a total 191,597 limited-service units. Fast-casual was the driving force behind the 4.2% sales growth for Top 500 limited-service restaurants.
The fast-casual sub-segment continued its climb in 2014, as sales at these concepts on Technomic’s Top 500 list surged 13% to $30 million, an increase from the previous year’s 11% sales growth. It also added units, growing 9% to total more than 22,000 stores. The growth is seen across menu categories, but especially in burger and sandwich concepts.
Fast-casual, better-burger players—including Smashburger, boasting a 24.8% increase from 2013 and a sixth-place rank on the list of fastest growing LSR chains with more than $200 million in sales—have honed the craft of creating high-quality burgers at a price that keeps consumers coming back. Not to mention BurgerFi, The Habit Burger Grill, MOOYAH and Shake Shack—all fast-casuals capturing the top spots for fastest growing limited-service restaurant chains. All of these brands’ increases in growth hover around 40%, except for BurgerFi with its whopping 110.8% growth rate.
In the limited-service sandwich sector, three of the top five players— Jimmy John’s Gourmet Sandwiches, Jason’s Deli and Firehouse Subs—are fast-casual concepts. Jimmy John’s and Firehouse Subs saw sales and unit growth rates in the double digits in 2014. Both are also among the fastest growing limited-service sandwich concepts, joined by fellow fast-casuals Zoë’s Kitchen, Jersey Mike’s Subs and Which Wich Superior Sandwiches.
Successful sandwich concepts in limited-service have led the way, like other fast casuals, with a high-quality, premium product and convenient service. They also have launched new and simplified meal deals that create an even better value for customers.
Many of these fast-casual chains have experienced success thanks to their build-your-own style, an element within fast-casual that is evolving and growing rapidly: Fast-casual concepts that allow guests to build their own dishes with visible preparation areas performed even better, growing 23% in 2014, despite these formats making up just 23% of fast-casual chains.
Today’s consumers are much more engaged with the food they eat and exert more control over what they order at restaurants. The service models that have brought the kitchen out in the open succeed by emphasizing fresh ingredients and offering a transparent preparation process.
In addition, another limited-service segment has emerged that is building on fast-casual’s success with consumers, combining the convenience and price point of a quick-service restaurant with the food quality of fast-casual. Technomic is calling this rising segment QSR Plus, with players Chick-fil-A, Potbelly Sandwich Shop, Freddy’s Frozen Custard & Steakburgers, In-N-Out Burger, Pita Pit, Culver’s and El Pollo Loco. Collectively, this group grew annual sales by 9.2% in 2014, including a 9.6% gain at Potbelly and an 8.5% increase at Pita Pit. More chains are expected to build on the fast-casual revolution and move into this “in-between” space to offer consumers value at an attractive price point.
Beyond fast-casual, one of the biggest LSR stories from this year’s report was Starbucks’ dethroning Subway for the No. 2 spot, propelled by Starbucks’ and other coffee cafés’ ability to meet the needs of consumers with a propensity for 24/7 snacking. Millennials, more than any other generation, are snacking more frequently than two years ago. Starbucks’ La Boulange food lineup has helped improve its food offerings alongside its already strong beverage program.
Starbucks enjoyed an 8.2% growth in sales, while Dunkin’ Donuts and Tim Hortons increased sales in 2014 by 6.2 and 8%, respectively. Coffee cafés are likely to continue to grow, with improved food offerings and a constant focus on convenience and throughput for their large group of regular customers.
Progress in Full-Service
The full-service segment comprises 32.8% of Top 500 chains with $73.8 billion in sales, representing a 3.6% increase in annual sales from 2013. Fine-dining shines again in the full-service segment of the industry, with Top 500 concepts growing sales 6.9%, a rate higher than the average (3.6%), as well as casual-dining (3.5%) and midscale (3.2%) sub-segments.
Fine-dining concepts also added units at a rate of 2.9% in 2014, while Top 500 casual-dining and midscale chains saw unit growth rates of less than 1%. Among the various menu categories, steak houses and varied menu concepts have fared the best, both growing faster than the segment’s average 3.5%.
Top 500 full-service restaurants with a steak focus grew annual sales 5.5%, led by Texas Roadhouse with sales up 9.7%. Fine-dining standout Fogo De Chão, a Brazilian-style steak house, increased sales 17.1% for a fifth-place rank of fastest growing full-service chains. The category’s improvements beyond steak have aided its growth: adding new flavors with infused butters, sour creams, dressings and sauces; driving between-meal traffic with enhanced bar and happy hour menus; and improving midday options to cater to the lunch crowd.
Varied-menu concepts grew 4.7%, helped by strong sales at Buffalo Wild Wings (up 16.7%). Smaller brands are growing quicker than mainstays like Applebee’s and Chili’s Grill & Bar. Del Frisco’s Grille was ranked the fastest growing varied-menu chain, growing at a rate of 58.2% with just 16 units (a 45.5% increase from 2013). These and other varied-menu brands have captured consumers’ interest with their beer programs and have driven loyalty through apps, events and specials.
Struggling Chains
Restaurants like Starbucks and Culver’s cannot experience this growth without taking market share from others. Emerging from this year’s data is a theme of smaller chains taking share from large chains, like Burger King (1.6% growth), McDonald’s (-1.1%) and Wendy’s (-0.4%). These three burger behemoths in particular have been adding menu items at a rapid pace over the past several years, expanding their focus further away from core offerings, at the risk of hindering the speedy service for which they’re known.
The trend continued in the sandwich menu segment, as Subway toppled from its No. 2 spot on the list, with annual sales falling 3.3% in 2014. The original build-your-own chain has been inching up prices closer to what fast-casuals charge, while keeping freshness and quality mostly the same. This provides an opening for fast-casual fresh sandwich chains to step in to meet emerging consumer preferences. Subway remains the largest chain in terms of units, with more than 27,000 in the U.S. alone, but the quick-service sandwich shop may have reached its peak with units beginning to cannibalize one another.
In the full-service segment, seafood and Italian/pizza menu categories have been hurt by high price points and competition, respectively. Three of the five major seafood players saw sales drop in 2014: Red Lobster (-0.5%), Joe’s Crab Shack (-3.3%) and McCormick & Schmick’s (-6.1%). The Italian/Pizza category overall declined 0.4%, as competition has heated up, particularly from fast-casual pizza chains.
Looking Ahead
A number of insights can be gleaned about consumers and their evolving preferences from a look at which restaurants are growing and those remaining stagnant. One major trend is healthfulness; for consumers today, that means antibiotic-free meat, fewer additives and genetically modified foods, and local and sustainable sourcing. Consumers’ preferences in these areas are leading to an elevated quality of the supply chain, and restaurants at the forefront, including Chipotle, are benefit by adhering to and touting these practices.
Consumers, especially younger diners, also value restaurants that engage in socially responsible practices; leftover food donation programs can drive traffic, especially in the limited-service segment, where three out of five consumers would support concepts that provide edible leftovers to nonprofit organizations. Consumers also are increasingly more concerned with the pay and treatment of workers, adding an element that goes beyond environmental responsibility. So far this year, McDonald’s has pledged to raise wages at its company-owned stores, and Chipotle recently announced sick time, paid vacation and tuition reimbursement for part-time employees. The clamoring for higher wages will present challenges to operators across segments.
The outlook for the industry is that small is in, based on the decline in sales of the industry’s largest chains. This means smaller units with narrowly focused menus and leaner staffing with increased reliance on technology—although a backlash may be brewing from consumers who want to unplug and be waited on. This dynamic will continue to be challenging for operators who must find ways to meet the needs of consumers with diverging preferences, based largely on generational differences. Younger diners demand speedy, high-tech service with a heightened experience from music and visuals.
The restaurants that continue to be successful and stand out among the vast foodservice options are those that find a way to provide value to consumers in their own terms.