Hospitality Market Report: Battle for Business

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The good news is, slowly but surely, inch by inch, the Canadian foodservice industry is recovering from the recession. Overall, 2014 was a year of fairly healthy sales growth: Toronto-based Restaurants Canada projects that by the end of 2014, we will have seen a 4.9-per-cent rise in commercial foodservice sales over last year — a jump from $54.8 billion in 2013 to $57.5 billion in 2014. That said, traffic to foodservice outlets was relatively flat in 2014, according to Robert Carter, executive director at the NPD Group in Toronto. “There was not a lot of growth in customer traffic, only about 1.0 per cent,” he says. “So a lot of the [sales] growth is coming from increases in the amount of money people are spending per occasion. The average eater check seems to be increasing.”

This could be in part due to slightly better consumer confidence in the face of a slowly (but surely) rebounding Canadian economy. At the end of August 2014, unemployment was 7.0
per cent — a 0.5-per-cent increase compared to 12 months earlier, not much of an increase, but an increase nevertheless. Real GDP growth was hovering just above 3.0 per cent for Q2 and was expected to be approximately the same for Q3 2014, according to CIBC World Markets Inc.’s data. Its “Economic Insights” report from September 2014 sums up the state of the economy as such: “Though employment continues to seriously disappoint, the economy appears to be expanding at a solid clip. Growth is poised to post two consecutive quarters of growth above 3.0 per cent, with available data pointing to upside risks to our current 3.2-per-cent Q3 call. Canadians are, however, tapped out on credit, and having already dipped into savings, a moderation in consumer spending could temper Q4 growth. But Canada’s exports are coming alive, with reasons to hope that related business investment is on its way.”

So, while things are looking up, the average Canadian is still mired in debt. And, although consumers seem willing to spend a little more at foodservice outlets, they still aren’t willing to spend a lot more. So it makes sense that the biggest foodservice story for 2014 is that the quick-service sector continues to outpace growth in full-service, at 5.3-per-cent growth for QSR compared to 4.6 per cent in full-service, according to Restaurants Canada. “Within the quick-service segment, which represents 64 per cent of all customer traffic, that’s where we’re seeing very strong dollar growth in the average eater check growth,” explains NPD’s Carter. Analysts have typically attributed the better performance of QSR in recent years to a cash-strapped consumer, but Carter says the economy doesn’t tell the whole story in 2014. “In 2008, when the downturn hit, that was more of an influence,” he explains. “But then, as the economy starts to recover and employment numbers start to stabilize, the convenience factor tends to play a huge role.” Time-crunched consumers appreciate getting good food in a hurry, with an emphasis on “good.” QSRs have been stepping up their game, offering better quality, more premium items, unique flavours and innovation. That, combined with the advent of more upscale fast-casual chains entering the quick-service market, has allowed traditional QSRs and fast-casual outlets to charge more for certain items, as consumers are willing to pay a little bit extra for quality and innovation.

This all ties in with today’s evolving consumer demands. According to Kelly Weikel, senior consumer research manager at Technomic, Inc. in Chicago, Canadian operators in all foodservice sectors were faced with a more discerning consumer in 2014. “Today’s consumers are demanding,” says Weikel. These high expectations relate to craftsmanship, food provenance (the desire for organic and local, for instance), customization  and unique and innovative tastes  and flavours.

Across all segments there’s been an increase in customer loyalty programs designed to retain today’s choosy customer. “The marketplace is becoming so competitive that operators need to focus on not only securing their existing customers, and giving them a reason to come back, but also — how do you steal customers from your competitors?” asks Carter. Creating loyalty is especially important when it comes to millennials, who are approaching restaurant experiences somewhat differently than previous generations. “We still eat food as fuel, but these days food has become social, food has become fun, and you’re going to talk about it, Instagram it, Facebook it,” says Warren Price, EVP at Toronto-based chains New York Fries and South St. Burger Co. When a millennial goes to a restaurant and has a great experience, they’ll spread the word on social media, and similarly, bad experiences spread like wildfire. This ups the ante for operator performance, says Price.

Sector By Sector
The strongest growth by far, in terms of foodservice sectors, was the catering segment, at 6.6-per-cent growth in 2014, according to Restaurants Canada data projections. “And that’s been driven by a number of factors,” says Chris Elliott, senior economist at Restaurants Canada. “We’ve had a booming natural resource industry, so that’s led to some fairly strong growth for the remote camps that have been servicing that industry. We’re also seeing a lot of contracting out in healthcare foodservice — retirement homes and long-term care facilities are adding beds because of an aging population — and we’re seeing a lot of contracting out at hospitals. And we are also seeing strong growth in education-related foodservice
because of increased enrolment in colleges and universities.” Conversely, “drinking places” is a category expected to grow by just 0.8 per cent in 2014. Elliott points to increased awareness of drinking-and-driving legislation, as well as a spike in alcohol prices at drinking places as a couple of reasons for the decline.

But when it comes to the traditional restaurant market, as discussed earlier, quick-service clearly came out on top with a strong 5.3-per-cent growth in 2014. “Customers are still looking for affordability, especially if we’re talking about high debt levels and consumers being squeezed,” says Elliott. “And of course, for their part, operators have responded, introducing new menu items for customers, offering new value-based promotions and improving the quality of the food.”

New York Fries and South St. Burger Co.’s Price says his quick-service chains have had “a pretty good year overall, although there have been some battles to make it that way.” For New York Fries, Price says same-store sales (as of the end of July) were up by approximately 3.0 per cent, with system-wide sales up by 6.7 per cent, factoring in new unit growth. On the South St. side, same-store sales were fairly flat, although system-wide sales were up by 11 per cent due to unit growth. “South St. is in a different marketplace, where we’re fighting a little harder against the competition, not just in the premium burger business, and there’s plenty of that, but also in the restaurant business in general. There are so many restaurants today,” he says, explaining that while people seem willing to spend a little more money at QSRs, it’s still a continual fight to gain customer loyalty in today’s increasingly competitive atmosphere. So, Price’s chains are constantly tweaking the menu and ingredients to ensure consumers find their food exciting and satisfying.

On the full-service side, there has been 4.6-per-cent growth from 2013 to 2014. While that sounds fairly good, sales in this segment — which encompasses everything from casual family chains to fine-dining independents — still have a ways to go to reach pre-recessionary levels. Interestingly, NPD’s Carter believes part of this slower recovery can be blamed on the fact that QSR’s quality and innovation is rising so rapidly, particularly in the growing fast-casual market, that quick-service is taking business away from full-service. “People are responding to that quick-service market improvement at the expense of the full-service dining segment,” he says. Technomic’s Weikel agrees: “The distinguishing factors that used to be there for full-service in terms of quality and service levels are starting to blur a little more. So consumers are starting to say, ‘OK, I can get close to the same thing at quick-service for a much lower price point.’”

However, this doesn’t have to spell gloom and doom for full-service operations. Weikel sees the increasing consumer desire for craftsmanship, artisanship and the overall unique “experience” as values that can be achieved best at full-service restaurants. So, for full-service operators to succeed, they should aim to satisfy that desire for a uniquely hospitable and remarkable experience. “From a consumer standpoint, they’re saying, ‘If I’m going to be paying for this full-service experience, I want something that’s going to be different.’ So differentiation is really important — and creating that full experience,” says Weikel.

Tony Longo, director of Operations at Toronto’s Ink Entertainment, which operates a number of trendy nightclubs and high-end restaurants, agrees that thriving in full-service restaurants these days is about upping the experience. “It’s about creating unique markets and specializing in a food style. So, if you’re serving Spanish, you’re not going to serve anything but Spanish,” he says, a nod to Patria, his company’s upscale Spanish restaurant in Toronto, which has received excellent reviews from food
critics for its authentic Spanish cuisine. “This is what you come here for, and it’s done extremely well.”

Vancouver-based Cactus Club Cafe, a casual fine-dining chain and 2014 Pinnacle Award winner, is also finding success by giving the full-service consumer a better experience. Richard Jaffray, founder and president of Cactus Restaurants Ltd., says his chain succeeded in 2014 by “offering customers affordable luxury in terms of food, service and atmosphere.” The consumer desire for local and sustainable foods is another area where full-service venues can often outshine QSRs, and Cactus Club has made a concerted effort to satisfy this desire. “We have found that our customers have an increasing interest in local and sustainable menu offerings, which is why we continue to support the Vancouver Aquarium’s Ocean Wise program and work with local suppliers where possible,” says Jaffray. “While this is a challenge for some concepts to respond to, for Cactus Club Cafe, it is a ‘great news’ story.” And, that’s the differentiator.

*Please note statistics in this story have been updated since most of its featured charts were created.

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