State of the industry: Food service

by Rebekah Schouten
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Food service
Healthy, clean menu items along with technology and value drive traffic.
 

KANSAS CITY — Restaurant industry sales are expected to reach $799 billion by the end of 2017, the National Restaurant Association said, up 4.3% over last year.

“That’s a staggering sum,” said Hudson Riehle, senior vice-president, Research & Knowledge Group, National Restaurant Association, during a presentation at the National Restaurant Association Restaurant, Hotel-Motel Show, held May 20-23 in Chicago. “If the restaurant industry was actually a country in the global economy, the restaurant industry now in the United States is larger than 90% of the world economies.”

Consumer trends have shifted in the industry’s favor, with now almost $1 out of every $2 spent on food allocated to restaurants. That’s up from $1 out of every $4 in 1955.

Now, for the bad news. In the past 10 years, the restaurant industry’s growth has slowed significantly.

Top 10 concept trends chart
 

“That’s important to understand because that is the operating environment going forward,” Mr. Riehle said. “It is a moderate growth environment and definitely lower than it was pre-recessionary.”

Restaurant operators are not so optimistic about sales gains in the months ahead. Only 32% of those surveyed by the N.R.A. expect higher sales in six months, and only 28% expect economic conditions to improve in six months.

Declining same-store sales and customer traffic have contributed to the bearish outlook. Fifty-four per cent of restaurant operators recorded a decrease in same-store sales from last year, the N.R.A. found, and 63% saw a decline in customer traffic from last year.

The fast-casual segment continues to outpace other industry segments in sales growth, with the top 250 chains growing sales a cumulative 8.4% in 2016 to a total of $40.4 billion, said Technomic, Inc., Chicago. However, that number is a drop compared to the 11.9% sales growth in 2015 and 13.8% growth in 2014.

Chipotle meal
The struggles of Chipotle Mexican Grill had a substantial impact on the overall performance of the fast-casual segment.
 

The struggles of Chipotle Mexican Grill, Denver, had a substantial impact on the overall performance of the fast-casual segment, Technomic said, as the second-largest fast-casual chain saw its sales decline by more than 13% in 2016.

Future growth for the fast-casual segment may come from specialty and health-focused concepts, Technomic said, citing chains such as Sweetgreen, Modern Market and Lemonade as companies to watch.

On the consumer side, pent-up demand for restaurant eating remains high; 42% of consumers aren’t dining out as often as they would like, which compares with 27% in 2006. Moreover, the key millennial demographic is saddled with student debt.

While perceptions of the economy have improved, most consumers maintain a dampened outlook.

“Value proposition has to be stronger than ever today,” Mr. Riehle said.

Top 20 food trends chart
Top 10 food trends chart

Three out of four consumers said they would visit a restaurant during off-peak hours to receive a discount, a strategy more restaurant operators may be exploring in the future, Mr. Riehle said.

“With video menu boards in quick-service restaurants and tablets in table service, it is now possible for operators to change pricing by time of day,” he said.

Restaurant meal subscriptions present another opportunity, enticing cost-conscious consumers and helping operators generate incremental demand. Forty-two per cent of consumers said they would join a monthly program that pays in advance for restaurant meals with such benefits as discounts and exclusive offers.

“Over half of millennials would subscribe to a restaurant meal plan,” Mr. Riehle said. “Why? They grew up with the Netflix model.”

He added, “In the years ahead there is going to be a lot of innovative pricing, not only in terms of by time of day but in terms of subscription models.”

Restaurant tablet ordering
Two-thirds of consumers equate technology with convenience.
 

Technology may offer distinct competitive advantages, too. About two-thirds of consumers equate technology with convenience, and nearly as many said technology options speed up service, said Annika Stensson, director of research communications for the N.R.A.

But many consumers hesitate to adopt cutting-edge technology, and operators face such barriers as cost of implementation and transaction fees.

“When consumers dine out, there are some attributes that play into their decision matrix,” Ms. Stensson said. “Convenience, value and food quality are important, but what’s on the menu also matters.”

The availability of healthy menu items is an important driver, she said. Two in three consumers said they are ordering more healthful options in restaurants now than two years ago.

Kale salad
Two in three consumers said they are ordering more healthful options in restaurants now than two years ago.
 

“Trends are becoming more concept-based, more idea-based than single ingredient-based or dish-based,” Ms. Stensson said. “These days it’s not so much about whether kale or cauliflower is going to be the hottest trend of the year; it’s more about if that kale or cauliflower is sourced locally, if it’s grown in an environmentally friendly way and how it’s prepared.”

Today, consumers perceive free-from foods as a foundation of a healthy, balanced lifestyle, said Nancy Kruse, president of The Kruse Co., at the National Restaurant Association Restaurant, Hotel-Motel Show. Citing Mintel data, Ms. Kruse said 84% of consumers seek more natural, less processed foods, and 59% agree foods with fewer ingredients are healthier.

“From my point of view as a trend watcher, this is the No. 1 single biggest trend of the past decade, hands down,” Ms. Kruse said. “What has been surprising to me about this trend is the velocity with which it has moved through our industry. It used to be a fringe issue, and it’s as if the switch were flipped, and it swept through with remarkable rapidity.”

McDonald’s Corp., Chicago, for example, has in recent months announced a series of menu changes and commitments, which have included a transition to cage-free eggs and the removal of artificial preservatives from Chicken McNuggets. More recently, the fast-food chain said it has eliminated artificial flavors in its vanilla soft-serve.

McDonald's soft serve ice cream cone
In May, McDonald's eliminated artificial flavors in its vanilla soft-serve.
 

Beyond the well-publicized actions of Panera Bread and Chipotle Mexican Grill to remove artificial ingredients from menu items, many other national restaurant brands are pledging similar moves. Fazoli’s, Lexington, Ky., a fast-casual Italian chain with 220 units, announced the removal of 81 ingredients from its supply chain, and Denny’s introduced a new pancake recipe featuring four simple ingredients: eggs, flour, buttermilk and vanilla.

“This has just been a home run for Denny’s,” Ms. Kruse said, adding that the launch lifted same-store sales and boosted orders for the brand.

The next phase in the clean menu movement, Ms. Kruse predicted, will be sourcing smaller chickens.

“The thinking is the hens lead longer healthier lives and therefore their meat is of a higher quality,” she said, adding that Wendy’s Co. and Subway have recently pledged to purchase smaller birds.

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