In the years leading up to COVID-19, the quick-service restaurant segment was a growing industry. “Between 2014 and 2018, QSR was seeing average annual sales growth of 5.8 per cent per year, which is exceptionally strong,” says Chris Elliott, senior economist for Restaurants Canada. “We were also seeing expansion in number of units and overall, there seemed to be this growing need for people wanting convenience and value. Breakfast, especially, over the last decade, was driving a lot of that foodservice spending — people were looking for that convenience on the way to work.”
But in 2018, Elliott says higher menu prices began to impact the segment, especially in Ontario due to the minimum-wage increase. “Once you factor out inflation and unit growth, average unit volume adjusted for inflation was actually higher [in 2017] than in 2019. So, even though we saw the overall aggregate sales numbers were growing — and hit a record level in 2019 — at the operator level (total sales divided by the total number of units) sales have lagged the last few years. Economists would say ‘on the one side, sales are up; but on the other side, sales were flat.’ Overall, people were spending more at restaurants, but from the restaurant perspective, they weren’t seeing any improvement in sales.”
A deeper dive shows that pre-COVID, the QSR industry was actually starting to slow down, agrees Vince Sgabellone, industry analyst, Canada Foodservice, The NPD Group. “The FSR industry was actually outpacing QSR in terms of traffic and dollar growth,” he says, adding over the last two years, he’s seen that accelerated evolution and change within QSR was coming anyway. “The digital, delivery and at-home consumption revolution that we were all forced to adopt in March of 2020 was already taking place somewhat. Prior to COVID, more people were working from home, shopping from home and entertaining at home already, [which meant] meals, snacks and beverages at the office, on the way to the office or on the way home from the office — those were already starting to slow down. The coffee industry in particular was feeling that hit.”
Signs of the Times
In March 2020, the world shut down. Restaurants shuttered, office buildings sat empty as employees worked from home and sales across all foodservice segments plummeted. By April 2020, QSR sales had dropped 40 per cent compared to pre-pandemic levels, according to data from Restaurants Canada.
This compared to full-service restaurant, where sales were down about 77 per cent, and drinking places such as bars, taverns, and nightclubs, down almost 90 per cent. “Many of these [FSR and drinking place] operators had shut down completely because they didn’t have any type of off-premise service,” explains Elliott of the gap in segment performance levels. “They weren’t doing any type of delivery or takeout service.”
Largely though, quick-service restaurants could stay open because they had takeout, drive-thru and delivery options, says Elliott, adding most of what was closed were food courts inside malls.
Pre-pandemic, Sgabellone says 60 per cent of QSR business was off premise, meaning the segment was more than ready to pivot once lockdowns began. “It wasn’t as big a deal for them. Many of the big players also were already heavily invested in digital, so when the market went digital, they were ready with their digital platforms. And many of them had the drive-thru already, which again, was just a way to enhance that on-premise revenue.”
When COVID-19 hit “that 60 per cent went up to about 80 per cent, so it actually grew in size, not just in share. The QSR industry was able to pivot very quickly, because it was already set up for off-premises — that was their meat and potatoes, especially at the chain level — although that wasn’t necessarily the case as much for the independents, who would have had to struggle a little bit more in the beginning as they didn’t have the digital platforms or the drive-thrus.”
Throughout this pandemic, Elliott says he saw a much faster recovery for quick-service restaurants. In fact, by June 2021, foodservice sales in the QSR segment had returned to pre-pandemic levels.
“One of the biggest factors driving these sales was not actually delivery, it was drive thru, which accounted for about 50 per cent of all sales at quick-service restaurants up to about April 2021. People were looking for that touchless, almost contact-free approach, so any restaurant hat had a drive-thru outperformed those restaurants that did not,” says Elliott.
And while delivery and takeout were touted as the saviours during pandemic times, digital and delivery sales had actually been experiencing double-digit year-over-year growth long before COVID-19 appeared.
“In the three years prior to the pandemic, [digital ordering] doubled from about two per cent to about six per cent of orders,” says Sgabellone. “And then in March , it tripled again to about 18 to 20 per cent and now it’s settling at about 15 per cent of orders.”
While the digital trend is linked with delivery and third-party delivery apps, Sgabellone adds digital also means pre-ordering your drive-thru order or coffee, which emerged as a growing trend during the pandemic.
The Rise of Gen Z
In his almost 15 years of following foodservice trends, Sgabellone says the top foods in Canada have remained fries, burgers, chicken sandwiches and pizza.
“That’s not going to change,” he says. “Those top foods are always good to top foods, but now they’ve become a tremendous platform for new flavour exploration, whether it’s some sort of a global flavour or new preparation, [as well as] the meatless revolution.”
One of the main drivers of flavour innovation to emerge during COVID-19 was a shift in demographics. As the Gen-Z generation (24 years old this year) leave the nest and enters the workforce, Sgabellone says the group’s influence on the foodservice market is growing exponentially. And not just in QSR, although he says that segment accounts for 60 per cent of all Gen-Z visits.
“Their behaviours are driving the market,” says Sgabellone. “[For example,] their demands for exploration of flavours — they’ve grown up with the proliferation of brands and flavours and that creates opportunities for the big [brands] to jump on board those flavour trends. But it’s also the opportunity for the little guys — the independents and the small chains.”
He points to the growth in Indian, Mediterranean and Ethiopian cuisines “and this is from the little mom-and-pop independents to small chains. A lot of the influence in those flavour trends are coming from the back-end millennials and the front-end Gen Zs, who are less brand loyal and more interested in trying something new.”
Talking About a Revolution
As restrictions continue to be lifted and people feel more comfortable going out to eat in restaurants, Sgabellone says QSR operators will have to figure out how to keep those off-premises customers they gained over the last two years.
“People have gotten used to ordering off-premises and some of that behaviour will stick. But at the same time, there’s all this pent-up demand for sitting down in a restaurant and enjoying the experience. And quick service has always been just as its name states: quick and convenient. So, once the experiential part of restaurant dining comes back into our consideration set, quick service is going to be diminished from consideration and [operators are] going to have to figure out how to how to do [experiential dining]. Otherwise, they risk going back to where they were pre-2019, which was slowly slowing down.”
He says this could mean coming up with ways to bring an experience into the quick-service environment, or making sure operators hang on to their off-premise customers using loyalty programs, deals or new flavours.
Elliott agrees it will be an uphill battle for the segment as the QSR revolution continues. “It’s a challenging revolution, because what you’re also seeing is other people looking at the quick-service-restaurant market and saying, ‘I can do that, too.’ And I’m thinking specifically grocery stores in the last couple of years, [and] convenience stores where they want to play in the same sandbox; they want to be able to provide value, lower-priced foods, convenience, where you can just pick up and go. So, that’s going to be a new era of competition for quick-service restaurants, compared to say, a decade ago. And because of that competition, quick-service, restaurants are looking for new ways to adapt and change and are being forced to look at new ways to remain relevant to the guests and customers.”
By Amy Bostock