Mixed Bag: Looking Back at How Foodservice Operators Fared in 2018

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Following two years of solid sales growth across all sectors, sales in Canada’s foodservice industry slowed slightly to 5.2-per-cent growth in 2018 — down from six per cent in 2017 and 6.7 per cent in 2016. This trend was reflected in this year’s Top 100 Report, which saw total gross sales for our Top 100 operators increase modestly to $36.5 billion for the 2018
fiscal year.

According to Chris Elliott, senior economist at Toronto-based Restaurants Canada, 2018 will likely be remembered for being a complex mix of industry growth and operator struggles.

“Overall, when we look at foodservice sales in 2018, there was almost $90 billion in sales — up 4.3 billion and representing a 5.2-per-cent increase over 2017. In any other year, that would be something we’re celebrating. But, the problem is, most of that increase [in 2018] was due to menu inflation. When you back up menu inflation and the decrease in unit growth, for the average operator in Canada, it was actually down slightly. Essentially, it was flat compared to where it was in 2017.”

But, he adds, it depends on where you were in the country “because in some provinces, such as British Columbia, we continue to see some fairly strong growth.”

Quebec also had another strong year. “It’s something we’ve seen over the last few years due to the low unemployment rate and strong consumer confidence,” says Elliott. “In Ontario, it was the reverse. We’d seen several years of really strong growth and then suddenly, for the average operator — again once adjusted for menu inflation — meal sales were down 2.2 per cent.”

He points to the increase in the minimum wage in January 2018 as a cause for the slow down. “Operators were struggling with how to cope with these changes. It was quite a shock to them. For some of them, they were reducing employment hours. We didn’t see that big of an impact on employment overall — they were looking for other cost efficiencies. But it seemed the biggest way to adapt to this was to raise menu prices. So, we saw menu inflation in Ontario hover around seven per cent throughout a good portion of 2018 — that’s the largest increase since [the introduction of] the GST in 1991.”

He says full-service restaurants came out on top in 2018. In contrast, the quick-service segment saw a bigger increase in menu inflation, which “caused a bit of sticker shock for a lot of guests at restaurants and they basically said, ‘well, we’re either going to go to a full-service restaurant or not going out as much’.”

However, according to David Hopkins, president of Toronto-based The Fifteen Group, the QSR segment had a positive 2018, moving to offer higher quality ingredients, producing better dishes and presentation in its offerings — all while maintaining convenience and affordability.

And while Elliott says some of the larger chains are struggling, independent restaurants are doing well because of the growth of delivery. “What we’re seeing is some of the smaller independents now getting a nice foothold in [the market] because of the growth of the delivery category.”

Last year also saw a number of high-profile international brands, such as Jollibee and Chick-fil-A — setting their sights on Canada. “The foodservice industry in Canada has been the fastest-growing segment out of all the major industries over the past decade and [international brands] see that growth and that strong opportunity,” Elliott explains.

On the flipside, he says, are the homegrown brands taking their concepts outside of Canada. “They find there’s limits to how far they can grow in Canada and are looking for new opportunities to try and add to their bottom line. We hear about [many brands] going into the Middle East as well as parts of Asia.”

Hopkins agrees. “Canadian brands continue to look beyond our borders because of both market size and cost advantages. The Canadian market is still an expensive place to operate a restaurant and a relatively small market for multi-unit growth.”

But, warns Hopkins, “we should note that not all make the move or succeed unless they really understand and prepare for the higher labour and food costs.”

LEADING THE CHARGE
Tim Hortons once again dominated the Top 100 Report, closing out 2018 with $8.9 billion in gross sales — a modest two-per-cent increase over last year. The Toronto-based coffee giant experienced a transformative year, following a period of franchisee unrest in 2017.

Last March the chain unveiled its revitalized restaurant design, promising to “provide guests with a modernized restaurant experience.” Together with its restaurant owners, Tim Hortons plans to invest $700 million to bring the ‘Welcome Image’ to a majority of Canadian locations over the next four years. The new image includes exteriors boasting natural looking, lighter and more inviting materials, while the open-concept interiors will feature artwork that reflects Tim Hortons’ values and history — including a commissioned portrait of Tim Horton, a mosaic of iconic brand images and a photo wall that features the brand’s unique coffee-sourcing and proprietary blending process.

In July, the brand entered into an exclusive master-franchise joint-venture agreement with Cartesian Capital Group to develop and open more than 1,500 Tim Hortons restaurants throughout China over the next 10 years. It also announced a multi-year plan to expand and modernize its Canadian distribution network as part of a long-term commitment to support restaurant owners and improve the guest experience in restaurants. The plan included the construction of two new warehouse facilities — one in Alberta and one in B.C. — and the significant expansion of an existing warehouse in Debert, N.S.

A number of menu overhauls took place in 2018, including the introduction of all-day breakfast in July and the new Timmies Minis kid’s menu in November. Tim Hortons first piloted “Breakfast Anytime” in several Ontario locations earlier that year — a decision motivated by increased guest demand for the all-day menu offering.

In the number-2 position, with $5.3 billion in gross sales, McDonald’s Restaurants of Canada achieved huge growth in 2018, recording a $300-million increase in gross revenue over 2017. The year also saw two new McCafé locations open in Toronto. While the brand continues to grow market share in Canada, establishing McCafé as a café destination is part of the company’s ongoing strategy to build on its reputation as a leading coffee brand and marks the next step of McCafé’s evolution. 

In July, the QSR icon became the first company in Canada to serve Canadian beef from certified-sustainable farms and ranches, beginning with its Angus line-up, in accordance with standards set by the Canadian Roundtable for Sustainable Beef.

It was another busy year for MTY Food Group, closing out 2018 in third place on our Top 100 Report with $2.7 billion in gross sales across its 75 brands (due to the company’s huge portfolio of brands, we have once again chosen to highlight total numbers for all MTY brands combined). The QSR giant added five more concepts to its growing portfolio in 2018. In March 2018, it acquired 27 Grabbagreen locations for approximately US$2.675 million. Shortly after, the company bought Timothy’s World Coffee and Mmmuffins from Threecaf Brands, Canada, Inc., a subsidiary of Le Duff America, for about $1.7 million — adding 32 franchised and seven corporately-operated locations to its stable.

In September, MTY bought the SweetFrog Premium Frozen Yogurt franchise system for US$35 million, assuming control of all 331 franchised/licensed restaurants. The company then picked up most of the assets of Quebec-based Casa Grecque, including 31 franchised restaurants, as well as a central kitchen and a distribution centre that service the Casa Grecque restaurants and some external customers.

The company finished the year by signing an agreement to acquire the assets of gourmet-burger favourite, South St. Burger, which had 40 restaurants in operation.

Starbucks finished 2018 in fourth place in the Top 100, bringing in an estimated $1.8 billion in gross sales and opening 58 new units, including new Reserve Bar locations in Toronto and Vancouver. In July 2018, the company announced plans to eliminate plastic straws across its 28,000 stores by 2020. As part of its $10-million commitment to develop a fully recyclable and compostable global cup solution, Starbucks designed, developed and manufactured a strawless lid for all iced coffee, tea and espresso drinks.

The company also closed a deal with Nestlé in August 2018, granting Nestlé the perpetual rights to market Starbucks consumer packaged goods and foodservice products globally, outside of the company’s coffee shops. The agreement covers Starbucks’ packaged coffee and tea brands, such as Starbucks, Seattle’s Best Coffee, Teavana, Starbucks VIA Instant, Torrefazione Italia coffee and Starbucks-branded K-Cup pods.

TOP 100 NEWCOMERS

A number of additional companies also made their Top-100 debut this year.

A newcomer to the Top 100 Report, but no stranger to the foodservice landscape, Montreal-based Foodtastic Inc. expanded its portfolio in 2018, thanks in part to a $47-million investment from Restaurant Royalty Partners — a joint venture managed by Oaktree Capital Management L.P. and JHR Capital LLC. The funding helped Foodtastic continue its organic-growth plan, which saw 13 new restaurants open in 2018.

“Our partnership with Restaurant Royalty Partners marks an exciting next step in our company’s growth. This capital will accelerate Foodtastic’s strategy of acquiring brands with strong potential for growth,” says Peter Mammas, president and CEO of Foodstatic.

Among its purchases are Enoteca Monza Pizzeria Restaurants, a growing, Montreal-based full-service Italian-restaurant concept with a state-of-the-art food commissary.

“The Monza acquisition will leverage our marketing, purchasing and operational systems to better serve our existing franchisees,” says Mammas.

Foodtastic Inc. has plans to grow the Monza brand immediately, with four new units set to open in the Montreal area in 2019 and locations in Quebec City and Outaouais region slated for 2020.

Mississauga, Ont.-based Paramount Fine Foods debuted in 46th position with $90 million in gross sales across its 50 locations. A privately owned Canadian company, Paramount Fine Foods followed up a strong 2018 year by announcing its global expansion strategy for 2019. The Middle-Eastern restaurant chain plans to open 16 locations by the end of the year, bringing its total to more than 80 worldwide.

In the number 62 position, Calgary-based Craft Beer Market’s seven locations reported gross sales of $52.5 million in 2018. A privately owned Canadian company, the chain opened a new location in Kelowna, B.C. in June 2018. Its other locations are located in major cities such as Edmonton and Vancouver.

Known for its unique spin on vegetarian cuisine, Copper Branch is a plant-based restaurant chain launched in Dorval, Que. in 2014. With 48 locations, the company joined the Top 100 list in 94th position with $14.5 million in gross sales. In November 2018, the company expanded to the U.S. with its first location in New York City. The chain is targeting a total of 80 locations across the globe by the end of 2019 and 150 locations by 2020.

TRENDS
“Anecdotally, 2018 was the year of the plant-based offering,” says Hopkins. “[There were] so many operations with a new approach to plant-based food and not all focused on super-healthy offerings, but instead showing how great vegan food can actually taste, for both the vegan and non-vegan guest. Vegan and plant-based eating exploded — attracting a broader guest segment that is deciding to eat vegan for the health benefits versus what it traditionally [represents].”

Middle-Eastern cuisine continued to be a growing segment in both fast casual and QSR, he says, offering unique variations of the traditional cuisine.

He also points to technology as an important part of the changing foodservice landscape. “Self-ordering kiosks are now becoming more prevalent, as well as mobile ordering, which is becoming easier for the consumer.”

A LOOK AHEAD
Looking ahead to 2020, a lower unemployment rate will drive wages up, increasing disposable income by 3.4 per cent, according to data from Restaurants Canada. Elliott says this impending rise partially accounts for the increased sales growth — both nominal and real — anticipated for next year.

“So, 2020 will be more in line with 2019,” he says. “We’re not seeing a lot of economic activity, although it will improve compared to where it was in 2019. But, in terms of consumer spending, we’re not expecting to see a lot of disposable-income growth. Overall, for 2020, we’re looking at a 4.4-per-cent increase in sales.

In the meantime, he says, menu prices will rise an average of 3.1 per cent in 2019 as foodservice owners seek to compensate for rising labour costs, plus staff-recruitment and retention expenditures.

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