2016 Hospitality Market Report: Operators Continue to Struggle for Market Share as Foodservice Sales Growth Remains Flat


Canadian foodservice operators likely experienced a feeling of déjà vu this year, as the 2016 restaurant landscape closely mirrored that of 2015. But while growth remained flat, QSRs continued to steal share and millennials continued to be the driving force behind restaurant innovation, 2016 did bring with it some new challenges as well. “As a whole, [2016] can be classified as a tumultuous marketplace,” says Robert Carter, executive director, Foodservice Canada at the NPD Group in Toronto. “Because we had soft customer traffic, which remained flat, we did see continued pressure around price and menu inflation continued to creep up.”

There was also a greater polarization of how people are using the restaurant industry, mainly, the record number of independent restaurant closures in 2016 and a shift to chain-restaurant concepts as an overall statement. “Independents just don’t have the marketing muscle or resources to battle the big players and it’s really tough to make a go of it unless you have an amazing point of difference and can establish yourself,” says Carter of the shift.

Compared to 2015, he says, overall traffic was flat in both years; dollar growth was very similar but the shifting dynamics within the industry were different — from the increased popularity of chain concepts to the rise of the digital door and a push for menu innovation. “There was a lot more activity in 2016; it just seemed like there was more stuff going on this year,” he says.

According to Chris Elliott, Senior Economist for Restaurants Canada, while 2016 was supposed to be the year of big improvements in terms of overall economic growth, he agrees not much has changed on that front. “Overall, I’d say it’s a very similar trend to what we saw last year,” he says, citing the impact of weak business investment and modest export growth. “And because of that, we’re not seeing job growth or increases in disposable income. But surprisingly, foodservice sales continue to be quite strong amidst a lot of those challenges.”

To understand these economic trends, Elliott says you have to look to the past. “It’s very much economic-driven in terms of what’s happening right now. If you go back 10 years, all the growth was driven by the Prairie Provinces and we didn’t see as much growth in Ontario or B.C.,” he explains. “Now, with this whole change in the economy — where pressed commodity prices have an impact in Alberta and Saskatchewan — we see the growth moving to B.C. and Ontario.”

The shift, he says, is thanks in large part to the two provinces’ robust housing markets, strong consumer confidence and high retail spending. “A lot of that spending is also ending up in restaurants,” says Elliott. In fact, according to Restaurants Canada’s Foodservice Facts 2016 report, restaurant sales represent 27 per cent of Canadian households’ food-and-beverage budget — a share that has changed little since 2010. So, if people are still eating out, why are so many restaurants struggling? According to Carter, it comes down to growth — or lack of it. “In a market that’s not growing in terms of the size or number of people going out to restaurants, it continues to be a steal share game,” he says, adding operators need to understand the mindset of the consumer in order to establish a point of difference.

Frequency of restaurant visits is another challenge that continues to plague operators across all segments. “Per-capita consumption has actually decreased by two visits per year, per capita,” says Carter. “We’re just not going out as often.”

Elliott agrees, adding high debt level is making people rethink their spending habits. “In Canada, 168 per cent of income is debt,” he says. But he says, people are still not willing to stop eating out entirely. “People still spend on small indulgences — they may cut back on bigger ticket items, but they love going out to restaurants.”

Where operators are seeing a difference is where people choose to eat. According to Carter, there’s been a continued shift this year away from full-service restaurants to either quick-service restaurants or fast-casual concepts.


“As people cut back on extras in order to tackle debt, it will most certainly have an adverse effect on foodservice sales in Canada,” says Elliott.

To that end, he says QSRs are going to lead all segments of the foodservice industry with forecasted growth of 6.3 per cent ($28,563 million) in 2016 — the strongest growth seen within the foodservice industry this year. “Even in provinces where they’re mired in recession right now, we’re seeing people moving from full-service to QSR.”

The Fast-food Restaurants in Canada report, released by U.S.-based IBISWorld in August, shows that during the past five years, the segment has expanded despite changing consumer tastes. “Since 2011, higher consumer spending and product innovation by fast-food restaurants has renewed consumer interest in fast-food,” says Andrew Alvarez, industry research analyst at IBISWorld and author of the report. “Products with higher profit margins, such as coffee, smoothies and salads, have become more prominent at traditional fast-food restaurants, leading to an increase in the average industry profit margin.” Customization and high-quality ingredients have become increasingly important with Canadian consumers, leading major QSR players to reconsider overall strategy and menu offerings. “The QSR segment continues to be the leader from an industry standpoint and that’s being led by the innovation coming out of Tim Hortons and McDonald’s as they expand beyond their core offerings,” says Carter. “Starbucks has also put an increased focus on its food and even Wendy’s is getting into the game with some interesting menu innovations (the Pretzel Burger, Grilled Chicken Sandwich and Tacolicious Salad).”

A&W, which closed out 2015 with gross sales of $1.1 million, continues to record strong gains with its raised-without-hormones or antibiotics claims. In September, Subway announced it has removed artificial colours, flavours and preservatives from 28 menu items. The chain also added turkey, chicken and roast beef to its growing roster of ingredients featuring the ‘free from’ claim. The changes are part of Subway Restaurants’ commitment to remove all artificial colours, flavours and preservatives by 2017. According to Alvarez, the QSR segment’s consistent growth is expected to continue over the next five years — at a slower pace — due mainly to faltering consumer confidence amid volatile commodity markets and uncertain economic conditions. Full-service Failings

The rising popularity of QSR is putting pressure on the full-service restaurant segment, which is expected to see modest five-per-cent growth in 2016 ($27,957 million). Foodservice Facts 2016 shows 60 per cent of FSR revenues are generated by independent operators and with a substantial decline in the number of independents (down 25 per cent since 2009), the segment continues to struggle. According to the IBISWorld’s Full-service Restaurants in Canada report, industry growth has been subdued as consumers seek more for their money when spending at restaurants. “Quick-service restaurants have outperformed full-service restaurants due to their more affordable prices and superior product development. Along with slow revenue growth, operators have been put under pressure by rising food prices, which have negatively impacted profit margins.” In 2016, the report cites shaky consumer confidence as the main factor holding the industry back from realizing its full growth potential; however, healthy gains in corporate profit are expected to contribute to industry growth of 2.2 per cent over the year.

“That said, the growth within that segment is coming from the premium casual-dining brands,” says Carter. “We’re seeing good growth for places such as Cactus Club, Earls, Joey’s, Browns Socialhouse and Moxies. Where we see softness is among restaurants such as Boston Pizza and Kelsey’s — operators which are very similar in their styles and continue to have challenges in the marketplace.” Elliott says geography also plays a big role for operators in this segment. “It really depends on where in the country you are,” he says. “You might see some that are doing quite well, such as Quebec, Ontario and B.C., but in Saskatchewan we’ve seen declines in FSR sales (down one per cent).”

The retail meal solution category continues to see strong growth, recording an increase of 3.5 per cent at grocery stores and an impressive five per cent at convenience stores last year, according to data from Chicago-based Technomic. “People continue to look for convenience and one of the challenges we’ve seen is competition from Costco and Wal-Mart-type stores,” says Elliott. To counter, traditional grocery stores such as Loblaw’s and Metro are reexamining their value propositions and offering “meal deals” to draw customers in. “It’s a very price-driven segment aimed at getting people into the stores,” says Elliott, adding one of the biggest issues that restaurants continue to face is competition from grocery stores.

With consumers always pressed for time, it’s no surprise the breakfast daypart continues to be the darling of the industry. Data from the NPD Group shows breakfast currently holds an 18.1 per cent share of all restaurant visits and 13.3 per cent of dollars. “It’s one of the driving trends in restaurants right now — people are looking for convenience. The growth in breakfast sandwiches, for example, has been amazing. A lot of that is just because people are looking for portability — they can eat at their desk or while they’re driving.”

“We expect that in 2017, [breakfast] will continue to be the growth-driver in the industry,” predicts Carter. “But we’re also starting to feel a little more traction around the lunch daypart —particularly with a fast-casual segment that’s geared towards lunch.” He says while some casual operators are looking at pricing strategies to capitalize on the growing lunch daypart, it’s dinner that continues to be the really challenged area of the marketplace. “It’s hitting operators in the mushy-middle/casual-dining segment hard and it’s hitting operators who aren’t evolving.”

This struggle is not new; supper traffic has been declining steadily in recent years as a weak economy curbs spending and an abundance of pre-cooked and prepared options have become available at grocery stores. But, says Elliott, although this daypart has dropped to a 22.8 per cent share of traffic, it still accounts for the highest share of dollars (38.6 per cent).

As smartphone ownership increases in Canada, (to 57 per cent — well above the global average of 42 per cent), digital innovation is showing up across the foodservice industry. What Carter coins the “digital door” (any customer who accesses a restaurant through the Internet or mobile device) may currently account for a mere two per cent of restaurant traffic but it’s growing at more than 20 per cent annually. “In fact, digital-door traffic has tripled over the last four years,” he says.

McDonald’s, which has been leading the charge with its self-order kiosks, was joined this year by the increased penetration of Starbucks order-ahead app, “which is just doing fantastic for them,” notes Carter. Boston Pizza rolled out its MyBP Rewards program (online and in app form) and the launch of the UberEats program in 2015 started to get serious traction in 2016 — a function, Carter says, of the growth that’s coming through digital channels. “[The digital door] is now worth $1 billion in annual sales and is the fastest area of growth in the marketplace as more consumers look at the convenience factor associated with it. It’s starting to define the marketplace and will be highly influential into 2017,” he says.

While Carter says he expected digital was going to be a growth area in 2016, he didn’t think it would grow so dramatically. “Nothing in the foodservices area changes so quickly, because consumer behaviour is so engrained, but the digital growth was a lot more dramatic because of the increased adoption of the idea of ordering food through an app or online. [Adoption] may have seemed to be slow, but it’s just growing gangbusters.”

Underlying that is the continued force of the millennial cohort. “They now represent the largest group of restaurant consumers and their influence on the marketplace is being felt on the marketplace from a digital footprint standpoint.”

Carter says in 2017 he expects to see a tie-in between digital ordering and the HMR category. “It seems to be the natural next step; the demand from a consumer standpoint is definitely there.”

“Overall we’re expecting a bit of moderation in foodservice growth for 2017,” says Elliott. “This is really because we’ve seen such strong growth of more than five per cent over the previous four out of five years.” He says he expects growth to follow Conference Board of Canada forecasts for the retail sector: a moderation in consumer spending. “It just cannot continue to grow at such an unsustainable pace,” he stresses. “But once you back out inflation of 2.4 per cent, we’re really only growing at about the same rate as the population.”

So when will things look up for the restaurant industry? “It’s going to be hard and we’re years away from that,” says Carter. “In the next five years, growth will continue to be relatively flat; I don’t think we’ll see a lot of progress because in Canada, our population growth is only coming from immigration — we’re not going to see an increase in population. Almost 50 per cent of the population eats out on a daily basis, so are we going to see a big increase in penetration? It’s hard to say. There’s still the economic impact and what that looks like from a household spending point of view.”

Carter and Elliott both agree, millennials will be the core driver of the marketplace in the coming years as the boomer generation continues to decline — causing a shift in the population. “The millennials’ eating habits are much different than those of the generations before them, so the FSR segment is going to continue to face challenges and it’s going to be the QSR and the fast-casual that’s going to experience any kind of growth moving forward,” says Carter.

Volume 49, Number 6 

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