By Tate Bastien, Rick Brown, and Vince Sgabellone
Last year was a dramatic one in Canadian retail. The post-pandemic, pent-up demand for experiences (e.g., travel, concerts, sporting events, dining out) collided with rising economic headwinds from inflation and rising housing costs. With declining disposable income, consumers became increasingly cautious. We observed dollar and unit declines in categories such as small and major appliances, housewares, office supplies, toys, and technology. These were the same categories that enjoyed abundant growth during the pandemic. Despite their cautiousness this year, consumers increased spending on items that allowed them to look or feel their best. Prestige beauty led the way, growing sales by more than 15 per cent year-over-year. It was followed by foodservice, up by about 10 per cent.
So, what does this mean as we look forward to 2024? The strong economic headwinds that started early this year are now creating a financial storm. Personal finances are likely to get worse before they get better, especially for anyone with a larger mortgage. But we know even in a declining market there will be growth opportunities. Consumers are expected to continue spending on doing things rather than buying things. Paraphrasing one of my favourite consumer behaviourists, John Dick from Circana partner Civic Science, consumers are just trying to re-fill their emotional tanks after three-plus years of turmoil, despite current economic uncertainty. They’ll try to capitalize on experiences, micro-moments of joy, and affordable luxuries.
Lingering supply-chain disruptions limited innovation in 2023, and we saw significantly fewer new product offerings. We expect to see a return to normal in 2024, with increased product innovation. This should spark consumer excitement and that FOMO feeling — fear of missing out — related to new trends.
Finally, promotions will continue to play a strong role in 2024, but that doesn’t have to be about racing to the bottom in terms of price. Think of it as driving up the perceived value for the overall spend. This will be a challenge in retail overall, and in foodservice in particular, where margins are the thinnest.
In the pages that follow, Circana’s foodservice industry analysts speak to the leading trends and market catalysts that are most likely to yield growth in 2024.
Market Overview
Canada’s foodservice market has come through the worst downturn in its history: pandemic-related devastation. With massive double-digit declines in traffic and dollars, the closure of thousands of locations, the upheaval of closed dining-rooms, mask mandates, supply-chain challenges, and labour disruptions, the impact was beyond what anyone could have anticipated. Some habits from that period persist, such as our home-centric lifestyles, while some historic habits have re-emerged, such as consumers’ love for their morning meals and coffee.
Amid the upheaval, Canada has been poised on the edge of recession for many quarters. This creates a “recession psychology” that plays into all spending decisions but has the greatest impact on foodservice decisions given the size of the discretionary spend represented by our industry. And yet, the recovery continues because restaurants are recognized as much more than places to grab a meal. They are destinations for social gatherings, celebrations, exploration, and discovery — valued for the complete food experience. Operators that can insert themselves into this experiential equation will position themselves well for the future.
The Digital Restaurant Experience
In the past year, the number of restaurant digital orders (those placed on the Internet, with a mobile app, or through text) has declined. This seemingly counter-intuitive data point is not a cause for alarm since the rate of digital ordering is still about three times what it was prior to the pandemic. Instead, this flattening of the digital growth curve at about 11 per cent indicates a return to in-person restaurant experiences. This exact phenomenon is reported across many of the retail businesses Circana tracks.
The Future of Foodservice forecasting model projects digital ordering will resume its momentum sometime in 2024, at a rate aligned with overall market growth. In other words, it appears the decline has bounced off the bottom, and digital ordering will maintain its current level of importance in the market.
Like so many other aspects of the foodservice landscape, even the relatively new phenomenon of digital ordering is not immune to evolutionary forces. One such force is loyalty programs. As operators battle each other and third-party aggregators for the screen space and clicks of a fickle customer base, their loyalty programs keep expanding. Dealing is a common technique employed by these loyalty platforms to grow engagement, contributing to the overall increase in dealing. And yet, the use of loyalty programs has stalled over the past two years at about 30 per cent. In this uncertain economic environment, it appears consumers seek the latest deal rather than the best loyalty program. Time will tell which programs, and program features, will endure.
The Foodservice Segment Shifts
Total restaurant traffic grew by seven per cent for the 12 months ending September 2023. This is a very positive number — it means total commercial foodservice traffic in Canada has achieved the nine billion-visits mark once again, shown by the latest CREST consumer tracking data from Circana.
Digging deeper into this performance, FSR outpaced the market with 12 per cent growth, as people returned to in-person dining this year. This compares with QSR growth of seven per cent, leaving both segments flat to 2019. Only the retail foodservice segment failed to increase visits in the past year, remaining below 2019 levels. Performance in recent months indicates the tides continue to shift, influenced in part by trading-down behaviours among price-conscious consumers.
Peeling away the next layer of the data, both the casual and midscale FSR subsegments grew at similar rates. Casual was helped along by a surge in socializing experiences, while midscale received a boost from on-premises breakfast. Both benefit from the return of some workday foodservice activity and the persistent pandemic-era trend of supper meals with the family.
Chart 2 shows growth across QSR subchannels is not so equally distributed, although each did add visits in 2023. The fastest growth was in the QSR varied menu subchannel, which comprises anything not included in the other subchannels, including the booming trend among restaurants serving Mediterranean and Asian cuisine. This benefits smaller chains and independents as consumers seek out new and unique menu offerings and, in some cases, search for the flavours of their homelands. These operators are also a target of consumers who are trading down from FSR but still seek something a bit more elevated than traditional QSR.
QSR coffee is the second fastest-growing subchannel, but it remains depressed versus pre-pandemic volumes. Like QSR sandwich, it depends heavily on a steady flow of workday-related visits. While these rebounded somewhat in the past year, many people continue to work from home, hampering a full recovery of these functional foodservice visits.
Looking ahead, Circana’s Future of Foodservice predicts flat growth in 2024 of two to four per cent for both QSR and FSR. But the QSR burger, chicken, and pizza subchannels are expected to trail this performance, just as they have in 2023.
