While analysts may have defined 2016 sales as being flat, the Top 100’s top 10 operators recorded gross-sales increases for the year — thanks in large part to mergers and acquisitions activity and new unit openings. In fact, many of this year’s Top 100 brands grew their numbers, posting total 2016 gross sales of $32.1 billion, up 6.6 per cent from $30.1 billion in 2015.
Robert Carter, executive director, Foodservice at Toronto-based NPD Canada says the big message overall in 2016 was “the same as it was last year — it’s a steal-share game. If you’re growing, then you’re literally stealing customers from the competitive set.” With that in mind, he says competitive pressure has continued to increase and is driving innovation from a menu standpoint. “We’re seeing a lot more unique positioning of menu items and expansion of core menu offerings from top operators trying to drive additional consumers to different dayparts,” he says, adding many brands are unveiling bolder additions to core products — such as McDonalds’ recent introduction of the Bacon Big Mac and the move to all-day breakfast by both McDonald’s and A&W.
The View From The Top
Tim Hortons dominated this year’s Top 100 by posting sales of $8.5 billion (up $428 million from 2015). The chain, owned and operated by Restaurant Brands International (RBI), opened 200 new units in 2016, bringing its total units to 4,613 (3,650 in Canada; 812 outside of Canada), once again garnering the Tops in Hospitality Award for highest sales-volume increase.
After acquiring the iconic Canadian brand in 2014, Restaurant Brands International began reducing its costs by downsizing its head-office staff and creating price efficiencies by amalgamating its Burger King and Tim Hortons’ purchasing functions. The moves were good news for RBI’s shareholders, as the cuts helped boost the company’s bottom line and saw share prices jump almost 40 per cent. But franchisee discontent has run rampant — resulting in the formation of the Great White North Franchisee Association, an alliance of Tim Hortons Canadian franchisees working to address what they allege are RBI-initiated changes that are impacting their ability to effectively run their franchises (see story on p. 5)
International expansion was also on the menu in 2016 as the company signed deals that will see the brand expand to the U.K. and the Philippines. The brand grew its breakfast share in 2016 by five per cent, thanks in part to the introduction of its croissant breakfast sandwich. Another noteworthy move was the addition of fresh salads to the menu.
McDonald’s Restaurants of Canada had another great year, finishing 2016 with gross sales of $4.5 billion, good enough for the number-2 spot on this year’s Top 100 Report. With 1,450 units in Canada, the company — which is celebrating its 50th anniversary this year (see story on p.30) — expanded its modernized guest experience and self-ordering kiosks across the country in 2016. “The continued technology movement is one way the big chains are looking for additional revenue opportunities in a flat market,” says Carter. But not everyone thinks this trend is a positive one. According to Doug Fisher, president of FHG International Inc. in Toronto, technology — specifically automation — is “a big and ugly thing that happened over the last year and is going to continue on the QSR side. It’s horrific.”
Fisher argues companies such as Starbucks, McDonald’s and Wendy’s “talk about how customer service is the primary item they’re selling yet they’re getting rid of it. They’re getting rid of someone saying hello and thank-you and [replacing it with] a machine. I go to the drive thru at McDonalds now because the idea of ordering from a machine is so unpleasant. I’d still like to talk to a person and have some interaction. Maybe that’s a baby boomer reaction to a millennial change.”
While he says he hasn’t seen sales increase with the change to automation, the move has started to reduce labour. “I never anticipated the restaurant scene becoming a mechanical machine,” he says. “If you can automate ordering, you can automate burger production and, at some point, lose the bodies all together. That [reflects] badly on our industry.” Subway Restaurants rounded out the top-three with gross sales of $1.7 billion, a 12-per-cent increase over 2015. In response to growing consumer demand for transparency and cleaner foods, the brand continues to work toward its commitment to remove all artificial colours, flavours and preservatives by the end of 2017.
“[There is an] emotional aspect to eating out and you’ve got people who are trying to live a better version of themselves,” says Carter about the healthy eating trend. “This is leading to the rise of trends such as raised without antibiotics and more transparency around food because consumers want to know what they’re eating.”
With today’s consumers more time strapped than ever, the market for freshly prepared foods continues to grow. As a result, growth of Home Meal Replacement (HMR) segment means the battle continues between restaurants and grocery stores for market share. But the food highlighted as “Food-to-Go” is not your grandmother’s rotisserie chicken. “We expected meal kits to have slow growth but it’s been very dramatic,” says Carter. “That speaks to the fact consumers aren’t cooking at home and are looking for convenient meal solutions. Clearly consumers are buying time.”
According to Fisher, in today’s foodservice landscape, acquisition is the only way to expand. “[Operators are] not stealing share — they’re buying share,” he says. “Stealing would be coming up with something more creative and taking business away from someone else. They’re just buying market share and, from a stock market standpoint, it’s a good strategy but it impacts the consumer.”
Carter agrees that the most effective way to increase market share is to increase penetration through unit counts. “You see it in the Cara acquisitions as it expands its footprint,” he says. “Getting more units suggests you’re going to drive some traffic gains because you’re going to be stealing from competitors overall if you have brand strength.” From a consumer standpoint though, Fisher says the acquisition approach to growth has created a “homogenized and white-washed” industry. “Our industry, especially in Canada, has [become]particularly boring, especially where the chains are concerned,” he says. “They aren’t creating anything new, just buying one another. From a shareholder perspective, it’s very good but what it’s really indicating is that the big players have lost creativity in our market.”
The other problem with having all the big brands together under one roof, warns Fisher, is they are all starting to look and taste the same. “There is little difference between a Kelsey’s and a Casey’s and an East Side Mario’s and a Montana’s — they’re all serving ribs, pasta and chicken.”
In a nod to better-for-you restaurant options, Pita Pit increased its gross sales by 32 per cent to $391 million. “Pita Pit is growing as it moves towards that perception of health and wellness,” says Carter — “Better-for-you foods, customization and personalization of its offerings.
He also singled out Vaughan, Ont.-based Shoeless Joe’s, which grew sales by $19.8 million over 2015. “Shoeless Joe’s went through a great menu revamp, with more focus on [food quality] and chef-inspired meals, moving away from the sports bar image,” he says, adding the players “putting a greater focus on innovation around the food, talking about upscale quality and enhanced flavour offerings (even within the QSR segment) — those are the areas we see growth coming.”
And with per-capita consumption dropping by 12 visits per year in the last year alone, innovation becomes even more important. “If you’re not going out as often, you want to make sure that when you do, you’re getting the best possible experiences,” says Carter. Another industry disruptor in 2016 continued to be the growth of services such as UberEats, JustEats and chef-prepared meal kits — all of which can aid operators looking for additional revenue opportunities in a flat market. “The explosion of delivery was unexpected,” says Carter. “We saw the growth — we knew it was coming — but what was surprising was how aggressively it’s now resonating with consumers.”
Fisher points to the drive towards more ethnic foods as a key trend in 2016 and identifies Toronto-based Paramount Fine Foods as the leader in that space. “Many other [operators] are going to jump into the Middle-Eastern food market. It’s a good and interesting hole in the marketplace.”
He says there have also been many fun, trendy offerings such as Sweet Jesus, Chimney Stacks and Eva’s Original “but I don’t think it’ll last very long.”
A new battleground
For the balance of 2017, Carter says he doesn’t expect any big industry shifts. “There’s not going to be a game-changer [causing] the industry to grow four or five per cent; it’s going to be really hard to drive growth and operators need to be more strategic to identify growth opportunities.”
Technology is expected to play a much more advanced role, with more operators moving to app platforms similar to Starbucks — making it convenient to pay, order and interact. “Brands will move more to social and mobile — that’s really where the battle is going to be,” Carter predicts.
Competition — both from other restaurants and the retail sector — will be another driver behind operators’ growth strategies. “[Restaurants] need to steal share from the grocery segment,” says Carter. “It’s becoming a bigger threat and operators are starting to recognize that and are looking for ways to eke out every customer.”