State of the U.S. Foodservice Industry
— July 2009 —
Bob Goldin
Executive Vice President
(312) 506 3936
rgoldin@technomic.com
Table of Contents:
Introduction .............................................................................. 1
Macro Environment.................................................................. 2
Jenny Anderson
Manager, Special Projects
(312) 505 5877
janderson@technomic.com
Update on U.S. Consumer: The New Frugality ..................... 7
U.S. Foodservice Industry Performance Overview ............ 10
Technomic, Inc.
300 South Riverside Plaza
Suite 1200 South
Chicago, Illinois 60606
(312) 876 0004
www.technomic.com
Restaurant Channel Trends & Dynamics ............................ 17
Beyond Restaurant Segment Trends & Dynamics ............. 23
Health & Nutrition Trends Impacting Foodservice ............. 26
Sustainability Issues in Foodservice ................................... 30
Operator Tactics to Cope With Recession .......................... 33
Supplier Support Needs ........................................................ 37
Conclusion.............................................................................. 39
Appendix: Web Contacts for Major Companies.................. 40
Introduction
Bord Bia has commissioned Technomic to prepare semi-annual reports about the state of the U.S.
foodservice industry. The purpose of these reports is to provide Bord Bia’s members with intelligence
about the operating climate for the U.S. foodservice industry and the impact on operators and suppliers.
Given the recession (which is the most challenging economic environment since the Great Depression of
the 1930s), this report focuses heavily on the current climate, which is proving to be a “game-changer” for
foodservice and other industries that rely on consumers’ discretionary spending.
The key objective of this report is to present an overview of the macro environment, consumer attitudes
and behaviors, foodservice industry dynamics and critical trends poised to impact performance and
practices going forward. It includes findings gathered from an extensive collection of secondary sources
as well as non-proprietary Technomic research. It is organized as follows:
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Macro Environment
Update on U.S. Consumer
U.S. Foodservice Industry Performance Overview
Restaurant Channel Trends & Dynamics
Beyond Restaurant Segment Trends & Dynamics
Health & Nutrition Trends Impacting Foodservice
Sustainability Issues in Foodservice
Operator Tactics to Cope with Recession
Supplier Support Needs
Conclusion
Key definitions used in this report are as follows:
ƒ
Limited-Service Restaurants (LSR) – Establishments where patrons generally order or select items
and pay before eating. Food and drink may be consumed on-premise, taken out, or delivered to
customers’ locations. Check averages generally fall below $7. This segment consists of quick-service
operations and cafeterias/buffets.
ƒ
Quick Casual (QC) – A sub-segment of LSR, these establishments have limited- or self-service,
check averages between $7 and $10, food prepared to order, fresh (or perceived as fresh)
ingredients, an innovative menu suited to sophisticated tastes, and upscale or highly developed
interior design.
ƒ
Full-Service Restaurants (FSRs) – Establishments with a relatively broad menu along with table-,
counter-, and/or booth service and a waitstaff. These establishments offer meals and snacks for
immediate consumption primarily on-premise, though they may also offer takeout service. This
segment is composed of Midscale, Casual-Dining, Upscale Casual and Fine Dining restaurants.
ƒ
Midscale Restaurants (MSRs) – Full service and a moderate check average (generally $8-$12).
ƒ
Casual-Dining Restaurants (CDRs) – Full service, check average of $12–$20 and alcohol is served.
ƒ
Upscale Casual Restaurants (UCRs) – Full service, check average generally between $20 and $50
and alcohol is served. Lunch and dinner dayparts are emphasized and there is an adult focus and
upscale, contemporary décor.
ƒ
Fine Dining Restaurants – Also known as “white tablecloth restaurants,” these are restaurants with
an emphasis on dinner and check averages exceeding $50.
ƒ
Beyond Restaurants – Refers to foodservice operations found in non-commercial segments such
as Lodging as well as foodservice in supermarkets and convenience stores.
page 1
Macro Environment
This section provides an update on the macro environment and conditions impacting the overall climate
and consumers, we well as the foodservice and retail industries. Specific reporting includes:
ƒ
Gross Domestic Product
ƒ
Disposable Personal Income
ƒ
Consumer Confidence
ƒ
Employment
ƒ
Gasoline Prices
Like all major industries in the United States, the overall health and growth of the U.S. economy affects
the success of the food industry. There are numerous metrics used by economists to track general
conditions and expectations for the economy. Important indicators include Gross Domestic Product
(GDP), disposable personal income (DPI), and overall employment levels.
Foodservice industry growth is affected by each of these (and others), but correlates particularly
strongly with employment and DPI because when consumers feel positive about their employment
situation and have more discretionary dollars, they are more likely to “splurge” on activities like eating out.
When they are anxious about the outlook for jobs, they are more likely to save money and cut back on
these types of expenditures.
Gross Domestic Product
Gross Domestic Product (GDP) is a key measure for the overall health of the economy and refers to the
market value of all final goods and services produced in the U.S. in one year. It is also what economists
use to gauge growth of the economy and determine whether a recession has occurred. (Two consecutive
quarters of negative real GDP growth indicate a recession.) As can be seen from the following data, the
economy contracted sharply in both the fourth quarter of 2008 (down 6.3%) and the first quarter of 2009
(down 5.7%), ushering in a recession that is proving both deep and enduring.
GDP Quarterly Percent Change – Real vs. Prior Period
page 2
3Q
1Q '08
3Q
1Q '07
3Q
'06 1Q
3Q
'05 1Q
3Q
'04 1Q
3Q
'03 1Q
Source: Blue Chip Economic Indicators
1Q
2009
-5.7%
1Q 2007
0.6%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
1Q '09
2Q 2004
4.5%
The recession is expected to continue through the first half of the year. Blue Chip economists
expect GDP to begin rising in the second half of 2009, after another forecasted decline of 1.8% in the
second quarter.
Disposable Personal Income
Disposable Personal Income (DPI) refers to consumer income after taxes and it remains weak. For May,
it was up just 0.1% over the same period one year ago. Looking at the data below, recent spikes in DPI,
such as seen in April, correlate with lower taxes and government stimulus payments and support
programs, including unemployment benefits. Going forward, Blue Chip Economists forecast that DPI
will remain weak and for all of 2009 be up 2.1% over 2008. The forecast for 2010 is an increase of 1.8%
over 2009.
DPI % Real Change vs. Prior Year
May
2009
0.1%
Dec 2004
6.4%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
Apr
Jan '09
Jul
Oct
Apr
Jan '08
Jul
Oct
Apr
Oct
Jan '07
Jul
Apr
Jan '06
Jul
Oct
Apr
Jan '05
Jul
Oct
Apr
Jan '04
Aug 2005
-1.3%
Source: Dept. of Commerce
Related to DPI data, many consumers are now much more focused on saving after the financial crisis
brought declining values for their homes, stock portfolios and retirement funds. Consumers are now
rebuilding their reserves after years of free spending and most economists expect that Personal Savings
Rates will increase as people build their savings.
This tendency to save is expected to be lasting. The Personal Savings Rate has jumped to the highest
level since 1993 (6.9% in May). Going forward, it is likely to rise as high as 8%. Consumers remain
reluctant to spend, which will make economic recovery more difficult. According to government data,
Consumer Spending in May rose just 0.3% compared to April, even as some seniors received one-time
payments as part of the government’s stimulus plan.
page 3
Consumer Confidence
Consumer confidence is another strong indicator of the general health and strength of the economy and
is largely dependent on disposable personal income and employment. Like GDP and DPI, it is also
critically important to the foodservice industry. Simply put, when consumer mood is upbeat, they are more
likely to spend. When consumer confidence is low, as has been the case the last several months due to
concerns about the economy and employment prospects, many become more cautious in their
purchasing behaviors.
The chart below does express boosts in consumer mood for April and May, which was the highest level
the Index reached in eight months. It should be noted, however, that this still represented very low levels
on a historical basis. Compared to readings from 2006 through much of 2007, Consumer
Confidence has plummeted more than 50 points and in February reached an all-time low of 25.3.
Conference Board research in May found that consumers were considerably less pessimistic than earlier
in 2009 with an expectation that business conditions, the labor market and incomes will improve in the
coming months. Consumers’ outlook also improved. Based on The Conference Board’s Expectations
Index, fewer consumers expected business conditions to worsen in the next six months and there was a
sense that the worst of the economic crisis has passed. The June reading, however, brought another
drop in optimism, again due to concerns about employment. The expectation among those surveyed by
the Conference Board is that there will be less negative conditions in the months ahead though growth is
not in the foreseeable future.
Consumer Confidence
Jul 2007
111.9
Index
June
2009
49.3
120
100
80
60
40
20
Source: The Conference Board
page 4
Apr
Oct
Jan '09
Apr
July
Oct
Jan '08
Apr
July
Oct
Jan '07
Apr
July
Oct
Jan '06
Apr
July
Oct
Jan '05
Apr
July
Oct
Jan '04
July
Apr
Jan '03
0
Employment
The deteriorating employment picture is weighing on all consumers’ minds and significantly
impacting their spending. As can be seen, the number of employed people in the U.S. steadily declined
through early 2009. The unemployment rate reached 9.4% in May.
Household Data
Total Population Employed
000s
May
2009
140,363
Jul 2007
147,315
148,000
Jan 2004
136,924
143,000
138,000
May
Jan '09
Sep
May
Jan '08
Sep
May
Jan '07
Sep
May
Jan '06
Sep
May
Jan '05
Sep
Jan '04
128,000
May
133,000
Source: Bureau of Labor Statistics
More troubling is that these figures do not take into account the many people who have seen their hours
cut or their pay reduced. Beyond the formally defined unemployed, there are several more Americans
who are what is considered “under-employed,” meaning that they have taken on part-time positions even
though they would prefer full-time work or they have become frustrated in their job search and given up
looking. In May the percentage of Americans who could be classified as underemployed was 6.8%
meaning that in total 15.9% of Americans were not fully employed.
Concern about employment prospects is now nearly universal in the U.S. As consumers lose jobs, see
their paychecks shrink or worry that impending layoffs may impact them in the future, many are
sacrificing or reducing discretionary expenses like eating out.
page 5
The other important figure tied to employment is restaurant employment. As a measure of the health of
the industry, it telling that while operators now have a larger pool of good-quality talent due to the
rising unemployment rate, they have not been hiring for the last several months.
Restaurant Employment Growth
% Change from Prior Year
Aug 2007
4.1%
May
2009
-0.9%
Mar 2007
0.7%
5%
4%
3%
2%
1%
-1%
Apr
Jan '09
Jul
Oct
Apr
Jan '08
Jul
Oct
Apr
Jan '07
Jul
Oct
Apr
Jan '06
Jul
Oct
Apr
Oct
Jan '05
Jul
Apr
Jan '04
-2%
Source: Bureau of Economic Analysis
Gasoline Prices
One last important factor that significantly impacts discretionary spending in the U.S. is gasoline prices
given that so many rely on their cars. When prices nearly doubled last summer, this was an issue
that took on urgency because many restaurants were hurt as consumers spent more money filling
their gas tanks. Adding pain to the situation for operators, transport costs for deliveries became much
more expensive, and many distributors implemented fuel surcharges. While gas prices dropped late
last year, they are once again creeping upward and may once more impact foodservice spending
for already-strapped consumers.
Gasoline Costs per Gallon in Dollars
Jun. 08
$4.11
$4.50
$4.00
May
2009
$2.29
$3.50
Jan 2004
$3.00$1.61
$2.50
$2.00
page 6
Apr
Jan '09
Oct
Jul
Apr
Jan '08
Oct
Jul
Apr
Jan '07
Jul
Source: Energy Information Administration
Oct
Apr
Jan '06
Jul
Oct
Apr
Jan '05
Oct
Jul
Apr
Jan '04
$1.50
Update on U.S. Consumer: The New Frugality
As consumer dynamics evolve and change so too does the food industry. To shed light on the potential
impact behind these shifts, this section highlights the latest trends of note and underlying implications.
The most pressing issue today is rising frugality in response to the recession. Technomic has
conducted extensive research in this area and it is clear that consumers’ values and attitudes about
consumption and spending have changed, likely long-term.
New Economic Realities
The financial crisis and resulting recession have been a shock to the system and many consumers in all
income brackets are finding that their feelings of personal economic security have changed. Asked to
describe their financial situations, nearly three-quarters of respondents (73%) indicated that they are
“getting by” or “struggling.”
Personal Financial Situation
% Indicating
Getting By
52%
Struggling Comfortable
21%
27%
Source: Technomic Consumer Survey, May 2009
page 7
Changed Attitudes
Many realize they need to change their financial philosophies and are more committed to saving money.
Correlating with recent gains in the Personal Savings Rate, the vast majority (87%) agreed that they need
to save more and spend less. This was up substantially from a December 2008 Technomic survey when
75% agreed.
Those efforts to save money are typified by the fact that most consumers (90%) now consider themselves
to be bargain hunters. This is not surprising given the unprecedented deals and discounts now being
offered by restaurants and retailers. Price sensitivities have changed for the long-term, and possibly
permanently for some. It will take much more to entice consumers to spend for a long time to
come, especially now that an orientation toward value offerings and discounts has become
engrained.
With this new sense of frugality consumers are increasingly willing to make trade-offs and this includes
some foodservice occasions. Coffeeshops, bars and clubs, and upscale restaurants are among the things
that many consumers are willing to sacrifice as part of their efforts to be more budget-conscious.
Plan to Do Less of/Not at All This Year
Have regular beauty/
spa service
78%
Take foreign vacations
78%
Buy watches, jewelry, perfurme, etc.
74%
Use home service providers
73%
Visit coffee shops
72%
Go to bars/clubs
71%
Eat at upscale restaurants
71%
Source: Technomic Consumer Survey, May 2009
page 8
Restaurant Usage Will be Impacted
Consumers are also changing their general foodservice behaviors in significant ways. More than threequarters (76%) indicate that they plan to change the way that they use restaurants in the coming year.
Scaling back frequency of their visits, spending less and seeking out less-expensive venues and menu
items are all strategies consumers will employ as they cut back restaurant spending.
% Indicating
Stop Going
Same
to All
Frequency,
Restaurants
Less
4%
Expensive
8%
Same
Restaurants,
Spend Less
10%
Nothing Will
Change
24%
Special
Occasions
Only
19%
Same
Restaurants,
Less Often
35%
Q: Regardless of the economy, what best describes your plans for using restaurants this year?
Source: Technomic Consumer Survey, May 2009
Beyond these measures, many will also order fewer “extras” like appetizers, desserts and
alcoholic beverages, all items that contribute strongly to operator profit margins. Stronger
suggestive selling tactics will be required to entice consumers to purchase them and operators may look
to suppliers for stronger promotional messages.
Even as operators introduce new products with growing frequency, consumers are keeping a tighter grip
on their wallets and will increasingly expect “more bang for the buck.” This will likely be a long-term shift
and while their perceptions of value will be dominated by price, portion size, premium ingredients and
distinctive offerings will also continue to play a role in defining value for some consumers.
page 9
U.S. Foodservice Industry Performance Overview
This section presents an overview of the key performance trends and dynamics influencing the
foodservice industry. Specifically, this section highlights:
ƒ
Technomic’s updated industry forecast
ƒ
Same-store sales trends
Technomic Forecast Revised Downward
Technomic released its latest foodservice industry forecast in May. Based on current conditions, 2008
and 2009 will be the worst-performing years for foodservice since the firm began tracking performance in
1972.
U.S. Foodservice Industry Forecast (May 2009)
Segment
Total Restaurants and
Bars
Limited Service Restaurants
Full Service Restaurants
Drinking Places
Total Beyond Restaurants
Retail Hosts
Supermarket Foodservice
Convenience Stores
All Other Retailers
Travel & Leisure
Recreation
Lodging
Airlines
Business & Industry
Education
Primary/Secondary Schools
College/University
Healthcare
Hospitals
Long Term Care
Senior Living
All Other
Vending/Office Coffee
Service
Military
Corrections
Other Locations
Total Foodservice
Share of
Retail Sales
Equivalent
2008
Share of
Operator
Purchases
2008
Nominal Growth
2008
0.6%
2009 (F)
68.8%
60.3%
31.2
29.8
7.9
31.2%
5.3%
2.9
1.7
0.7
9.7%
3.6
5.5
0.5
2.5%
4.8%
2.7
2.0
3.5%
1.6
1.1
0.8
5.6%
29.1
26.2
5.0
39.7%
7.7%
4.7
2.2
0.8
8.9%
3.4
4.8
0.7
3.8%
7.0%
4.1
2.8
4.9%
2.1
1.6
1.2
7.5%
3.2
-2.5
3.5
0.8
4.0
6.0
2.0
0.0
-1.7
-1.0
-1.0
-15.0
-3.0
4.9
4.5
5.5
3.2
2.8
1.8
6.0
-1.9
1.5
-7.5
0.0
-3.0
1.2
2.5
1.5
-5.0
-9.8
-6.0
-12.0
-10.0
-7.5
3.2
3.0
3.5
1.1
0.6
0.0
3.5
-3.6
4.1
5.3
-3.0
-5.0
0.6
0.7
0.2
0.9
1.0
0.3
0.0
3.0
1.0
100.0%
100.0%
0.7%
Source: Technomic, Inc.
Note: Nominal growth assumes inflation rate of 4.4% for 2008 and 2.5% for 2009.
page 10
2.4%
Real Growth
2008
-3.6%
2009 (F)
-4.8*
-1.2
-6.6
-0.9
-3.5
-0.3
1.5
-1.8
-4.2
-5.8
-5.2
-5.2
-18.6
-7.1
0.5
0.1
1.1
-1.2
-1.5
-2.5
1.5
-6.0
-7.1
-1.0
-9.8
-2.4
-5.3
-1.3
0.0
-1.0
-7.3
-12.0
-8.3
-14.1
-12.2
-9.8
0.7
0.5
1.0
-1.4
-1.9
-2.4
1.0
-6.0
-0.5
-1.0
0.0
-4.2
-1.3
-3.3
-2.9
-1.5
-2.4
-2.6%
-3.6%
-5.0%
-7.3
Forecast Highlights
On the positive side, final figures for 2008 total industry sales were revised upwards slightly from
January projections due to the fact that Limited-Service Restaurants actually performed better than
expected. On a nominal basis (i.e., not adjusted for last year’s inflation rate of 4.4%), total foodservice
sales for last year rose 0.7% over 2007. The Restaurant & Bars segment, which accounts for roughly twothirds of industry sales, grew 0.6% while sales in the Beyond Restaurant segments increased 0.8%.While
nominal growth was achieved in 2008, these figures still represent historical lows. Further, taking a
look at real growth rates that do factor in inflation, nearly all segments of the industry showed declining
sales for the year.
Looking ahead, 2009 will bring significant declines as the current economic slump impacts foodservice
as never before, though menu price inflation is expected to moderate considerably (dropping to 2.5%
versus 4.4% for 2008). Limited-Service, which managed to outperform expectations for 2009, will also
likely start to see more weakness as the unemployment rate continues to climb and consumer trade-down
reaches its peak.
Looking at prospects for some of the specific segments (which will be touched on in more detail
throughout this report), noteworthy observations include:
ƒ
Limited-Service is holding up best among the restaurant segments as some operators have found
ways to successfully leverage consumer demand for value by proving that they now offer improved
quality compared to the past at the same affordable price points. The slightly more upscale QuickCasual operators in particular are benefitting from consumers trading down from Full-Service
restaurants. However, another increase in the federal minimum wage in July 2009 (an 11% increase
to $7.25 per hour) will put additional pressure on these operators going forward. Many will focus on
efficiencies to offset cost increases. McDonald’s for example is expanding drive-through lanes and
using more efficient drink dispensers to streamline service. Others, like Burger King, are resorting to
new higher-margin items, such as its Burger Shots mini burgers.
ƒ
Within Full-Service restaurant segments, the Fine-Dining sub-segment is another that is severely
challenged. Many of these chains are reporting significant double-digit declines in their same-store
sales. Casual-Dining is also likely at a crossroads, which is significant because the Varied Menu
operators in particular represent some of the broadest menus and largest purchases in the industry. It
is likely that in the future, more Full-Service operators will focus on building takeout (which does not
require tipping) as opposed to eat-in occasions, resulting in demand for improved packaging and
products that travel well.
ƒ
Supermarket Foodservice has not benefitted from consumers cutting back on restaurant meals as
much as had been expected. That said, Technomic does remain bullish about opportunities in this
segment longer-term as retailers continue to improve their prepared foods and the convenience of
their in-store services.
ƒ
Convenience Stores also hold some good opportunities for foodservice suppliers and Technomic’s
forecast was revised upwards as these operators continue to expand their fresh foods and position
offerings like coffee, sandwiches and pizza as more affordable alternatives to limited-service
restaurants.
ƒ
The Lodging segment faces significant challenges in the short-term as businesses and consumers
scale back on travel. The midscale segment is the most strongly positioned. This includes the more
affordable properties like Holiday Inn and others, many of which also offer free hot breakfasts as an
extension of their value positioning. Banquet and catering operations, another area that has been
important in driving foodservice growth, are also suffering and putting pressure on the segment.
page 11
Unlike economists’ forecasts for the economy as a whole, foodservice recovery is expected to be further
delayed, especially if the employment situation continues to deteriorate and the unemployment rate
climbs. Technomic does not expect industry performance to begin improving until late 2009 or
early 2010 and does not anticipate that actual growth will resume until 2011. Operators are also
pessimistic about when recovery will occur. The majority of those surveyed by Technomic believe that
business will not bounce back until 2010.
One important positive relative to the outlook for operator performance is that food costs are
moderating for operators. Due to the recession, demand for many key commodities has subsided and
prices have fallen. Based on Technomic operator surveys, fewer are reporting that costs have risen
compared to the prior year. In the most recent May survey, 50% agreed that food costs have increased
compared to the prior year. (This compares to 68% in January and 86% in May 2008.)
Same-Store Sales Trends
Same-store sales (results from units open at least one year) are an important tool in determining the
health of the restaurant industry and individual concepts because this metric eliminates the impact of
new-store openings, which has been a key driver of U.S. restaurant industry growth for the last several
years. These results also reflect benefits from menu price increases. As such, same-store sales provide a
better reflection of how operations are fueling a chain’s performance.
Recent quarterly results from publicly traded chains reinforce how the different segments are faring in the
current environment. Overall, Limited-Service chains are managing to stay above water with their
stronger value proposition, while Full-Service chains are hurting and have seen negative
performance since early last year. Soft results for many major chains indicate that the restaurant
industry’s downturn does not yet show signs of abating.
.
Total Restaurant Same Store Sales
Percent Change vs. Prior Year
6%
4%
1Q 2009 DOWN 1.1% FROM 1Q 2008
3.8%
2.0% 2.3%
1.9%
2%
1.6%
0%
0.7%
0.5%
1.3%
0.1%
0.4%
-2%
-1.1%
-1.4%
-2.2%
-4%
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Source: Public Company Reports, Technomic
page 12
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
Limited Service Restaurant Same Store Sales
Percent Change vs. Prior Year
6%
1Q 2009 UP 1.0% FROM 1Q 2008
4.7%
3.6%
4%
3.1%
2.9%
3.8%
1.7%
2.4%
2%
1.4%
2.0%
1.4%
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
1.0%
0.7%
0%
Q106
0.8%
Q208
Q308
Q408
Q109
Source: Public Company Reports, Technomic
Full Service Restaurant Same Store Sales
Percent Change vs. Prior Year
1Q 2009 DOWN 3.2% FROM 1Q 2008
1.4%
2%
0.7%
0.7%
0.4%
-0.5%
0%
0.1%
-0.8%
-0.8%
-1.2%
-2%
-3.2%
-3.4%
-4%
-5.3%
-6%
Q2-06 Q3-06 Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 1Q-09
Source: Public Company Reports, Technomic
page 13
Individual Results Illuminate Both Bright and Weak Spots in the Industry
Looking at recent results from major individual publicly traded companies that rank within the top 100 U.S.
chains, it is evident that some have found more effective ways to navigate current challenges. Others are
having a difficult time as consumer demand diminishes and competition intensifies.
Limited-Service Performance
Some of the major Limited-Service chains are successfully tapping into consumer interest in value,
though others are showing the same weakness found in other areas of the industry. While franchised
Burger King units saw the strongest same-store sales performance for reporting chains in the most
recent quarter, McDonald’s remains a key model for best practices. Its same-store sales for both
domestic and international operations have increased nearly every month since mid-2003. While
competitors are closing units and seeking out ways to cut costs, the chain is currently gearing up for
major product expansions with its McCafe specialty coffee program and premium Angus burgers. It is also
aggressively marketing (especially the new coffee drinks) and maintaining capital expenditures, with a
good portion devoted to new construction that will add 650 units in 2009 compared to an average of 460
the past two years.
Limited-Service Restaurant Same-Store Sales
Percent Change vs. Prior Year
Limited Service
Positive
Burger King (Carrols Corp. units)
%
5.1%
Negative
Jamba Juice (company-owned
units)
%
-13.8%
McDonald’s (U.S. units)
4.7
Arby’s
-8.7
Tim Hortons (U.S. units)
3.2
Starbucks
-8.0
Pizza Hut (NPC Internationalowned units)
Einstein Noah Restaurant
Group
Chipotle
2.2
Carl’s Jr. (CKE)
2.1
Burger King
1.6
Sonic Corp.
-3.6
Hardee’s (CKE)
1.2
Qdoba Mexican Grill
-2.3
Wendy’s (franchised units)`
1.2
Pizza Inn Inc.
-0.9
Domino’s
1.0
Popeyes (AFC Enterprises)
-0.3
Panera (franchised units)
1.0
CEC Entertainment (Chuck E.
Cheese)
-0.1
Krispy Kreme
0.9
Jack in the Box
0.4
Panera (company-owned units)
0.3
Papa John’s (company-owned
units)
0.3
Papa John’s (franchised units)
0.3
Wendy’s (company-owned units)
0.3
page 14
-5.0
-3.7
Full-Service Performance
Same-store sales for Full-Service chains illustrate the struggles for many of these players as consumers
seek out more affordable alternatives, whether that means trading down to Limited-Service concepts,
purchasing prepared foods from supermarkets or doing more cooking at home. Many of the chains
posting positive (though relatively weak) results are in the Midscale segment, where price points
are lower. High-end concepts in particular are seeing substantial declines. Most notable are the high-end
steakhouses, many of which have resorted to steep discounts to lure diners.
One major exception to Full-Service struggles is Buffalo Wild Wings, which has found a way to resonate
with consumers even as they have grown more price-sensitive. Part of its successful formula is providing
a distinctive dining experience that differentiates its brand from others in the Full-Service field, while
maintaining a broadly appealing menu with ample variety and a strong adult-beverage (alcoholic drink)
program. The concept taps into consumer interest in customization, offering more than 10 different
sauces for its signature wings as well as burgers, sandwiches and other favorites in an atmosphere that
also offers entertainment in the form of televised sports and interactive games.
Also telling about the following table is negative results for several of the major Casual-Dining
players, many of which were once considered bright spots in the industry. Examples include Red Robin,
Outback Steakhouse, Ruby Tuesday, California Pizza Kitchen, Chili’s, The Cheesecake Factory,
Olive Garden and BJ’s Brewhouse.
Another ominous sign for Casual-Dining came in June when multi-concept powerhouse Darden, which
owns approximately 1,700 casual-dining restaurants under its Olive Garden, Red Lobster, Longhorn
Steakhouse, Capital Grille and Bahama Breeze brands, noted that it does not anticipate business
recovery this year. The Orlando-based company expects that blended same-store sales for its three
largest holdings (Olive Garden, Red Lobster and Longhorn) will, in the worst-case scenario, fall as much
as 2% or, at best, remain flat in its current fiscal year (which ends next May). This news is important
because Darden operates some of Casual-Dining’s strongest and most well-established brands and has
typically managed to outperform even as other competitors see negative same-store sales. As can be
seen in the following table, once-reliable chains like Olive Garden and Red Lobster are also now seeing
declines.
page 15
Full-Service Restaurant Same-Store Sales
Percent Change vs. Prior Year
Full Service
Positive
Buffalo Wild Wings (companyowned units)
Buffalo Wild Wings (franchised
units)
Steak ‘n Shake (company-owned
units)
%
6.4%
6.0
2.4
Negative
Morton’s Restaurant Group
Ruth’s Chris Steakhouse
(franchised units)
Ruth’s Chris Steakhouse
(company-owned units)
%
-24.1%
-23.0
-18.5
Golden Corral (Frisch’s)
2.3
McCormick & Schmick’s
-13.9
IHOP
2.0
Bonefish Grill (Outback)
-10.0%
Denny’s (franchised units)
1.4
Maggiano’s Little Italy (Brinker)
-9.5
Denny’s (company-owned units)
0.3
Outback Steakhouse
-8.4
Red Robin
-8.1
Carabba’s (Outback)
-7.3
Ruby Tuesday (companyowned units)
-6.8
page 16
P.F. Chang’s China Bistro
-6.6
California Pizza Kitchen
-5.9
Famous Dave’s of America
-5.5
Longhorn Steakhouse
(Darden)
-5.4
Chili’s (Brinker)
-5.2
Ruby Tuesday (franchised
units)
-5.1
On the Border (Brinker)
-5.0
Perkins
-4.9
Red Lobster (Darden)
-4.6
The Cheesecake Factory
-3.4
Applebee’s (company-owned
units)
-3.2
Applebee’s (franchised units)
-2.9
O’Charley’s
-2.9
Texas Roadhouse (franchised
units)
-1.7
Cracker Barrel
-1.5
Olive Garden (Darden)
-1.4
Texas Roadhouse (companyowned units)
-1.3
BJ’s Brewhouse
-0.1
Restaurant Channel Trends & Dynamics
The food and beverage industry continues to evolve. Consumer dynamics are changing, segments are
blurring and the channels are facing new demands. Several key trends are driving results in individual
sectors. The following presents an overview.
Limited Service
Quick Casual
ƒ
Limited-service chains are focusing heavily on value meals as competition has intensified. This ranges
from promoting “dollar menus” and items priced under $1 to sandwiches in the $5 range, such as
Subway’s hugely successful $5 Footlong promotion. At the same time that many are emphasizing bargain
prices, several operators are also adding more premium options at slightly higher price points to appeal
to consumers who are looking to trade down to less-expensive restaurant venues.
ƒ
In terms of popular concept positionings, segments that are performing well are those that appeal to
both consumer interest in value and freshness. This includes several sandwich chains (most notably
Subway). Specialty clusters like Beverage (which includes coffeeshops and smoothie-focused concepts)
and Snack (which includes several doughnut shops) are still growing but are being negatively impacted as
consumers turn away from small indulgences.
ƒ
Quick-Casual occupies a prime position for consumers who want to trade down from full-service
restaurants or trade up from quick-service for just slightly higher price points. According to research from
Technomic Information Services, the top 100 quick-casual chains in the U.S. achieved double-digit
growth in 2008, with sales up 10.8%. Strong concept clusters with the segment include Asian/Noodle,
Bakery Café, Mexican and Hamburger.
ƒ
Consumers have recognized that chains such as Panera and Chipotle offer high-quality food that is
perceived as fresher, with on-trend culinary influences and an appealing atmosphere. Adding to appeal,
they provide fast service (that does not require tipping) and lower prices than Full-Service alternatives.
Compared to many major Casual-Dining chains that have not been as effective in modernizing their
menus, many of the items offered by Quick-Casual concepts are more sophisticated and unique.
ƒ
This segment overall is not benefitting greatly from any trading down among consumers, though it
does have a good value orientation with an emphasis on large portions and affordable prices. It includes
the buffet concepts and comfort food specialists like Bob Evans and Cracker Barrel and remains rather
lackluster. There has been little innovation or major activity beyond the relative strength for the two major
players: IHOP and Denny’s. Both chains are striving to leverage their strengths, which include reasonably
priced menus and late-night hours. They are also trying to make their concepts more convenient and
contemporary by exploring faster service models and even takeout in some cases.
ƒ
Traditional Casual-Dining is at a crossroads. Many chains in this segment are experiencing steep
declines in performance. After years of steady price increases but little menu innovation to accompany
them, many consumers have recognized that these types of restaurants no longer represent a good value
for their dining dollars. This is particularly true in the Varied Menu cluster, which includes many of the
industry’s largest chains (e.g., Applebee’s, Chili’s, T.G.I. Friday’s, Ruby Tuesday). Many have now
resorted to steep discounting to drive traffic, raising concerns about longer-term profitability. Chains are
also now targeting new growth opportunities to strengthen performance. Some of these include lunch,
takeout and catering.
ƒ
Like Fine Dining, Upscale Casual concepts are also hurting. While they once they occupied an appealing
niche that allowed consumers to trade up from traditional Casual-Dining and enjoy high-quality food in a
sophisticated atmosphere without the perceived “stuffiness” of Fine Dining, concepts like The Cheesecake
Factory, Fleming’s Prime Steakhouse and Kona Grill are now seeing weaker demand as consumers
cut back on splurges.
ƒ
Weaker tourism, budget cuts for corporate entertaining and a consumer tendency to save money even for
special occasions are hindering this segment. According to Technomic estimates, Fine-Dining
restaurants may see their sales fall as much as 15% this year. Several operations have closed and
more will likely follow. Other operators in the segment are focused on reinventing their concepts entirely to
remain relevant amid changed consumer values and growing frugality (e.g., adapting more casual décor
and inexpensive menu items like pastas and less-expensive proteins).
ƒ
Many of the Fine-Dining steak chains are now offering unprecedented meal deals (e.g., a three-course
lunch at renowned steakhouse Morton’s for just $25 with choice of rib-eye, grilled shrimp and scallops or
grilled salmon as the main entrée and three-course dinners for $39.95 at Ruth’s Chris) and coupons (up
to $30 off the price of a meal in some instances). They are also emphasizing their bar area where
customers can come for a more casual and affordable dining experience. New specialty drinks, appetizers
and other casual food have been key to those efforts.
Midscale
Casual Dining
Upscale Casual
Dining
Fine Dining
page 17
Top 10 Operator Update
The leading chains have a tremendous influence on the U.S. foodservice industry. The top 100 alone
accounted for 54% of restaurant sales in 2008. Industry consolidation means that the leading players
continue to grow in strength and influence. This section highlights key activities by the 10 largest
operators (that also have international operations outside North America) in the following key segments:
ƒ
Limited-Service Restaurants
ƒ
Full Service Restaurants
Leading U.S. Limited-Service Chains
ƒ
As noted, McDonald’s is putting more money into expansion, store remodels and
advertising as it has almost completed rollout of its McCafé specialty coffee platform in the
U.S. Offerings include hot and cold specialty drinks like lattes and mochas. The chain is
aggressively and successfully marketing the drinks as a suitable substitute for more expensive
drinks at Starbucks and other traditional coffeeshops. After focusing on chicken products in
recent years, it rolled out a line of more premium Angus burgers in July 2009, giving
customers a chance to trade up to a larger third-pound patty made with premium beef at a
slightly higher price point of $3.99.
ƒ
Subway is another that has found a good formula for competing in a recessionary
environment. The chain increased its U.S. systemwide sales more than 17% last year, an
impressive feat for a chain of its size. Its limited-time $5 Footlong promotion earlier this year
was so successful that the offer was expanded from eight sandwiches to 20. The chain
already has an appealing “fresh” orientation compared to many fast-food alternatives and a
popular spokesman in Jared Fogle, who shed a substantial amount of weight on a selfdeveloped diet of Subway sandwiches, but it continues to focus on healthier alternatives.
Its most recent is Tuscan Chicken Melt that joined its Fresh Fit menu of six-inch sandwiches
that have nine grams of fat or less.
ƒ
Burger King has garnered attention with its edgy, humorous marketing spots targeting young
people but has recently seen same-store sales moderate. Management has admitted that the
chain was slow to promote value as other competitors marketed lower prices. The chain is
also requiring that stores remain open later to take advantage of late-night opportunities and
has developed a new concept called Whopper Bar for non-traditional sites such as airports
and casinos. Distinct from traditional Burger Kings, Whopper Bar specializes in customized
burgers with a choice of more than 20 different toppings.
ƒ
New products at its core restaurants have included a Bacon Cheddar Ranch Tendercrisp, a
more premium and higher-priced Steakhouse Burger with A.1 steak sauce, and two bite-sized
options: mini sandwiches called BK Burger Shots and BK Breakfast Shots (breakfast
sandwiches with egg, meat and cheese on a bun) The chain has also been adding new
broilers to its U.S. stores that will eventually allow them to prepare a wider variety of foods.
(Possible additions that have been mentioned include barbecue ribs, grilled salmon
sandwiches and steak kebobs).
ƒ
Starbucks has encountered some difficulties recently as the recession has made small
luxuries like its upscale coffee drinks a thing of the past for many increasingly cost-conscious
consumers and competitors such as McDonald’s, Dunkin’ Donuts and even convenience
stores have enhanced their efforts to target morning coffee sales. Over the last several months
it has been focused on boosting performance and profitability. Key to those efforts has
been overcoming its high-priced image. The chain has lowered prices on several of its more
basic drinks and also introduced a new bundling option called Pairings that provides combos
of its coffee drinks and popular breakfast foods for under $4. It has also revamped its food
program after discontinuing earlier versions of breakfast sandwiches last year. It is also
striving to bring back some of the experience that set it apart in its earlier days. It will now
grind and brew coffee throughout the day to bring more “theater” back to stores as well as the
fresh coffee aroma. It had been grinding beans only in the mornings. Earlier this year it
announced major layoffs and several store closures.
page 18
ƒ
Wendy’s merged with Arby’s this year after significant pressure from an activist investor. It is
undergoing a bit of a turnaround after lagging behind McDonald’s, Burger King and others in
terms of innovation in recent years. This year it shelved plans for a national breakfast rollout
and is turning its attention to chicken and specialty beverages to drive sales. More
specifically, it has rolled out Sweet & Spicy Boneless Wings, a premium product priced at
$3.99, as well as coffee-flavored frozen Frosty drinks.
ƒ
It is also planning a new signature burger a part of an effort to more strongly position itself as
a destination for premium menu items. Wendy’s has been testing 14 different products based
in part on customer feedback on how to revive the chain and reinvigorate its new-product
development process.
ƒ
Like others, Taco Bell is also broadening its menu and is reportedly testing tacos made with
shrimp and pork “carnitas” as part of a bid to offer more variety and maintain customer
frequency. Last month it rolled out a new mini menu highlighting spicy items. The Volcano
Menu has several boldly flavored options (many featuring a new high-impact Lava sauce).
ƒ
It announced that it will position its menu using a “barbell strategy” with higher-priced
premium items on one side and inexpensive value-oriented options on the other. One major
component of its value orientation is a “Why Pay More?” value menu rolled out last year that
introduced new lows to the Limited-Service segment’s “dollar” price wars. Offerings on that
menu range in price from 79¢-99¢, price points that are encouraging some customers to see
the menu as inexpensive entrees but others to view these offerings as sides to add on to other
meals.
ƒ
Pizza Hut operates in the very mature pizza segment and has implemented a few different
measures to stimulate interest and sales. The most major initiative is continued expansion of
a family-sized pasta line called Tuscani (e.g., Lasagna, Chicken Alfredo, Bacon Mac ‘N
Cheese). Introduced last year, Tuscani is now a $500 million business and accounts for
approximately 20% of the chain’s sales. To reflect its broader menu focus, which also includes
chicken wings that have been introduced at many locations in recent years, the chain has
tested use of the name “The Hut” in marketing efforts but notes it will not change the actual
concept name.
ƒ
It is also marketing more natural ingredients in its pizzas, specifically pizza sauce made with
all-natural ingredients and all-natural pepperoni and Italian sausage. This focus on natural
proteins from such a major chain may raise interest in such ingredients among other operators
as a means to convey higher quality.
ƒ
Pizza Hut has also entered the value wars and in June introduced a limited-time “Big Eat
Tiny Price” menu with four items starting at $5. The line-up includes a medium one-topping
premium Pizza Mia pizza; P’zone pizza that is folded over its fillings and baked calzone-style;
a Personal PANormous Pizza with one topping; and new Stuffed Pizza rolls with pepperoni
and cheese as well as marinara or ranch dipping sauce.
ƒ
Dunkin’ Donuts is committed to expansion despite the recession. In an interview this
month with The Boston Globe, new CEO Nigel Travis noted that the company recently opened
th
its 15,000 unit worldwide. He also commented that there are signs that its customers have
scaled back visits to its stores (e.g., one trip per week instead of two) and are also trading
down to less-expensive products, which is why it recently introduced a new breakfast wrap
for 99¢. The Wake-Up Wrap with egg and American cheese (also the first sandwich at the
chain to feature a tortilla) is part of its DDSMART menu of healthier alternatives and was
promoted as “Breakfast NOT Brokefast.”
ƒ
The chain also recently introduced Cinnamon Twist (a portable variation on cinnamon rolls)
and will be promoting its frozen Coolatta beverages (similar to a Starbucks Frappuccino) this
summer. It also reduced prices for its lattes at several East Coast stores this summer and
introduced a new campaign to promote its doughnuts after focusing much of its new product
development and marketing efforts on other new items to broaden its menu.
ƒ
KFC’s major initiative has been creating a more health-conscious image with the rollout of
its new grilled chicken offerings as an alternative to its signature fried products. Since the
grilled chicken was rolled out in April, management reports that both overall sales have been
up and sales of the new offering have been steady, though specifics were not been disclosed.
The chicken is also being credited with drawing repeat visits and plans are already in the
works for expanding it. The grilled chicken is priced the same as the fried chicken and the
chain’s signature buckets can now be ordered with a mix of grilled and fried chicken.
Depending on the piece, the grilled chicken has 70-180 calories and four to nine grams of fat,
while its fried chicken has 110-370 calories and 7 to 21 grams of fat.
page 19
ƒ
KFC has also tested halal meat in some London stores due to strong demand for such
products in that market but has no plans to offer it in the U.S. at this time. It does, however,
have a handful of franchisees in Atlanta and Chicago that offer halal menu items. (Halal
products meet Muslim dietary standards.) KFC is also embarking on expansion in the
United Kingdom and Ireland, planning 300 units in those markets over the next three to five
years. It will also refurbish many of its existing stores. There are currently 760 KFCs in the
U.K.
ƒ
Since its merger with Wendy’s, performance at Arby’s has slipped. The new management
team is planning several new products to boost results, including several built around sliced,
roasted meats. The centerpiece is a new collection of Roastburgers. The sandwiches use the
chain’s signature roast beef and are marketed as a healthier alternative to burgers. Besides
the oven-roasted sliced beef, the Roastburgers are topped with lettuce, tomato and onion and
served on a specialty roll with one of three toppings: All American (with ketchup, mustard and
secret sauce), Bacon Cheddar, and Bacon and Bleu Cheese with pepper bacon and bleu
cheese spread. It also recently added a Roast Chicken Club Sandwich with sliced ovenroasted chicken, fruit iced teas and reportedly has shakes in the works.
page 20
Leading U.S. Full-Service Chains
ƒ
Since merging with IHOP in late 2007, little has been revealed about new parent Dine
Equity’s plans to contemporize the Applebee’s brand, though it has been forthcoming about
its efforts to improve margins at the chain and has reported some success in this area. First
quarter results for Applebee’s improved thanks to food and labor cost management as well as
changes in menu pricing, according to analysts, though there is some concern as to whether
cost controls can be sustainable.
ƒ
Early this year, Dine Equity formed a purchasing co-op for Applebee’s and IHOP to more
strongly leverage the combined buying power of the two large chains and secure competitive
contracts for key commodities and other products. It expects the co-op to deliver savings of
3%-5% over the next several years.
ƒ
Like others in Casual-Dining, Applebee’s has been relying on deals to drive traffic.
Specifically it has offered a limited-time “2 for $20” menu multiple times, offering a choice of
one appetizer and two entrees. It offers a similar bundled option during the lunch daypart, with
a Pick ‘n Pair menu that allows diners to create a combo from a choice of soup, salad,
sandwiches and pastas Monday through Friday at prices starting below $6. As another sign
that approachable menu items and interesting twists on familiar favorites are proving a popular
focus for innovation, it has also introduced a new line of specialty burgers called Realburgers.
ƒ
Chili’s has seen its same-store sales slide in its last three quarters and has been focused on
affordability with new items. Besides a “10 Under $7” menu (that puts the concept at prices
similar to those of Quick-Casual chains), other new items have included Fire Grilled
Quesadillas.
ƒ
It has also been offering more rewards to members of its loyalty club, such as free chips
and queso with the purchase of an entrée.
ƒ
Red Lobster continues to rely on limited-time offers to draw traffic. Examples include its
popular Lobster Fest and wood-grilled entrees inspired by the flavors of the Mediterranean.
ƒ
Like Applebee’s, it has also been working to more effectively target the lunch opportunity,
rolling out a new Quick Catches menu earlier this year that includes eight items starting at
$6.99, all said to be “created with your busy schedule in mind.”
ƒ
Olive Garden has historically been a strong performer thanks to its strong value orientation
with the promise of free soup or salad and breadsticks along with a menu of broadly appealing
Italian favorites. Yet it too has seen its same-store sales fall in recent quarters and actually
turn negative in the last one.
ƒ
Like sister chain Red Lobster, it also continues to rely on limited-time offers, most recently
twists on traditional comfort foods with an emphasis on affordable pastas. Examples include
stuffed mezzaluna (a variation of ravioli), Chicken or Shrimp Carbonara with bucatini pasta,
and Grilled Steak or Chicken Crostada (both served with campanelle pasta tossed in a
pancetta bacon and cheese sauce).
ƒ
Outback is challenged by a heavy debt load. Parent OSI hired a turnaround firm in March
and announced last month that it would sell a controlling interest in its 35-unit Cheeseburger
in Paradise concept to the chain’s president.
ƒ
The steakhouse chain has been focused on discounting to drive sales. In March it debuted
a new menu with 15 meals under $15. It is also promoting variety beyond its signature steaks.
This winter it offered a seasonal menu with seafood items, specialty cocktails and desserts.
ƒ
IHOP appointed a new president this month. The chain has been emphasizing its strength
as a destination for all-day breakfast and abundant portions with new products like
strawberry-themed crepes, pancakes and stuffed French toast as well as Loaded Country
Hash Browns with different combinations of meats and cheeses served over hashbrowns,
along with two eggs and two pancakes.
ƒ
It has also been quietly testing a fast-casual concept called IHOP Café that appears to be
a potential vehicle for expanding in non-traditional sites. It features a downsized menu of some
of the most popular offerings from the core menu as well as coffee drinks, smoothies and
shakes.
page 21
ƒ
Denny’s has been focusing on connecting with young people and building its late-night
business with a “Rock Star” menu that features menu items developed by popular musicians
and based on what they crave after a performance. The menu is part of an All Nighter program
under which the entire dining experience at restaurants changes after 10 p.m. Staff are
allowed to wear more casual clothes and the music changes to alternative rock. The menu
includes several shareable options bridging both dinner and breakfast dayparts, with
items starting at $3.99. Current examples include a Band of Burritos option with two different
burritos, tortilla chips and ranch dressing and a “Sumwich” of French Toast filled with ham,
Cheddar cheese and eggs.
ƒ
The chain is also working to strengthen its appeal for families and other core customers and in
May introduced 16 new menu items, noting that it recognizes that money is tight and it must
lure customers by offering more than just competitive prices. To give them new and
interesting reasons to eat out, it responded with additions for all dayparts, such as Breakfast
Burritos, Prime Rib & Bleu Salad, a Chicken Melt, skillet dinners that include Monterey Sirloin
and Tilapia Ranchero, and a new Breakfast Roast Coffee.
ƒ
Denny’s has also been more aggressive in response to Limited-Service chains encroaching on
its breakfast business. It also has plans to expand a Fresh Express grab-and-go counterservice concept designed to build its takeout business. It also has plans to offer drive-thru
service and curbside pickup to position its restaurants as more convenient destinations during
hurried weekday breakfast occasions, which differ significantly from weekends when
consumers take more time to relax over the morning meal and indulge in egg dishes and other
treats.
ƒ
Like Chili’s, T.G.I. Friday’s has been focused on making stronger connections with its core
customers and has been enhancing its “Give Me More Stripes” loyalty club. Benefits for
its members have included free food, including chips and dip and hummus and chips,
desserts, and takeaway snacks such as its licensed Cheddar and Bacon Potato Skins
packaged chips. It has also offered members coupons for 1¢ appetizers and $1 entrees.
ƒ
The chain is also another that has offered deep discounts in the form of buy-one-get-one-free
coupons for entrees. This spring it also introduced nine new value-oriented salads and
sandwiches, offering them at a promotional price of just $5 for a limited time. All are complete
meals that also come with a choice of fries, potato chips or side salad. Another promotion
earlier in the year highlighted its 10 most popular entrees for $9.99, a discount of nearly 30%
in some cases.
ƒ
In June, the company also appointed a new executive to lead its international growth strategy.
ƒ
Ruby Tuesday is working to turn around several quarters of declining performance and
announced in January that it would close up to 10% of its company-owned locations in the
U.S. Efforts to reposition its identity to a more upscale focus with new advertising and an
updated menu have not resonated with consumers and same-store sales have remained
negative since late 2006, though there was some improvement in its most recent third quarter.
ƒ
It has been working to pay down debt and reduce costs and has put new-unit expansion on
hold.
ƒ
After its profits dropped nearly 50% in its first quarter, Red Robin has committed to new menu
items and increased advertising to boost sales. One of those new items is the return of
steak sliders, an item that proved popular with customers and drove traffic when offered last
summer. There are also two new shareable starters (Nacho Ordinary Chili Nachos and Bueno
Con Queso cheese dip with chips) and a spicy Burnin’ Love Burger with a cayenne-seasoned
patty topped with fried jalapeno rings, salsa, Pepper Jack cheese and chipotle mayonnaise.
ƒ
It is also in the midst of a major expansion push beyond its core markets on the West Coast
and has been working to boost brand awareness in these new markets. The chain is known for
a menu that is both family-friendly with its gourmet hamburger focus as well as an inventive
bar program it calls “Masterful Mixology.”
page 22
Beyond Restaurant Segment Trends & Dynamics
Beyond restaurant segments are being impacted in different ways by the current climate. The following
outlines current status for three of the leading non-restaurant areas of the U.S. foodservice industry.
Lodging
C-Stores
Supermarkets
ƒ
The lodging industry has been hard-hit by cutbacks in business travel as well as consumers scaling back
on expenses for vacations and weddings (with catering a key revenue driver for some hotel operators).
While all lodging segments are seeing declines in revenues per average room (REVPAR), the economy
and midscale segments are performing best, while the luxury and upscale segments are seeing steeper
declines in business.
ƒ
Occupancy rates continue to decline and rates per room are also dropping. According to research
from Smith Travel Research, occupancy rates are down by double digits in 19 of the top 25 major U.S.
markets compared to last year, with the biggest declines in Detroit, Chicago and Phoenix.
ƒ
The outlook for lodging will become even more challenging going forward because expansion is still
underway; currently there are more than 4,000 hotel projects in the works even as demand has
diminished.
ƒ
Recognizing that gasoline and cigarette sales are diminishing profit opportunities, c-store operators
continue to expand their foodservice offerings.
ƒ
Operators are also becoming more strategic about store design, optimizing layouts so that traffic is
driven toward higher-margin items – often their prepared food offerings.
ƒ
Supermarkets are poised to benefit as consumers eat more meals at home, but do not necessarily
cook them from scratch, instead relying on convenience-oriented retail meal solutions (like marinated
meats and other partially-prepared ready-to-cook proteins) and prepared foods.
ƒ
Expanded deli and prepared foods remain a focus for major chains and many are updating their
programs and remodeling stores to expand their capabilities in this area.
ƒ
Smaller formats emphasizing prepared foods and a limited assortment of other products are allowing
chains to expand in urban markets and appeal to consumers convenience needs at the same time.
Bord Bia has expressed particular interest in the C-Store and Supermarket segments. The following
section highlights recent noteworthy developments in each.
C-Stores
Convenience-store chains are expanding into new product categories and many are putting stronger
emphasis on these expanded options by optimizing store layouts to better showcase their fresh foods.
Noteworthy examples of these efforts include:
ƒ
7-Eleven has a new hot foods program that includes toasted sandwiches, pizza, chicken wings and
tenders, Jamaican beef patties and cinnamon churros. It invested in high-speed ovens that can
prepare pizza in 90 seconds and toasted sandwiches in 45. Late last year the company revealed that
pizzas were already the third fastest-selling item at locations where they were available, exceeding
sales of cigarettes and some coffee offerings.
ƒ
Casey’s General Stores is building on the strong foodservice reputation it has built with its fresh
made-from-scratch pizza and doughnut lines with a new built-to-order sandwich program and is
expanding tests of iced coffee. It is also adding seating for onsite dining at some new locations and is
rolling out a larger store layout that is designed to drive traffic toward higher-margin products,
including its prepared foods.
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Wawa is now more aggressively targeting dinner sales. A Dinner Deals program rolled out this spring
offers reduced prices for offerings like salads, chicken strips and soups between 4 p.m. and 8 p.m.
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C-stores also continue to roll out new products that reflect the same trends evident in recent
introductions at popular Limited-Service chains, including specialty coffees and toasted sandwiches.
They are also more aggressively marketing them as lower-cost alternatives to restaurant options.
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Quick-Chek, which includes coffee bars, sub shops, soup bars and bakery items made fresh daily in
its more than 100 East Coast stores, promotes its fresh food as “restaurant-quality, no reservations
needed.” Offerings include breakfast sandwiches on a choice of six breads, while lunch and dinner
options include ciabatta subs (the same crusty bread featured in many of the trendy options at QuickCasual restaurants).
ƒ
Wawa expanded its sandwich menu with three new Toasted Flatbread options, which is noteworthy
because flatbreads have been appearing on appetizer menus at several Casual-Dining chains
recently. All include a combination of meats and melted cheese. Varieties are: Salsa Chicken,
Pepperoni Pizza and Turkey Quesadilla.
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Putting additional pressure on upscale coffee concepts, 7-Eleven is now rolling out iced coffee to
draw more women and younger consumers to its stores. It has also introduced a frozen drink called
Slurpaccino that bears a strong resemblance to Starbucks’ Frappuccino.
Supermarkets
Supermarket foodservice has evolved significantly over the last two years. Where this segment was once
typified by supermarket delis specializing in rotisserie chicken, mashed potatoes and wet salads from the
deli case, what is now known as retail meal solutions (RMS) come in the form of individual stations and
food bars devoted to ethnic cuisines, comfort foods, side dishes, salads, burgers, sandwiches, pizza,
barbecue, antipasto, desserts and more. There is also a stronger emphasis on both freshly prepared
ready-to-eat options and chilled products that can be consumed later. Whole Foods has set the
standard for high-quality prepared foods and many others have now followed suit as consumers eat fewer
meals in restaurants and spend more time in grocery stores. Most of these offerings are now aggressively
marketed as delivering the same quality as restaurant meals but at better prices and with the added
benefit that they can be picked up as part of a “one-stop shop” for other groceries.
The major traditional supermarkets are now remodeling stores to add elements once found only in
upscale and fresh formats. This includes wing bars, made-to-order sandwich stations, sushi bars and
expanded fresh seafood and meat departments that offer more value-added products, such as marinated
meats; ready-to-cook gourmet burger patties enhanced with cheeses, spices and other ingredients; and
stuffed and breaded seafood options. Major chains are also building their RMS identity with sophisticated
store brands spanning several product categories (e.g., Safeway Signature Café, Food Lion On the Go
Bistro). The most extensive entry has been Supervalu’s Culinary Circle brand, rolled out to all of its
banners late last year. Marketed as “chef-inspired cuisine that mirrors today’s most popular restaurants”
and featuring more than 150 products, it spans prepared foods and packaged products for the centerstore and frozen departments. This includes appetizers, soups, salads, chilled side dishes and entrees,
seasonings, sauces, flavored butters, breads and desserts. Irish manufacturer Greencore has also been
involved in the new meal solutions at several major chains (e.g., Kroger, Delhaize-owned Hannaford).
The upscale retailers, like Whole Foods and Wegmans, continue to raise the bar even as they also
focus on value during the recession. In May 2009, Whole Foods opened the third-largest store in its
system (behind London and Austin, TX) in Chicago. It includes several in-store dining concepts that
enhance its reputation as a “groceraunt” (i.e., a grocery-restaurant hybrid). There is a diner; wine &
cheese bar; café emphasizing local beers and casual fare; an Asian concept with Chinese, Japanese and
Thai food; an Italian counter offering customized pastas, pizzas and calzones; a chowder bar that also
serves hot and cold seafood dishes and beer and wine; a taqueria; and a smokehouse and rotisserie area
that serves roasted meats as meals with sides and as sandwiches, to name just a few of the highlights.
page 24
Wegmans, which has locations along the East Coast, promotes its prepared foods as seasonal and
has separate lunch and dinner menus for its prepared foods. Its newest store in Virginia offers
specialty coffee drinks, hot panini sandwiches, burritos, a Wokery Bar serving Asian-inspired cuisine, and
freshly made sushi, pizza and sub sandwiches. There is also a food bar with seating for 19 where
customers can watch chefs prepare fresh meat and seafood dishes to order. With a reputation as a
gourmet grocer, the chain also recently introduced a new line of value-oriented ready-to-heat bundled
meals priced at $6 that include an entrée and two sides.
Evolution Beyond Menu
In-store services are also making retailer foodservice more enjoyable and convenient, and
positioning supermarkets as more similar to restaurants. Many stores now offer in-store dining with
comfortable seating, more attractive décor and entertainment such as free wireless Internet service and
television. Retailers also recognize that convenience is critical when competing with restaurants and are
working to improve speed and service for customers purchasing prepared foods with separate checkouts,
entrances, designated parking and even drive-through or curbside pick-up for customers purchasing only
RMS. Pre-ordering via phone, fax or online, menu boards and nutrition information are also increasingly
common.
Preparation methods are also changing amid efforts to contemporize. Retailers are relying on selfoperated and third-party commissaries more often to source specific products. Some are also doing more
in-store preparation to meet consumer demand for freshness and customization, while others are adding
new equipment to allow them to tap into the latest culinary trends (e.g., specialty beverages, grilled
sandwiches, wood-fired and hearth-baked pizzas). To better leverage the takeout opportunity, retailers
are also seeking packaging that is microwave- and oven-friendly, leak-proof, tamper-resistant and,
increasingly, environmentally friendly.
Small formats may emerge as a niche segment as chains develop new concepts with smaller
footprints and an emphasis on prepared foods as potential expansion vehicles, especially in urban areas.
Tesco’s U.S. entry Fresh & Easy was the first and while it reports that its prepared foods (most of which
are chilled) are proving popular with consumers, it has encountered challenges in this market. One
criticism is that it falls short on the promise of fresh given its packaged produce. Another key issue is that,
unlike urban markets in the U.K. in particular, U.S. consumers do not typically make as frequent visits to
supermarkets. They are also less familiar with the concept of ready-to-heat meals and there appears to
be a barrier that must be overcome in terms of perceived quality of these products. Nonetheless, other
major U.S. retailers are following Tesco’s lead and testing small formats of their own. This includes
Marketside by Walmart, Supervalu’s Urban Fresh, The Market concept from Safeway and Giant
Eagle Express.
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Health & Nutrition Impacting Foodservice
Increased attention to health & nutrition in restaurants falls into several key themes, with increased
government regulation and pressure from nutrition advocacy groups driving operators into stepped-up
responses. The following represents areas where operators are being driven to respond.
Nutrition Regulation Expanding and Driving Change
Government legislation is raising the profile of health and nutrition in restaurants. Various laws requiring
prominent displays of nutritional data (often directly on menus or menu boards) have been passed
throughout the country at state, county and city levels. Many of these early rulings have targeted LimitedService restaurants and most have focused on calories. New York City was the first, requiring that
restaurant chains with more than 15 units nationwide display calorie counts on menus or menu boards.
Statewide menu labeling measures have since been approved in California, Massachusetts, Oregon,
Connecticut and Maine. Similar mandates are also being considered in Oklahoma, Indiana, Florida,
Hawaii, Kentucky, Minnesota, New York and South Carolina.
After initial resistance to these measures, many (including the National Restaurant Association and
other foodservice industry members) are now calling for a national standard to provide uniform
guidelines for these efforts. This month there are signs of bipartisan agreement by lawmakers to
combine elements of two existing menu-labeling bills in the Senate: The Labeling Education and Nutrition
(LEAN) Act and Menu Education and Labeling (MEAL) Act. The agreement, which was developed with
participation from members of the foodservice industry, would pre-empt all existing state and local
labeling requirements. It calls for chains with 20 units or more to post calorie counts for standard menu
items (offered at least 60 days in the calendar year) on menus and menu boards. It also requires that
calories per serving be posted for each item on a buffet or salad bar. In addition, operators would also be
required to post a statement that additional nutritional data is available upon request, including
information about calories from fat, total fat, saturated fat, cholesterol, sodium, carbohydrates, sugars,
dietary fiber and protein.
Though it is not known when such a measure would be voted upon or put into action, many chains are
already proactively addressing nutrition disclosure in advance of such a national standard.
ƒ
Darden Restaurants (parent to Olive Garden, Red Lobster, Longhorn Steakhouse, Capital
Grille, Bahama Breeze and Seasons 52) announced in June that it will voluntarily list calories on all
of its menus to avoid piecemeal laws that are emerging throughout the country.
ƒ
Yum! Brands, which owns KFC, Taco Bell, Pizza Hut, Long John Silver’s and A&W announced
last fall that it would put calorie information on menu boards at all company-owned locations.
Lighter Menus Becoming More Common as Operators Offer Alternatives
Prior Technomic research has confirmed that the calories listed on New York City menus are
impacting consumers’ ordering behaviors. Based on a survey earlier this year, consumers find such
information helpful and want the foodservice industry to respond more aggressively to nutritional
concerns. Ninety percent (90%) of New York City restaurant-goers surveyed said that the calorie counts
listed on menus were higher than they expected and 82% said the information was affecting what they
ordered. Several major chains in all segments are now rolling out dedicated light or better-for-you
menus that help consumers take the guesswork out of healthy eating and avoid potentially losing
customers dissuaded by high calorie counts.
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Examples include:
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Chili’s has expanded a Guiltless Grill menu of items that have no more than 750 calories, 25 grams
of fat and eight grams of saturated fat.
ƒ
Einstein Bros. Bagels/Noah’s Bagels rolled out a Lighter Fare Menu with breakfast and lunch
options that have 400 calories or less.
ƒ
Quick-Casual La Madeleine rolled out a Smart Choices menu with a dozen small-plate combo
options for breakfast, lunch and dinner, with most totaling 500 calories or less.
ƒ
Baskin Robbins now has a Bright Choices platform that emphasizes better-for-you treats such as
fat-free, dairy-free, no-sugar-added and light ice cream.
Sodium Emerging as Next Hot-Button Topic
As nutritional disclosure gains momentum, sodium levels in restaurant meals have come under fire.
For example, nutrition advocacy group Center for Science in the Public Interest released a report in
May stating that in a study of 17 chains, 85 of their 102 meals had more than a day’s worth of sodium.
(U.S. government guidelines recommend that adults limit their daily sodium intake to 2,300 milligrams.)
As sodium has emerged as a stronger hot-button issue, some operators have already begun
responding with efforts to reduce levels on their menus.
ƒ
Yum! Brands announced at the beginning of the year that it was working to reduce sodium in menu
items at its KFC, Pizza Hut and Taco Bell restaurants. It has already lowered sodium levels for
products served at its restaurants overseas.
ƒ
Denny’s has eliminated higher-sodium dishes on its kids’ menu, replacing them with more healthful
alternatives such as fruits and vegetables. Management has also said it will offer smaller portions of
some of the items on its menus that are higher in sodium and fat, such as meatloaf and
brownies. It is also developing a Better For You Menu composed of items with reduced fat or sodium,
including turkey bacon, chicken sausage, wheat pancakes, egg whites, fresh fruit, granola and yogurt.
ƒ
Burger King will now only market Kids Meals that contain 600 milligrams of sodium or less. (Other
requirements are that such meals will have no more than 560 calories and less than 30% of calories
from fat). One example falling into those guidelines is a meal of Kraft Macaroni & Cheese, Apple
Dippers apple slices with low-fat caramel dipping sauce and low-fat Hershey’s milk. The combo has
505 milligrams of sodium. The chain has also assembled a Sodium Task Force and announced
plans to reduce sodium by 25% in its Tendergrill Chicken patties and by 36% in its chicken tenders.
One major concern is that consumers’ palates have grown accustomed to high levels of salt and will thus
find lower-sodium alternatives bland. Despite what many see as challenges in balancing flavor and
demand for healthier alternatives, food manufacturers are also focused on sodium reduction.
ƒ
Representatives from Kraft, Campbell and Unilever recently attended an information-gathering
session from the Institute of Medicine’s Committee on Strategies to Reduce Sodium Intake.
ƒ
Unilever has said it will work to reduce salt throughout its line of 22,000 food products offered
worldwide. Already it has cut sodium in Ragu pasta sauces and Knorr side dishes by as much as
25% by gradually reducing the amount of sodium over time to avoid consumer backlash about flavor
changes. (Foodservice management firm Compass says it has also taken a gradual approach to
cutting sodium from its soups.)
page 27
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Campbell already cut sodium in several of its soups and V8 juices and also has a line of kids’ soups
with lower sodium levels.
ƒ
Kraft also reports that it has spent nearly $20 million on research to reduce sodium in its brands.
Many recognize that the United Kingdom was quicker than others to respond to sodium concerns,
with many policies for labeling and reducing sodium content. As the U.S. foodservice industry steps
up its response to sodium reduction, it is likely that efforts will mirror what has happened in the U.K.
Gluten a Consideration for More Americans
More chains are now offering special gluten-free menus or guidance on gluten-free menu items but some
are also developing new gluten-free products to meet the needs of diners with celiac disease (gluten
intolerance).
ƒ
Starbucks introduced its first gluten-free food item this spring, an Orange Valencia Cake with
almonds that is prepared with gluten-free baking powder.
ƒ
Uno Chicago Grill, which has offered an extensive gluten-free menu of more than 20 items since
2006, introduced a new gluten-free veggie pizza in May following success of gluten-free cheese and
pepperoni pies introduced earlier this year. The gluten-free pies are made with a thin crust.
High-Fructose Corn Syrup also a Target Amid Interest in Natural Ingredients
High-fructose corn syrup (HFCS), commonly used as an inexpensive sweetener in a broad range of
products, has been experiencing a backlash by some in the nutrition community for the last several years,
but some operators are now starting to respond to their stated concerns. Starbucks announced in June
that it would begin selling baked goods without high-fructose corn syrup or artificial flavors and dyes. The
switch is part of new campaign that will be promoted as “Real Food. Simply Delicious.” Other chains that
have recently introduced items that were actively promoted as free of high-fructose corn syrup include:
ƒ
Jason’s Deli: eliminated HFCS from its food menu last year
ƒ
Which Wich: reports it is also working to eliminate HCFS from its menu
ƒ
Taco Bell: noted that the Fruitista Freeze beverages it rolled out last year are sweetened with
sucrose instead of HCFS
Artificial Colors May Loom on the Horizon
Though artificial colors (which have been linked to hyperactivity in children) represent a hot-button topic in
Europe, the issue has not caught the attention of Americans yet. In late February Maryland decided
not to move forward with a bill that would have required food manufacturers to add a warning label to
foods containing certain coloring agents. It also called for phasing out use of such substances by January
2011. Like other nutrition-themed regulation, however, it is possible that now that the idea has
been introduced to legislative bodies, other bills concerning artificial coloring will eventually
follow.
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Implications to Suppliers Surrounding Health & Nutrition
Nutrition regulation will force change in both operator practices and likely consumer ordering
patterns. There will be stronger demand for healthier alternatives and likely some adjustments to portion
sizes for more indulgent items and possibly dishes with high sodium content. The sodium issue, like trans
fats before it, has now generated enough momentum that it will likely emerge as the next major “villain”
among ingredients, meaning that operators and suppliers alike should be taking proactive steps to reduce
sodium content in their offerings. Operators will be looking to suppliers for strategies to reduce sodium
without negatively impacting flavor profiles.
page 29
Sustainability Issues in Foodservice
Like Bord Bia’s efforts to promote Ireland as the “Sustainable Food Island,” many in the U.S. food industry
have recognized the importance of sustainability as well as the resulting positive halo effect for the
corporate image when companies are perceived as being responsive to sustainability concerns. Many of
the responses seen in foodservice and other industries are also currently P&L-driven as companies
realize there are significant cost-savings possible with these measures.
Change in the U.S. is also be driven by several activist and “influencer” groups such as People for
the Ethical Treatment of Animals (PETA), the Humane Society, the nutrition-focused Center for
Science in the Public Interest (CSPI) and others. Many wield considerable power and have
successfully pressured major foodservice entities to adjust their practices. Government actions in some
regions (particularly California) have also been driving awareness of sustainability issues and
responsiveness. Examples include taxes and bans on bottled water and bans on polystyrene foam.
Many Components for a Complex and Important Issue
As part of the broader Corporate Social Responsibility movement, sustainability is itself a vast concept
with many different components. It includes issues related to climate change, protecting natural
resources and being mindful about pollution, recycling, using energy efficiently, utilizing local, organic and
seasonal products and treating animals humanely. Many have special links to the food industry, with hotbutton issues centered around seafood and sustainable fishing practices and eco-friendly growing
practices for coffee, tea and cocoa beans to name just two that have received considerable attention in
the U.S. (Sustainable packaging is another major consideration.)
The U.S. foodservice industry benefits from several resource groups that can provide assistance with
efforts to improve sustainability. Some of these include: the Green Restaurant Association, the
National Restaurant Association’s Conserve Initiative, The Sustainable Packaging Coalition,
Monterey Bay Aquarium’s Seafood Watch program to ensure sustainable seafood supply, and Chef’s
Collaborative, which is devoted to promoting sustainable and local ingredients.
Industry Response Far-Reaching and Growing
According to a January 2009 operator survey conducted by Restaurants & Institutions magazine,
operators are putting their dollars behind sustainability. It found that 62% were buying locally grown
products and 61% were purchasing sustainable products. Another 33% reported that they buy organic
items and 26% purchase locally grown meats and other proteins.
Several industry participants have also implemented policies and measures to address improved
sustainability. Despite anxiety about the economy and the potential risk that consumers’ concerns about
sustainability will be overshadowed, the industry continues to intensify its commitment to sustainability
and its associated issues. Recent examples include:
ƒ
McDonald’s announced earlier this year that it would conduct a survey to learn more about
sustainable pesticide practices for its U.S. potato suppliers. It reported that many are already
working to reduce use and introduce alternative methods to protect their crops. It will share findings
from the survey with its potato suppliers worldwide and also include the information on its dedicated
corporate social responsibility website (www.crmcdonalds.com).
page 30
ƒ
In Europe, McDonald’s has just launched a new Flagship Farms program to showcase and
promote farms in its supply chain that exhibit sustainable agricultural practices. The effort is
an extension of the McDonald’s Agricultural Assurance Program (MAAP), which was implemented in
2001 as a means to broadcast ethical, environmental or economic farming practices to other potential
McDonald’s suppliers. McDonald’s also uses organic milk in its restaurants in the U.K. and the
equivalent (known as biomilk) in Switzerland and France. Flagship Farms showcases seven
European McDonald’s suppliers, including Ireland’s Dempsey beef farm.
ƒ
Red Lobster parent Darden Restaurants works with several environmental groups to ensure
that the ocean’s seafood supply remains sustainable. It also seeks the opinion of experts
regarding whether it should offer certain types of fish on its menus. The company is currently in
discussions with the International Marine Stewardship Council about possibly certifying that its
wild-caught fish comes from fisheries that are well-managed. It is also looking to aquaculture (fish
farms) to provide much of its current and future seafood supply. It also requires that farmed shrimp
suppliers adhere to standards from the Global Aquaculture Alliance to limit environmental impact
and protect the quality of the shrimp. 1
ƒ
Chipotle Mexican Grill has enhanced its commitment to sustainable ingredients and announced in
May that it would expand its commitment to locally grown produce, pledging to purchase at least
35% of at least one bulk produce item used in each of its restaurants from local farmers when the
product is seasonally available. The chain implemented a similar program last summer and this year
expanded its target by 10%. The chain expects to have more than 25 local farms in a network that will
supply romaine lettuce, green bell peppers, jalapeno peppers and/or oregano served at its more than
860 units across the U.S.
ƒ
Foodservice management firm Sodexho announced this month that it would expand its Fair Tradebased hot beverage program to all of its accounts worldwide. All coffees and teas in the Aspretto
program are 100% naturally produced and accredited by Fair Trade certification organizations such
as the Rainforest Alliance, Fairtrade Foundation and Soil Foundation. The program is also
committed to using materials in packaging and utensils (e.g., cups, stirrers, napkins) that are fully
biodegradable or recyclable.
ƒ
Foodservice management firm Restaurant Associates (RA) unveiled a new series of Green
Dining Best Practices Initiatives this month and plans to roll the program out to all of its 110
accounts by 2011. The effort is designed to raise awareness of tactics for chefs and corporations to
cut environmental impact and costs. RA, which is owned by Compass Group North America,
devised the program with help from the Environmental Defense Fund and the Green Restaurant
Association. It has also committed to offering more sustainable seafood on its menus, providing
water dispensers as an alternative to bottled water, reducing the carbon footprint of meats and
proteins served at its accounts by 20% and reducing energy use in its facilities.
ƒ
Dunkin’ Donuts parent Dunkin’ Brands was approved this month to join the Ceres company
network, a coalition of investors, environmental groups and public-interest organizations that work
with companies to address various sustainability challenges, including climate change. Over the past
three years, Dunkin’ brands has implemented several initiatives to demonstrate commitment to
sustainability, including helping franchisees improve energy efficiency and sourcing its hot and iced
espresso beverages from 100% Fair Trade Certified coffee beans.
1
Orlando Sentinel 5/11/09
page 31
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Many chains are now developing eco-friendly restaurant models based on standards from LEED
(Leadership in Energy and Environmental Design). The latest is Starbucks, which this month
unveiled plans for eco-friendly units even as it closes underperforming stores. Reused and recycled
materials will be utilized in the décor.
ƒ
Disposables suppliers Solo Cup recently added compostable paper cups to its Bare by Solo line
of eco-friendly hot and cold cups. All of its Bare products are made with recycled, recyclable,
compostable or renewable materials.
Beyond sustainability, more humane animal treatment is also a growing hot-button topic in the U.S.
particularly eggs from chickens not raised in cages and pork sourced from pigs that are not kept in
gestation crates. Most recently, cage-free eggs have been generating substantial discussion and action
thanks to efforts from the Humane Society and PETA.
McDonald’s is looking into cage-free egg production and has launched a study to determine feasibility for
using such products in its restaurants. Most eggs produced in the U.S. come from chickens that are
housed in cages or pens shared by several birds, providing very limited living space. The egg industry
has voluntarily increased cage space in recent years but animal rights groups and others are calling for a
larger shift to cage-free egg production. McDonald’s is teaming with Cargill, one of its primary egg
suppliers to conduct a study regarding housing alternatives. It will use eggs produced during the study in
its U.S. restaurants and management has said that it expects that the project will be producing eggs,
including cage-free eggs by 2011. Already Burger King, Hardee’s, Carl’s Jr., Quiznos and Denny’s
have agreed to make up to 5% of their U.S. egg purchases from cage-free sources. 2 After pressure from
the Humane Society, Wendy’s also announced in May that it would commit to using a minimum of 2%
cage-free eggs in its restaurants and Red Robin revealed in June that it would serve only cage-free eggs
in its more than 300 company-owned units by the end of next year.
Implications to Suppliers Surrounding Sustainability
The most important implication for suppliers to the U.S. foodservice industry is that many operators now
have formalized programs for corporate social responsibility and have developed codes of conduct that
outline their expectations for suppliers in terms of sustainability and other issues. Compliance with
these guidelines will be required more often going forward.
For international suppliers serving the U.S. market, growing interest in local sourcing is a
potential barrier that may become more prevalent. Already some operators, including major
foodservice management firm Bon Appetit Management Co., have pledged to source more meat from
North America to cut down on the associated emissions that come from transporting the product. Bon
Appetit has pledged to purchase 100% of the beef used in its accounts from North America.
The new Obama-led government administration can also be expected to push government-led
environmental regulation even further. Though not coming from the federal level, one recent example of
these types of regulations is San Francisco’s new mandatory composting law that requires residents
and business (including restaurants) to compost food scraps beginning this fall. The law is part of the
city’s goal to divert resources from landfalls and achieve zero waste by 2012. This growing emphasis on
waste in some markets will again raise the profile for foodservice products that deliver optimum yield.
While consumer concerns about health & nutrition and sustainability may be overshadowed by the
economy to a certain extent in the short-term, Technomic considers these to be major hot-button
topics that will significantly impact the foodservice industry going forward.
2
Los Angeles Times 5/22/09
page 32
Operator Tactics to Cope With Recession
Operators in all segments are finding that they must adjust their game plans just to sustain
performance, much less grow their sales. The following represents some of the common tactics being
pursued by the major chains.
Addressing Consumer Frugality
Consumer price sensitivity is an issue that will bring dramatic changes to the U.S. foodservice industry,
likely for some time to come. With their discretionary dollars dwindling, many have new definitions for
what constitutes a good value and that definition is increasingly based on low prices and not
other factors such as the dining experience and convenience.
Lunch is now a more challenging daypart for restaurants because, especially during recessions, mid-day
meals eaten out can easily be cut out or replaced with a “brown bag” options from home. As The
National Restaurant Association has noted, lunch traffic goes down whenever the number of
unemployed consumers rises. Several operators have been conducting consumer research to determine
the price point that will bring customers through their doors. For most, the key is to keep lunch items
below $10. Yet several chains are now offering items well below that target.
ƒ
Before Quiznos rolled out its new toasted Torpedo sandwich in March, it tested the item with focus
groups at $4, $4.29 and $4.59 to determine what people were willing to pay for it. The company found
strong interest in the item if it was priced at $4. In January of this year the chain also cut prices on 37
other items, making 20 of its subs less than $5. Overall sales have jumped by double-digits and traffic
is up more than 30% this spring.
ƒ
On the full-service side, T.G.I. Friday’s introduced nine new salads and sandwiches priced at $5 in
April and reports that the items have boosted its lunch business. Regular prices for the items, which
range from $6-$11, were re-instated June 1. Its restaurants are also currently offering “endless” refills
on soups, salad, breadsticks and drinks during lunch for a price of $6.99.
As nearly all retailers have resorted to sales and deep discounts to encourage consumers to open their
wallets, many in the Casual-Dining segment have been offering special deals that in some cases rival
price points offered by Limited-Service restaurants. Examples include: Applebee’s (Dinner for Two for
$20); Ruby Tuesday (buy-one-get-one-free coupons for entrees); and Chili’s (10 Under $7 Menu).
While many of these operators feel they have no choice but to offer such deals, there are concerns
among analysts and franchisees that this discounting, while effective in generating traffic, is
doing substantial damage to profit margins. As an example, one T.G.I. Friday’s franchisee noted that
a steak sandwich priced at $11.89 on the regular menu was included in the $5 promotion when the
ingredients alone cost roughly $43.
This trend toward deep discounting is one that poses significant risk because there is a very real
possibility that these deals could alter consumer perceptions about price long-term. Many have already
become trained to wait for what are now inevitable special deals at department stores, other retail chains
and restaurants. While moderating food costs are helping to make these strategies more feasible,
operators will become ever-more reliant on suppliers to help them cut costs in several areas and identify
opportunities that deliver higher margins.
3
New York Times 6/24/09
page 33
New Twists on the Traditional Adding Interest to Menus
Many chains are introducing new products that put a unique spin on signature products, reinforcing that
small tweaks are sometimes all that is needed to bring new interest and build on the strength of
established items without veering too far from an established brand identity. Examples include:
ƒ
Breakfast specialist Denny’s has taken the ingredients from its popular Grand Slam Breakfast and
turned them into a new sandwich called the Grand Slamwich (which is also potentially more takeoutfriendly) as well as a Grand Slam Burrito of eggs, bacon, sausage, pancakes with syrup and
American cheese wrapped and grilled in a flour tortilla.
ƒ
Chevys Fresh Mex reconfigured several of its popular entrees as bowls to drive lunch traffic. It is
offering a Chile Verde Bowl, Smothered Chile Verde Burrito Bowl, Chicken Mole Enchilada Bowl, Red
Chile Pork Taquito Bowl and Grilled Fresh Salmon Bowl through August, promoting the items as a
“real sit-down lunch at a value price.”
ƒ
McDonald’s turned its iconic Big Mac into a snack called the Mac Wrap with sliced burger patty,
special sauce, lettuce, cheese, pickles and onions in a warm flour tortilla instead of on a sesameseed bun.
ƒ
IHOP’s limited-time Loaded Hashbrowns brought a new twist to omelets by featuring several different
combinations of popular fillings over hashbrowns instead of folded into eggs.
ƒ
Premium ice cream specialists Maggie Moo’s and Cold Stone Creamery both expanded into ice
cream cupcakes to complement their “mix-in” ice cream treats that are enhanced with customers’
choice of ingredients.
ƒ
D’Angelo’s Grilled Sandwiches extended its signature preparation method beyond sandwiches to
add Grilled Quesadillas to its menu earlier this year.
All of these are perfect examples of ways to identify new uses for commonly sourced products and
potentially expand usage of these key ingredients.
Mini Foods Appeal to Smaller Appetites and Budgets
While declines in food costs have helped operators offer lower price points to appeal to consumers’
increasing frugality, many have also recognized that smaller portions are another opportunity to
provide lower-priced options with lesser impact on profitability. As an added bonus, many of these
options can be marketed by tapping into two popular recent trends: snack-friendly options that provide an
opportunity for mini meals or sampling several different dishes during a meal and healthier alternatives.
Recent examples include:
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Jack in the Box: Mini Sirloin Burgers and Buffalo Ranch Chicken Sandwiches
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Great Steak & Potato: Little Philly 3-Inch Sliders
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Johnny Rockets: Mini Burgers with chunky Blue Cheese sauce, mini chili dogs
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Burger King: bite-sized breakfast sandwiches and burgers
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Steak ‘n Shake: Steakburger Shooters
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Dave & Buster’s: Chipotle Grilled Bar Chicks (mini grilled chicken sandwiches with chipotle honey
sauce and Pepper Jack)
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T.G.I. Friday’s: Jack Championship Slider Sampler (four small burgers topped with shredded
Cheddar, bacon and Jack Championship barbecue sauce)
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Chipotle: new Low Roller menu marketed as smaller portions with downsized prices
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Quiznos: Toasty Torpedos (though not a mini food in the traditional sense like the other products
here, these are long, slimmer sandwiches offered at a reduced price of $4, which notably falls below
Subway’s hugely successful $5 footlong sandwiches. The new line already accounts for a third of the
chain’s sales.)
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Potbelly Sandwich Works: Skinny Sandwiches with less bread, meat and cheese for a 25%
reduction in fat and a lower price point of $4)
For the supplier community, there are a few different implications behind this movement. On the
one hand, many of these products are new items that bring opportunity for new ingredients. On the other,
they also utilize less of core ingredients like cheese, meats, etc. given the smaller portions.
Broadened Menu Focus
After several years of relatively good times, restaurant operators are facing an operating environment like
never before. They are in survival mode and many are trying anything and everything to attract diners.
Innovation is at an all-time high as chains add new products with lower prices or options to
expand variety and boost visit frequency. These new items are also part of bid to avoid the “veto vote”
whereby one member of a dining party cannot find something appealing to eat and the group chooses
another concept.
A recent article in USA Today4 put all of this into perspective, illustrating the many ways major chains are
expanding beyond their roots. Though many of these examples were previously touched on in this report,
the list does show just how much operators are changing their strategies to achieve sales. Concept
differentiation is increasingly blurring.
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McDonald’s is rolling out gourmet coffees as Starbucks introduces new value meals.
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Domino’s is no longer delivering just pizza. It now offers oven-baked subs and bread bowls stuffed
with pasta.
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Boston Market, which was one of the main concepts to popularize rotisserie chicken, is now
promoting crispy chicken.
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Arby’s has long positioned itself as an alternative to burger chains but is now promoting a collection
of Roastburgers.
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The Cheesecake Factory, known for its large portions, has rolled out a collection of Small Plates &
Snacks (at lower price points).
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Morton’s is trying to downplay its luxurious steakhouse image by offering $5 burgers at its bar.
4
USA Today 6/4/09
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There are several other examples as well. Subway now has pizza and hot flatbread sandwiches in
addition to its signature subs. Cold Stone Creamery has moved beyond its indulgent ice creams to also
offer less-caloric treat alternatives in the form of iced and frozen coffees.
The major implication here is that operators are clearly open to expanding their horizons in the
name of innovation. Concept differentiation and clearly defined niches are giving way to pursuit of more
mass appeal. Suppliers can serve as a powerful resource with new ideas that provide more variety and
position a concept to capture more frequent visits from new and existing customers. At the same time,
operators and suppliers alike should remain focused on margins. In some instances some of these
new items have pulled sales away from more profitable options on menus.
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Supplier Support Needs
Operators are relying on supplier assistance to help them weather the storm. Yet even once the economy
improves, unit-expansion will no longer drive the maturing U.S. foodservice industry’s growth and there
will be a much stronger focus on improving unit-level performance. Suppliers will need to position
themselves as stronger business-building partners with their operator customers and deliver
more value-added support. This can mean any number of things from consumer insights (especially
regarding changed attitudes and values about frugality and food and beverage spending) as well as
innovation support/new product ideas and strategies to cut costs and make back-of-house operations
more efficient.
Operators Now Have Different Needs and Expectations
Grappling with rising food and labor costs and weakening customer demand, operators are increasingly
interested in ideas that help them improve yield for the products they use. Waste-management will be a
mantra going forward. They will also expect suppliers to more effectively and specifically convey
the value of their products. That might mean giving operators information that allows them to
communicate to customers that they are using products that are authentic, unique, sustainably produced,
locally sourced, healthful, natural, allergy-friendly, etc. Or it might mean specific benefits to the operator,
such as better yield, labor-savings, or versatility (with opportunities for multiple applications or something
that allows operators to purchase fewer ingredients). It could also be products that help operators
strengthen consumers’ perceptions of freshness (including components that can be used in made-toorder applications at the unit level), or clear, easy-to-understand nutritional information. Operators will
also be interested in ingredients that are perceived as more premium and have a proven ability to
command higher price points. Possible examples may include Irish butters or specialty cheeses.
Innovation assistance is also valued, as reinforced throughout this report. Beyond new products, many
operators are increasingly relying on limited-time offers to draw special attention to their operations and
create a sense of urgency for customers to visit. All are increasingly dependent on home-run ideas that
will draw diners to their restaurants.
Retailers Require Foodservice Expertise for Growth Initiatives
Beyond the restaurant segment, as retailers pursue foodservice opportunities more aggressively,
they see suppliers as a key asset in those efforts. Foodservice is not an area of core competency and
they need support as they navigate labor considerations, food safety standards and issues related to
customer service. Expectations of suppliers are now more extensive, with retailers seeking insights about
both competitors and consumers; culinary expertise and menu development support; training for products
and equipment; packaging collaboration; and help with differentiation to effectively communicate the RMS
story (e.g., cost-savings compared to eating in restaurants or buying several ingredients for cooking, timesavings compared to cooking, more flexible portion options, rotating menu options and extensive variety,
etc.). European expertise in chilled meals may also be valued as that is a segment that is welldeveloped in some European countries (notably the U.K.) but still emerging in the U.S.
Foodservice Purchasing is Evolving
Changes are also occurring in operators’ purchasing practices. Many are looking for more flexibility
from suppliers. A growing number are making smaller orders because they are less certain about
customer demand in the current environment. This may require some reconfigurations for case sizes.
Operators are also doing more “shopping” to find better deals, relying on multiple distributors and
alternative supply sources such as warehouse clubs and cash & carries like Restaurant Depot.
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Suppliers Focused on Enhancing Services
Beyond meeting these operator demands and needs, some suppliers are also emerging with other valueadded assistance that positions them as a consultant in navigating today’s current business challenges.
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Pepsico Foodservice launched a new Internet site designed to help restaurants run more efficiently
and profitably. GrowMyRestaurant.com includes information on topics such as increasing traffic and
check averages as well as tips for managing employees.
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Sysco has positioned itself as a business-building consultant with its free business reviews for
operator customers. The distributor is providing guidance in such areas as menu design, waitstaff
training and marketing initiatives.
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Nestle Professional (the company’s foodservice unit) opened a new Customer Innovation Campus
in Ohio late last year. The facility is designed so that it can be configured to completely replicate the
kitchen environments of its customers and also includes ideation and product development labs. The
idea is that customers can come to the center, outline their challenges and then work with the Nestle
team to create and test ideas in the campus kitchens.
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Conclusion
The recession and resulting changes to consumer values will bring a long-coming shakeout to the
U.S. foodservice industry that has for quite some time been over-supplied with too many units for
consumer demand that is diminishing further due to the economy. There have already been some major
operator casualties, with bankruptcies at once-major chains such as Bennigan’s and Steak & Ale.
Others will likely follow as the credit crunch has made many operators with substantial debt also quite
vulnerable and it becomes more difficult to access financing for renovations and expansion. In addition,
many other chains will close units.
This will make it all the more important going forward for Bord Bia members interested in tapping
the U.S. market to understand the strong and weak spots in the industry as part of their efforts to
align with customers that have better growth prospects.
The operating climate here is also having an impact on international operations for U.S. operators.
Growth abroad has been seen as an important strategy and growth driver for some large chains as the
U.S. foodservice market becomes saturated. Now, however, some are also facing some challenges with
their international operations as a stronger U.S. dollar drags down revenues from units abroad. Scaled
back expansion plans are also impacting business abroad. For example, major U.S. multi-concept
operator Brinker International has shuttered its operations in the United Kingdom. The eight units
consisted of six Chili’s units, one Maggiano’s Little Italy and one Romano’s Macaroni Grill. Each was
operated by a subsidiary called Hatfield Restaurants Ltd. Despite the U.K closures, the company
maintains a goal of 500 units outside the U.S. by 2014.
For Bord Bia, the current state of the U.S. foodservice industry is also likely a sign of things to come for its
members’ core customers as well. Many of the dynamics seen in the U.S. will likely migrate to the
European foodservice market, particularly for U.S. chains that have operations there. The global
economic downturn will bring fundamental changes to industries throughout the world. While foodservice
does enjoy some degree of insulation compared to other industries such as the automotive and luxury
goods sectors, many consumers are now learning some lasting lessons that will shape their lifestyles for
years to come if not throughout. The era of conspicuous consumption and free spending is over. The
rebuilding process will eventually come, but it will be typified by new attitudes and priorities.
All suppliers serving the U.S. market and others must be informed of current economic, industry
and consumer dynamics that are driving change. In the short term, menu innovation will remain a
strong focus as operators look for new products they can profitably offer at lower price points without
diluting their brand image. There is also a return to “the basics” with pastas, burgers and sandwiches
dominating menus. (A good example is the recent spike in promotions and new and emerging concepts
devoted to gourmet hamburgers, many of which offer premium beef but also other proteins such as turkey
or even buffalo and lamb).
Continuous and careful tracking will be required as long-effective strategies lose their power. Technomic
will continue to monitor developments and industry responses, providing its next update to Bord Bia in
October 2009.
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Appendix: Web Contacts for Major Operators
For further research on the major operators discussed in this report, corporate websites are listed below:
Limited-Service Restaurants
Full-Service Restaurants (Cont.)
A&W: www.awrestaurants.com
Arby’s: www.arby’s.com
Baskin Robbins: www.baskinrobbins.com
Boston Market: www.bostonmarket.com
Burger King: www.burgerking.com
Carl’s Jr.: www.carlsjr.com
Chipotle: www.chipotle.com
Cold Stone Creamery:
www.coldstonecreamery.com
D’Angelo’s Grilled Sandwiches:
www.dangelos.com
Domino’s Pizza: www.dominos.com
Dunkin’ Donuts: www.dunkindonuts.com
Einstein Bros. Bagels: www.einsteinbros.com
Great Steak & Potato: www.thegreatsteak.com
Hardee’s: www.hardees.com
Jack in the Box: www.jackinthebox.com
Jason’s Deli: www.jasonsdeli.com
Johnny Rockets: www.johnnyrockets.com
KFC: www.kfc.com
La Madeleine: www.lamadeleine.com
Long John Silver’s: www.longjohnsilvers.com
Maggie Moo’s: www.maggiemoos.com
McDonald’s: www.mcdonalds.com
Noah’s Bagels: www.noahs.com
Panera: www.panerabread.com
Pizza Hut: www.pizzahut.com
Potbelly Sandwich Works: www.potbelly.com
Quiznos: www.quiznos.com
Starbucks: www.starbucks.com
Subway: www.subway.com
Taco Bell: www.tacobell.com
Wendy’s: www.wendys.com
Which Wich: www.whichwich.com
Yum! Brands: www.yum.com
Chevys Fresh Mex: www.chevys.com
Chili’s: www.chilis.com
Darden Restaurants: www.darden.com
Dave & Buster’s: www.daveandbusters.com
Denny’s: www.dennys.com
Fleming’s Prime Steakhouse:
www.flemingssteakhouse.com
IHOP: www.ihop.com
Kona Grill: www.konagrill.com
Longhorn Steakhouse:
www.longhornsteakhouse.com
Maggiano’s Little Italy: www.maggianos.com
Morton’s: www.mortons.com
Olive Garden: www.olivegarden.com
Outback Steakhouse: www.outback.com
Red Lobster: www.redlobster.com
Red Robin: www.redrobin.com
Romano’s Macaroni Grill:
www.macaronigrill.com
Ruby Tuesday: www.rubytuesday.com
Ruth’s Chris: www.ruthschris.com
Steak & Shake: www.steaknshake.com
T.G.I. Friday’s: www.tgifridays.com
Uno Chicago Grill: www.unos.com
Full-Service Restaurants
Applebee’s: www.applebees.com
Bahama Breeze: www.bahamabreeze.com
Bennigan’s: www.bennigans.com
BJ’s Brewhouse: www.bjsrestaurants.com
Brinker International: www.brinker.com
Buffalo Wild Wings:
www.buffalowildwings.com
California Pizza Kitchen: www.cpk.com
Capital Grille: www.capitalgrille.com
The Cheesecake Factory:
www.thecheesecakefactory.com
Retailers
7-Eleven: www.7-Eleven.com
Casey’s General Stores: www.caseys.com
Delhaize: www.delhaizegroup.com
Food Lion: www.foodlion.com
Fresh & Easy: www.freshandeasy.com
Giant Eagle Express:
www.gianteagleexpress.com
Hannaford: www.hannaford.com
Kroger: www.kroger.com
Marketside by Walmart: www.marketside.com
Quick-Chek: www.quick-chek.com
Safeway: www.safeway.com
Supervalu: www.supervalu.com
Tesco: www.tesco.com
Urban Fresh: www.urbanfresh.net
Wawa: www.wawa.com
Wegmans: www.wegmans.com
Whole Foods: www.wholefoodsmarket.com
Lodging Operators
Holiday Inn: www.ichotelsgroup.com
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