The 2019 Hospitality Market Report

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The foodservice industry is reaching a pivot point. After a decade of healthy growth, 2018 numbers show the party may be over for the time being.

The Restaurants Canada Foodservice Facts 2019 report shows foodservice sales grew by 5.1 per cent to nearly $90-billion in 2018, representing a $4.3-billion increase over 2017. That caps a winning streak of five-consecutive years of growth exceeding five per cent. Also, the number of restaurant establishments rose by one per cent in 2018.

Based on an updated forecast, sales are projected to grow by an additional 3.7 per cent to $93.1 billion in 2019, with predictions annual sales will surpass $100 billion in 2021.

This is not as significant as it sounds, given industry performance over the past decade, says Chris Elliott, senior economist with Restaurants Canada. “Since 2008, the foodservice industry has experienced extraordinary growth in the full-service, quick-service and catering categories. Between 2008 and 2018, foodservice was the fastest-growing industry in Canada. Since 2000, the size of the industry has more than doubled.”

When 2018 numbers are adjusted for inflation, real sales actually grew by only 0.7 per cent, he adds. “To put that in perspective, real sales numbers were 3.3 per cent in 2017 and 3.7 per cent in 2016. Increases in minimum wage and higher food and operating costs have forced operators to increase menu prices by up to 4.2 per cent. The forecast for 2019 is slightly better at 1.1-per-cent improvement, but it’s certainly not back to the previous rates.”

Things are slowing down across the different segments, says Vince Sgabellone, foodservice industry analyst for NPD Group in Toronto. “I would say the climate is more slow and steady now.”

There are universal concerns in the wake of the economic climate and consumer spending that have led to this slowdown, he says. “Despite a strong economy, the huge debt-load hanging over Canadians is bigger than their disposable income. Eating out is one of the biggest buckets of expenses that people track and one of the first places to start cutting back.”

Demographics are also coming into play. More boomers — who were once the biggest segment for restaurant visits — are aging out of the workforce and have less disposable income. “Now it’s up to the younger generations to pick up the slack, but there are not as many of them as there were boomers,” Sgabellone says. “Even though their visits are growing, they don’t spend was much.”

Diversity is driving concepts across the board, he adds. “The population growth in Canada is two-thirds immigrants. They bring their culture and food to support their own demographic and make it available for everybody.”

QSR and Fast Casual
The quick-service restaurant segment (QSR) has seen growth over the past year, but traffic increases have dropped to two per cent compared to the previous year’s three per cent, according to NPD.

Softer categories include sandwiches and brewed coffee in lieu of specialty beverages that appeal to a younger demographic, while healthy eating and plant-based concepts are on the rise. Pizza, burgers and burritos remain strong and will continue to perform. The fastest-growing concepts are fusion, Middle Eastern, Indian, Greek and Japanese.

The QSR space in Canada has continued its growth in ethnic cuisine, says David Hopkins, president, The Fifteen Group Inc. in Toronto. “Years ago, ethnic meant Chinese or a bit of Thai; now you’re seeing Indonesian, Turkish, Raman bars. It’s partly because the Canadian marketplace is so multicultural compared to the U.S.”

He says a majority of calls he gets from prospective QSR operators feature some sort of ethnic play. “If not that, it’s plant-based or healthy foods. Those three categories account for 80 per cent of inquiries.”

The quality trend is resonating with customers more and more, Sgabellone says. “QSR is stepping up and raising the bar and consumers are responding. A&W has its quality messaging. McDonald’s has its sustainable beef. New York Fries is advertising compostable containers for its poutine.”

The quality play is what helped Quesada expand at a rate of 25 franchises a year. Steve Gill, founder and CEO of Quesada Franchising of Canada Corp., attributes its growth to practical basics: low cost of entry for franchisees, a simple business model and healthy ingredients.

“We aren’t doing too much differently other than putting more emphasis on plant-based and providing products and ingredients on the healthier end of the QSR scale. In 2004, we just happened to have the right idea at the right time that still happens to be relevant today.”

Fast causal is becoming a stronger player, but at the expense of the full-service market, according to Geoff Wilson, principal, fsSTRATEGY Inc. in Toronto. “It’s a category that allows consumers to trade down. Fast casual is becoming a market-share steal rather than being tied to industry growth. Full-service operators are worried about that. Panera’s quick serve with a premium, for example, suits those typically dining in for table delivery.”

Full Service
Wilson believes full service, whether casual, mid-scale or fine dining, is struggling in a relatively flat market. “We’re not seeing more traffic, so the only way to increase revenues is to steal market share or raise the average check price. At [some] point, you can’t raise prices any more as it will lead to declining customer counts.”

One small trend of note is the rise in family dining outings over the last 12 to 18 months, says Sgabellone. “After many years of decline in parties with children, there’s a small turnaround in people going out to eat with their kids as the front-end millennials now have families and are starting to fill the gap.”

More operators are looking at the mobile order, online order-payment and delivery area, Wilson says.

“That’s a very fast-growing area and an opportunity for growth. The margins aren’t as good because the third-party companies take a significant portion of revenue, but they’re incremental sales that restaurants may not have had.”

Nick Di Donato, president and CEO of Liberty Entertainment Group in Toronto says full-service dining is not without its challenges, but operating in a multicultural urban environment helps.

The company has properties in both the fine (BlueBlood Steakhouse at Casa Loma, Don Alfonso 1890) and mid-market (Cibo Wine Bar, Xango) dining segments. “Because Toronto is a world-class city, it’s recognized as a culinary destination. As such, we’re seeing more response to higher-end fine dining.”

He points out a significant demographic split between fine-dining (aged 40 and up for the most part) and casual-dining (aged 25 to 45) customers “Older demographics tend to look for a long seating where they can enjoy conversation, wine and a great meal. Younger groups look for a bigger vibe, with louder music, cocktails and sharing menus.”

The sector has had to undergo some menu tweaks to accommodate changing palates, which is why the company has shifted more to tasting menus, as well as increased vegetarian options.

The biggest challenge, Di Donato says, is managing rising costs. “We don’t want to raise menu prices, so we have to become more efficient and operate more effectively. It’s a conversation I have with managers every day.”

Sales at full-service restaurants were forecast to slow in 2019, according to Foodservice Facts 2019, due in large part to a moderation in spending in B.C., Ontario and Quebec. Growth is expected to hover around 4.1 per cent for the year.

Third-party delivery
An area seeing a great deal of action is third-party delivery. The Restaurants Canada Restaurant Outlook report states foodservice delivery sales jumped by 44 per cent in 2018 over 2017, driven by third-party services. It states: “What was once mobile-friendly is now mobile-first. People are shopping with their digital wallets and determining the value of your efforts through ‘likes.’ Needless to say, operators who leverage delivery technology and service are poised to thrive.”

“It’s huge,” Sgabellone says. “It’s not just delivery that’s led to the growth. It’s digital ordering and pickup as well. McDonald’s, Tim Hortons and Starbucks are enhancing their loyalty programs and tying ordering in with their apps. A&W and Wendy’s have also expanded their delivery and digital engagement.”

Wilson says the trend is consistent with consumers being more cautious with their money. “If they bring food home, they get a restaurant-quality product without having to pay for the dining-room experience. It will never replace the guest experience when socializing, but it’s an option that wasn’t available previously that will change the dynamic.”

Howard Migdal, managing director, Canada, SkipTheDishes, reports the delivery market has topped more than $4 billion in Canada and is growing at about 15 per cent year-over-year because people are consuming more meals at home and preparing fewer themselves. “Delivery allows them to get time back in their day,” he says.

When third-party delivery initially came into play, the first adopters were independent operators who wanted to tap into the delivery market. “Pizza and Chinese restaurants had enough value to do their own deliveries,” Migdal says. “It only makes sense if you have at least 30 orders a night.” By 2016, major brands started adopting food-delivery apps.

Migdal anticipates growth will continue into the double digits in the foreseeable future. “Despite the hyper growth, a low portion of Canadians are using food-delivery apps. It hasn’t fully penetrated the industry yet.”

The debate rages about whether delivery steals business from in-store dining. Hopkins notes the margins are an issue, as delivery companies are taking 30 per cent of sales revenue, leaving a profit margin for delivery orders of around 10 per cent.

But Migdal argues the opposite holds true. “When we talk to customers, we found deciding on a food delivery or on going to a restaurant are not interchangeable. Our survey showed 80 per cent actually ordered food from a restaurant they had never dined at before.”

What’s next?
Wilson sees the slow-and-steady pace continuing for the foreseeable future. “Operators will be focusing more on attempting to rationalize their operations. It’s really about fine tuning this past year and the next.”

Restaurants have already taken the hit on pricing and labour costs. Wilson believes inflation will not be as rampant as the past year. “But the pressure is always there, so I advise operators to stay the course, proceed with caution and fine tune their operations. Those will be the real watchwords.”

As for issues keeping operators up at night, Elliott says Restaurant Canada’s latest survey on top challenges saw a shift. “Typically, the answer has been labour and food costs and labour shortages. Competition from new restaurants was named as one of the biggest trends this time around. The numbers don’t even include new players, like B&Bs, retail stores, groceries and convenience stores. They’ve all expanded into the foodservice space.”

But there’s some optimism. Elliott says surveys of restaurateurs show four in 10 say their financial situation has worsened in the last year because of higher labour costs and decreased traffic. “But what’s interesting is that another 40 per cent said their financial performance improved because of better cost control and a focus on the guest experience.”

Improvements include changing business hours, moving to less-expensive ingredients and reducing the number of menu items to help control inventory costs and staff training. “They’re diligently going through and looking at any cost to try to save a nickel here or there,” Elliott says.

But he says, there’s no need to panic. “It’s unclear if there will be a recession in the next year or two. A lot could push things, such as uncertainty with global trade, a weak global economy and stock-market volatility. At the same time, if you look at fundamentals, Canada’s economy, job creation and wage growth are all strong.”

Operators should bear in mind, however, that even if a recession doesn’t happen, global uncertainty has led to a world preoccupied with instability, Elliott says. “Consumers are being more careful. This is not the heyday economy we saw in 2009. Accept the fact that continual uncertainty is the new normal.”

Written by Denise Deveau

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