The 2017 Hospitality Market Report

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Illustration By Margaret Moore

While Canadian foodservice operators should expect a modestly healthy 2017 in terms of growth, increasing competition and a changing consumer-spending landscape are going to prove challenging into 2018.

According to a recent Conference Board of Canada study, Canadian Industrial Outlook: Canada’s Food Services Industry, an increasingly competitive restaurant landscape and weakening consumer spending means revenue growth will be limited to only 3.9 per cent for 2017.

While Canadians may be holding onto their wallets a little more tightly, signs point to consumers still wanting to eat out. A recent study by Restaurants Canada, The Discerning Diner: What Canadians Want From Their Foodservice Experience, finds most Canadians eat out at least once a month, with 42 per cent favouring quick-service restaurants and 41 per cent spending their dollars at table-service restaurants. The study also finds QSRs continue to remain popular with Canadians — 44 per cent say their choice is motivated by convenience, 34 per cent by value and 31 per cent by fast service.

QSR
Aaron Jourden, managing editor, Global, with Chicago-based Technomic Inc., says QSRs continue to be the top choice for Canadians, so individual operations and chains will have to innovate if they wish to remain competitive. “So far, 2017 has looked healthy and we expect next year to be as healthy or healthier,” he says.

In fact, according to Foodservice Facts 2017, released by Restaurants Canada, the QSR segment recorded approximately $29 billion in annual sales in 2016 and is expected to increase another 4.3 per cent by the end of 2017.

Jourden says menu innovation will be key to customer service in the QSR segment, including healthier ingredients and a wider range of food options. “They are working to eliminate some of the unwanted ingredients and additives from their menus and we are starting to see them move towards more sustainable and eco-friendly sourcing practices for their ingredients,” he explains. “This might include cage-free eggs and antibiotic-free meats; and even the introduction of some ingredients that 10 years ago you would have not seen on a quick-service menu. For example, you are starting to see high-end condiments and cheeses [at restaurants such as] Subway.”

The Discerning Diner study shows 27 per cent of Canadians say they are more likely to visit a restaurant that offers organic or environmentally friendly food. However, Doug Fisher, president of Toronto-based FHG International Inc., is skeptical. “It’s hard to believe someone is making a choice to go to A&W over McDonald’s because they say A&W has no hormones in its meat,” he says. “In the end, you are going for taste, quality and for price and convenience.”

Late last year, Technomic released 5 Ways Canadian Foodservice Will Change in 2017 — a study highlighting important changes in the Canadian foodservice market. With Chinese and Mexican foods now part of the mainstream, the report notes that Canada is likely to see more global fare making an appearance in restaurants, especially QSR and fast-casual. Another trend is plant-based comfort foods, such as burgers, burritos and pizza. Not to be forgetten, desserts, for those with a sweet tooth will see the introduction of specialty flavours and ethnically inspired options such as Mexican paletas, Taiwanese shaved ice and Japanese-style cheesecake.

Robert Carter, executive director, Foodservices, with Toronto-based The NPD Group, says while 68 per cent of all consumer traffic in Canada continues to be generated through the QSR segment, how guests interact with operations is going through a profound shift. A survey by Canada Mobile shows 42 per cent of 18 to 34 year olds ordered take out or delivery on their phones in 2016, while 35 per cent of that demographic used them for rewards or special deals.

In response, the days of lining up and placing an order with a front-line counterperson may soon be over, as many QSRs begin either experimenting or rolling out smartphone applications allowing consumers to place and pay for their orders from an app, while others are adding electronic-kiosk ordering to their locations.

Carter is quick to add this is not new to the segment. “If you look at the restaurant segment 40 years ago, it was much more traditional dinners where you would go in, sit down and eat something,” he says. “Then there was the advent of the drive-thru with A&W and McDonald’s and that changed the landscape of the restaurant market and the eating habits of consumers. That convenience option continues to evolve and, within the last five years, has seen a huge push towards digital and online technologies.”

“Online traffic in Canada represents [approximately] $1.4 billion annually in spending and that has been, over the last three years, with an average growth of about 25 per cent,” Carter says, adding he foresees mobile ordering growing exponentially next year.

FAST CASUAL
According to Jourden, while fast-casual has been a foodservice trendsetter, this year and into next will likely see a bit of a slowdown in growth, due primarily to the increased number of players in the segment. Competitive pressures from newcomers expanding into Canada — such as the popular American-based chain The Cheesecake Factory, which is set to open in Toronto this fall — means existing brands need to up their game.

“As this market gets more saturated, operators will need to start thinking about how they’re going to better differentiate themselves,” he says. “Traditionally, what we have seen in the fast-casual sector is a lot of the bakery-cafés and Freshii-type models. Now the question is ‘what else can fast-casual bring to the table?’”

The Restaurants Canada report places consumer spending in restaurants this year at four per cent of household spending, down from 5.3 per cent in 2016, due to a retrenchment in consumer’s disposable income growth and increasing consumer debt. To remain competitive, fast casual is going to have to change. While demand will moderate in Ontario and B.C., Alberta and Saskatchewan will see a slight increase following two years of declines, the report says. After adjusting for menu inflation, real sales will grow at about the same pace as population growth — meaning in order to grow sales, fast-casual operators will need to steal traffic by focusing on food quality, value, convenience and innovative menu offerings.

Innovation is certainly something Neil Creighton, director of Food and Beverage at Toronto-based Aroma Espresso Bar, says will continue to be important for companies like his to be successful. He says Aroma’s strategy of bringing the best of quick-service and fast-casual traits together has helped the company grow to 40 locations, with four more to be added by the end of 2017.

When it comes to sitting down for a coffee, Creighton says consumers are looking for something more. “One of the things that has set us apart and allows us to be successful is the commitment we made to making our locations both stylish and comfortable,” he says. “Where many others in our space have the food served in takeout packaging, at Aroma, when you sit down with our food, it is served on china and you get a proper cup for your coffee or espresso.”

FULL SERVICE
The full-service segment — from premium-casual to fine dining — continues to struggle. Carter says the segment has been facing increased challenges since 2008, when the North American and European economy were rocked by a global recession and people scaled back their restaurant spending. While there has been some recovery in the global economy, he says Canadian consumers remain cautious.

TD Economics forecasts disposable-income growth will slow from 3.4 per cent in 2016 to 3.1 per cent in 2017 and three per cent in 2018. In the third quarter of 2016, household debt as a share of disposable income jumped to a record 168 per cent. Canadians will have to bring down that debt, which likely means less spending at restaurants.

“[Full service] has just not recovered,” Carter says. “They’re way off the numbers that they saw in customer visits in 2008 and our expectation is that it’s going to be many years before that segment gets close — if it ever reaches those levels — to what it had in 2008.”

Foodservice Facts 2017 shows sales growth in the FSR segment forecasted at only 4.1 per cent for 2016/17 — a decrease from last year’s sales growth of six per cent. That means those operating in the premium-causal and fine-dining segment have to find ways to not only attract consumers to their establishments, but to keep them coming back. Steve Pelton, CEO of the Toronto-based The Landing Restaurant Group and SVP of Milestones, says offering more than just a high-quality menu is key to keeping people coming back. For his brand, he says, that means using quality, local ingredients, keeping abreast of new food trends and adding unique experiences, such as beer and wine parings. “At The Landing Restaurants, we try to source only local items, those that are fresh, sustainable and seasonal,” Pelton says. “While we certainly can’t pull shrimp from Lake Ontario, we do make sure our shrimp come from sustainable sources. We believe our customer base really appreciates this. There is still growth in the segment — our Landings brand has grown from three restaurants to nine in two years, and our Milestones brand has seen excellent year-over-year growth, with this year better than in the last five.”

Andrew Oliver, CEO and president of Oliver & Bonacini Restaurants agrees that while overall growth in the fine-dining segment is down, his restaurants have been doing well, with solid year-over-year growth. He says what consumers want from a fine-dining experience is just that — an experience. “When people go out, they want to have a good experience, something of value. When it comes to fine dining, the expectation is that people want that ‘wow’ factor. So, whether you’re going to Canoe once a year or once a week, you want to be sure it’s a phenomenal experience,” he explains. “You have to make sure, each time a person comes to your restaurant, that meal is better than the one they had before — because there are 25 other restaurants they may want to try, and you want to make sure they come back to yours.”

Steve Salm, president of Toronto-based Chase Hospitality Group, says in his restaurants there is also a decided emphasis on food quality and health. In fact, approximately 25 per cent of all its menu offerings are plant-based, and there’s a strong emphasis on local and sustainable products — something he says customer are demanding.

Because experience is such as key component for guests, Salm says his restaurants now offer customized menus or plates. For example, Kasa Moto offers customized sushi platters and The Chase boasts a customized raw-bar platter. Planta can even create a customized menu for birthday parties.

Fisher predicts premium-causal and fine-dining establishments will look for new ways to reach customers going into 2018. He sees fine-dining and mid-range fine-dining restaurants eyeing the fast-causal or quick-service marketspace, but with a unique twist. For example, Chase Hospitality Group recently introduced Palm Lane, located in Toronto’s new Yorkville Village. The restaurant focuses on whole-meal salads and grain- and legumes-based bowls. The 2,000-sq.-ft. restaurant will seat 65 diners, but will also place an equal emphasis on take-out and catering. Diners will have a chance to select from 80 ingredients to build their own meals, or select featured salads and bowls.

MEAL KITS

With people’s lifestyles getting increasingly busy, eating out and shopping are becoming something of a luxury. Enter the meal kit. According to The Nielsen Company (US), LLC, meal kits are making inroads with time-harried families. While meal-kit sales in the U.S. continue to grow, they are still relatively new for Canadian consumers, but room for growth is tremendous. While only four per cent of Canadian households purchased meal kits in the past 12 months, compared to 25 per cent in the U.S., 80 per cent of those have continued to buy meal kits after trying them. Forty-three per cent said it helped them save time on meal planning; 39 per cent appreciated the time saved on preparation and cooking; 32 per cent liked the convenience of having the kits shipped to them; 31 per cent that it saved them time on grocery shopping if the kits were picked up in a grocery store; and 30 per cent liked the chance to try a new recipe.

And while QSR and FSR operators struggled for their share of the dinner check, sales of retail dinner traffic grew by more than 20 per cent in 2016, according to Restaurants Canada’s Foodservice Facts 2017.

THE DIGITAL REVOLUTION
Digital technologies are rapidly reshaping the restaurant landscape. According to the Restaurants Canada report, nine per cent of Canadians said they were very interested in using self-service and touch-screen kiosks, 13 per cent were interested and 29 per cent somewhat interested. Electronic-ordering systems at tables are also something Canadians want to use, with 10 per cent being very interested in seeing what it offers, 16 per cent definitely interested and 28 per cent somewhat interested.

UberEats, Just Eat and SkipTheDishes are becoming increasingly popular ways for operators to reach customers, while mobile-ordering apps will become commonplace, according to Carter. “The growth has been dramatic and more players are getting involved in offering what we like to call a digital door,” he adds.

Companies such as Starbucks have blazed a trail with its order-and-pay mobile app and Tim Hortons recently followed suit with its new mobile app that is available on iOS and Android. McDonald’s also has an app in the works for Canada and even smaller chains, such as Aroma, are looking at mobile apps and digital technologies for its operations. “If you’re not looking at it, you don’t have a long-term business strategy,” says Creighton.

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