The Altered Reality of the Franchise Landscape

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As consolidation and market shifts continue to impact the foodservice industry, growth across the country is being fuelled by a trio of trends: acquisitions, demographics and technology.

According to Vince Sgabellone, account specialist with Toronto-based NPD Group, today’s consumers are craving variety, authentic flavour profiles and plant-based alternatives, creating new opportunities for smaller, niche franchise chains with a unique offering to enter the market.

Though Canadian foodservice sales remained flat in 2018, Restaurants Canada’s Foodservice Industry Forecast: 2017 – 2021 indicates stronger gains can be expected at quick-service restaurants with higher spending expected at full-service concepts.

“With the market being flat, every new unit that opens can only grow and succeed by stealing customers from somebody else who’s already out there — another franchise, another chain or an independent,” says Sgabellone.

He says success comes down to understanding the millennial consumer and the role of digital. “Operators who are winning are successful in many of those areas, while others haven’t been able to find their secret sauce, so to speak — those growth areas of the market.”

Year of the Merger

It was a busy year for foodservice franchises and their national brands. In an effort to diversify holdings, large players such as Recipe Unlimited (formerly Cara Operations) and MTY Food Group had a busy year acquiring new brands.

At the beginning of 2018, Recipe Unlimited struck a deal to acquire The Keg Restaurants for $200-million. The resulting addition of 106 units boosted Recipe Unlimited’s portfolio to 1,365 restaurants. Since 2013, the brand has grown from five restaurant brands to 16.

It was also an active year for MTY Food Group Inc., which acquired Steak Frites, Giorgio and The Works Burger restaurant brands. It also scooped up chains such as Timothy’s, Mmmuffins, Grabbagreen, Casa Grecque and SweetFrog. Most notably, last March, MTY purchased Imvescor Restaurant Group Inc. for $248 million. Imvescor banners — most of which are in the casual-dining sector — include Bâton Rouge Steakhouse and Toujours Mikes.

“The chains will always dominate, especially in the quick-service space, but independents that partnered with [mobile-ordering apps] are levelling of the playing field,” says Sgabellone.

Change Drivers

Innovative franchises — ones that offer a unique spin on a traditional product — will continue to trend in 2019, Sgabelleone says. According to research from the NPD Group, Canadians are opening their wallets for creative operators offering either plant-based alternatives or quick access — through UberEats, et cetera — to food with unique and interesting flavour profiles.

Copper Branch, a plant-based chain based in Montreal, (see profile) has been growing its footprint in North America, announcing plans for expansion in U.S. markets. Earlier this year, A&W became one of the first national burger chains to offer the plant-based Beyond Meat Burger. Made from protein-rich pulse crops, such as peas and mung beans, the offering was so successful, the chain ran out of product just weeks after its release. Aroma Espresso Bar also released its version of the vegan burger — the Power Burger.

According to research from Dalhousie University, there are more than 2.3 million vegetarians in Canada, up from 900,000 just 15 years ago. Another 850,000 people consider themselves vegan, representing almost 10 per cent of the population. These figures doesn’t include consumers who moonlight as vegetarians — flexitarians. With that number expected to grow over time, the potential for success is huge.

Vegetarian is no longer perceived as a niche area, says Sgabellone. “[Millennials, especially, are] demanding high protein, more vegetable content and they’re [concerned about] animal welfare and environmental sustainability. When brands start to speak like that and design their menu and their business philosophy around those sentiments, they’ll be more successful in capturing that millennial consumer.”

With millennials looking for experiences, socially conscious operators and healthier food options, franchise brands have been able to demonstrate value by addressing all three points. In fact, heightened consumer awareness has forced restaurants to review their environmental policies and practices.

For example, in 2018, Subway Canada announced plans to eliminate plastic straws at 3,200 of its restaurants across the country. The move represents the company’s latest initiative to be more environmentally responsible. Others to follow suit include Prime Pubs (Fionn MacCool’s, D’Arcy McGee’s), Starbucks, A&W Canada, RBI (Tim Hortons) and Recipe Unlimited, which committed to reducing waste by eliminating plastic straws across its entire 19-brand network of restaurants by March 2019.

Rise of Premium-Casual

Vancouver-based Browns Restaurant Group (BRG) continued its momentum through 2018. Following the expansion of its growing portfolio — which includes Browns Socialhouse, Browns Crafthouse and Scotty Browns in the U.S. — the company recently launched its latest chain concept, Liberty Kitchen. As one of the few premium-casual brands offering franchising opportunities, BRG launched a new concept and announced its first multi-concept franchise owner.

“The big success with Liberty Kitchen is that the franchise owner also owns two Browns Socialhouse [locations],” says Scott Ward, president and COO of the Browns Restaurant Group. “We’re the only ones bringing [value] in a franchise package, whereas the other guys (Earls, Joey, Cactus Club) are corporately run.”

Kyle Anderson became the company’s first multi-brand franchisee in the BRG franchise system with the addition of Liberty Kitchen, which was the second BRG brand to open in 2018. This past summer, BRG also launched Browns Crafthouse in downtown Vancouver.

With an emphasis on quality, familiarity, design and premium-casual dining, BRG has been able to maintain double-digit growth by offering fresh ingredients and scratch cooking.

“There’s no question we follow consumer trends and behaviours — to a point,” says Bruce Fox, EVP of Business Development at BRG. “We’ve added four plant-based pizzas [at Liberty Kitchen] and they’re doing very well. You want to be at the forefront to the extent that you can put things on the table for people who are more adventurous, but also have a strong commitment to tradition and retro [items].”

The Vancouver-based company plans to reach 100 restaurant locations over the next two years, through planned expansion in Western Canada and Ontario. The company recently partnered with a franchisee in Ottawa and now also has a location in Oakville, Ont., with plans to open more Browns Crafthouse locations. The company also opened a Browns Socialhouse flagship unit in Vancouver.

“We’re not a family restaurant,” Fox notes. “We’re not out to chase the Boston Pizza or St-Hubert customer. We’re not even out to play against the [Recipe Unlimited] brands either. We’re looking at the upscale premium-casual [segment] and we’re going to bring that to the market.”

Future of the Food Court

Expect to see a more diversified group of franchise brands popping up in mall food courts in Canada, such as the new Union Station food court in Toronto, which offers an influx of ethnic influences. The Union Food Court features food-court stalwarts such as McDonald’s, Pizza Pizza and Tim Hortons — as well as more unique offerings, including the first Toronto location of Crave It Restaurant Group’s Bangkok Buri and the first food-court location of Loaded Pierogi.

“Where you used to find sandwiches, pizza and burgers, now you’re going to find food courts and assembly halls with ethnic flavour profiles,” Sgabellone notes. “Overall, I think we’re going to continue to see those ethnic influences and the chains are going to continue to grow, so the independents will need to continue to work hard to find their little niche.”

Expect to see more interactive spaces that serve unique cuisines, such as the Assembly Chef Hall, which features 17 of Toronto’s top chefs and restaurateurs. Other popular Canadian food halls include the Time Out Market, Eataly, the Queen St. Fare and Market & Co.

New Kid on the Block

At the end of 2018, Foodtastic Inc. received a $47-million investment from Restaurant Royalty Partners, a joint venture managed by Oaktree Capital Management L.P. and JHR Capital LLC. As a result, the Pierrefonds, Que.-based company will 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.

In November, Foodtastic Inc. acquired Enoteca Monza Pizzeria Restaurants, a growing, Montreal-based, full-service Italian-restaurant concept featuring a state-of-the-art food commissary.

“This acquisition of a home-grown Quebec business is consistent with our strategy of acquiring brands with growth potential that complement our existing brand portfolio,” 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 the Outaouais region slated for 2020. “The Monza acquisition will leverage our marketing, purchasing and operational systems to better serve our existing franchisees,” says Mammas.

The Quebec-based franchisor of multiple restaurants concepts — including La Belle et La Boeuf, Carlos & Pepe’s, Souvlaki Bar, Nickels and Bacaro — plans to open 18 restaurants in 2019.

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