Fast-food chains are gaining muscle again

February 23, 2016
JONATHAN BERR
MONEYWATCH
February 17, 2016
http://www.cbsnews.com/news/fast-food-chains-mcdonalds-burger-king-wendys-gaining-muscle-again/

McDonald’s (MCD), Burger King and Wendy’s (WEN), which have struggled in recent years, are now dishing up some appetizing operating results.

Same-store sales, a key metric of sales at locations open a year or more, have been on an upswing for the big chains recently. For instance, that figure has risen 5.7 percent at McDonald’s over the past 13 months, by 3.9 percent at Burger King over the 2015’s last quarter and by 4.8 percent for Wendy’s in the same period.

According to Darren Tristano, president of restaurant consulting firm Technomic, consumers are spending more at the chains, thanks to lower gas prices and an improving job market. The companies are also selling their food more aggressively to budget-conscious diners, a key demographic for the industry.

“With so much advertising shifted toward value play, $4 for 4, $2 for 2, etc … low prices are driving consumers toward convenience, value and comfort food,” he said, adding that renovations at the chains have also paid off. “Locations are becoming more appealing to consumers, who have viewed these restaurants as old and outdated.”

Burger King parent Restaurant Brands International (QSR) benefited from remodeling the burger restaurants and the expansion of the Tim Horton’s donut shop chain, which it also now owns. During yesterday’s earnings conference call, the company said U.S. franchisee profitability rose by more than 30 percent over last year, which CEO Daniel Schwartz called a “tremendous accomplishment.” Franchisees, who are independent business operators, own many fast-food restaurants.

Restaurant Brands has high hopes for an American classic: Grilled hot dogs, which Burger King is rolling out at more than 7,000 U.S. locations later this month. It may be chain’s largest new product launch since the 1970s.

“I personally visited the test market to confirm that the Grilled Dogs could be an operationally simple but pretty impactful product,” Schwartz said during the conference call. “And we’re all excited about it.”

Restaurant Brands was created in 2014 after the $11 billion acquisition of Tim Horton’s by Burger King Worldwide, which is controlled by Brazil’s 3G Capital. The transaction, called an inversion, lowered the company’s tax bill because it relocated to Canada, and it remains controversial.

Restaurant Brands on Tuesday reported better-than-expected profit, excluding one-time items, of 35 cents per share on revenue of $1.06 billion. Same-store sales rose by 6.3 percent at Tim Horton’s.

Wall Street, though, remains skeptical. Shares of Restaurant Brands have slumped more than 18 percent over the past year, underperforming McDonald’s, which gained more than 23 percent during that same time amid investors’ enthusiasm of a potential turnaround at the Home of the Golden Arches.

Morningstar analyst R.J. Hottovy, however, argued in a recent note that investors were overlooking Restaurant Brands’ potential for growth.

“While McDonald’s turnaround may have generated the most quick-service-restaurant headlines the past several months … Restaurant Brands International continues to fly under the radar with effective menu strategies, new franchise partnerships across the globe and exceptional cost discipline,” he wrote.

Earlier this year, McDonald’s reported its strongest quarterly earnings in nearly four years as consumers responded to the chain’s decision to offer breakfast all day. Wendy’s results beat Wall Street’s analysts’ expectations, and the chain forecast better-than-expected sales at existing locations in 2016.

Other fast food chains are also doing well.

Yum Brands (YUM), the parent of Taco Bell and KFC, recently reported better-than-expected quarterly profit, though revenue growth was hurt by the sluggish performance at Pizza Hut.

Popeyes Louisiana Kitchen (PLKI) announced in January that it expected 2015 per-share earnings to be better than it had previously forecast. It plans to release results on Feb. 23.

If the industry keeps this momentum going, investors may soon start ordering more fast-food shares.


Taco Bell Runs Naughty TV Ad For ‘Happier Hour’

March 27, 2014

taco-bell-campaign-188_2To drive awareness of its “Happier Hour,” which runs from 2 to 5 pm each day, Taco Bell is running new TV creative that’s slightly naughty, in a playful way.

The spot (in 30- and 15-second versions), from Deutsch LA, shows three different scenarios in which male/female pairs — office colleagues, college students and seniors — exchange suggestive looks and then appear to be heading out together for a tryst, as the song “Afternoon Delight” plays in the background.

But it turns out that they’re all actually headed to a Taco Bell, where they can get any “Loaded Griller” for $1, and any medium beverage for the same price, during those three afternoon hours.

The “Afternoon Delight” version is a Little Hurricane cover of the 1976 Starland Vocal Band song.

The keen-eyed viewer may notice a cameo by “America’s Next Top Model” winner Laura Ellen James, playing a college student who clearly makes the day of her much-shorter classmate when she lures him out of an in-progress lecture.

The spot started airing this week on networks and cable, and will continue running through the end of June, with additional media support through the end of August. Happier Hour is being promoted on Taco Bell’s social assets, including Facebook (10 million “likes”) and Twitter (1.1 million followers), as well as featured on YouTube.

Happier Hour is described in consumer promotions as a “limited time offer,” but it’s been running at participating locations since last year (an “always on” promotion), according to Deutsch. The current marketing push is the second campaign for Happier Hour; Taco Bell also ran a campaign last year.

The reasons behind a special afternoon event/offer aren’t hard to grasp. QSRs obviously benefit from driving more traffic during the quieter hours between and following regular meals. And offering snackable items at attractive prices has become a key strategy for driving such business.

According to a new “Snacking Occasion Consumer Trend Report” from foodservice research firm Technomic, 51% of Americans now report that they eat snacks at least twice a day — up from 48% two years ago. Nearly half (49%) report that they eat snacks between meals, and 45% replace one meal a day with a snack.

Among those who buy snacks at restaurants, 45% order from the value or dollar menu.

“There’s plenty of room for restaurants to expand their snack programs and grab share,” even as packaged food makers and retailers also push harder to grab those snacking dollars, noted Technomic EVP Darren Tristano.

And while candy is still the dominant snack (purchased at least occasionally by 71% of surveyed consumers), half of consumers say that “healthfulness” is very important to them when choosing a snack. As a result, many restaurants, like their CPG counterparts, are including healthier options within their snack offerings.


Making Sense of Value and Pricing Expectations

March 25, 2014

The prevalence of value-based promotions spiked in recent years as U.S. restaurant operators aimed to drive incremental traffic and sales among consumers affected by the recession. The use of these deals is becoming ingrained in consumer behaviour, even as the economy slowly improves. During the economic recession, consumers were more likely to cut back spending altogether, deals or no deals. Now that the economy is on the mend, consumers are accustomed to these deals being available and likely expect that they will be in the future.

While price continues to be a major component of the value proposition, it is by no means the only factor. Value is multidimensional, including the quality of food and beverage, and the quality of service and convenience. These different facets of value allow flexibility in formulating value propositions and pricing strategies.

This article explores U.S. consumers’ value equation; the appeal of restaurant deals and promotions; consumer price thresholds and how low prices drive traffic. U.K. operators will find many of these themes suitable for their own customers, whether they are deal-seekers or not.

The Value Equation

The restaurant value equation is comprised of a host of factors. It’s not straightforward—and it’s evolving. Primary drivers of value are price, quality, service and atmosphere. Secondary drivers vary but may include the meal or occasion as well as the diner’s mood and needstates. Consumers asked to describe what constitutes good value in a restaurant mention food quality, appropriate portion sizes, fair prices, service and cleanliness.

Food and beverage trump price in creating good value. Highlighting specific qualities of food and beverages—such as quality, convenience or healthfulness—can help marketers create a message of good value. Even at limited-service restaurants, the quality and taste of the food are most important: 86% of consumers say food and beverage are key to the LSR value equation, vs. 74% who name price. At full-service restaurants, of course, service and ambiance are also central: 87% name food and beverage as a component of value, 60% mention price, 28% ambiance, and 24% the service and amenities.

Customisation can enhance the value proposition. Half of diners—and a larger proportion of those under 35—say customisation is important in creating a good value proposition. They want to know that the meal will match their personal preferences and that they will get (and pay for) only the ingredients they like. Restaurants can incorporate customisation by offering menu items in multiple portion sizes (thus making them appropriate for both meals and snacks); allowing ingredient substitutions; and varying the heat level of foods from mild to super-spicy. Even a simple bottle of hot sauce left on the table allows patrons to customize their dish to their liking.

Deal-seeking in restaurants has become ingrained behaviour for consumers. Dealing was essential during the recession, but since then operators have been hoping to scale back on deals as the economy improves. However, consumers expect to continue employing deals; more than half say they’re using more deals now than two years ago. Interestingly, deal-seeking is not tied to income constraints; eight out of 10 diners at almost all income levels say they order from dollar menus at fast-food restaurants at least once a month, and among those with annual incomes over $150,000, seven out of 10 do the same. In addition, four out of 10 consumers use “daily deal” websites, and two out of 10 use them more than once a month. (These sites encourage restaurant patronage, but not loyalty; 55% of subscribers to daily-deal sites say they turn to these deals so they can try new restaurants more often.)

Traditional buy-one-get-one and half-off specials resonate strongly with consumers. More restaurant traffic is being driven by specials rather than the quality of the food, atmosphere or experience, with consumers asking: “What can I get for the price?” Deals that provide immediate half-off savings represent the most attractive value: eight out of 10 consumers say buy-one-get-one deals and half-off promotions add strong value, compared to seven out of 10 who name set-price specials, coupons or value menus. Buy-one-get-one specials, coupons and half-off deals are effective in driving traffic, with almost two-thirds of consumers saying they’d be likely or extremely likely to visit restaurants that offered these.

Base: Approximately 800 consumers aged 18+; base varies as promotions were randomly rotated Sum of percentages may not equal cumulative percentage due to rounding Source: The 2013 Value and Pricing Consumer Trend Report, Technomic

Base: Approximately 800 consumers aged 18+; base varies as promotions were randomly rotated
Sum of percentages may not equal cumulative percentage due to rounding
Source: The 2013 Value and Pricing Consumer Trend Report, Technomic

Pricing Expectations

Consumer price thresholds increase as the day progresses.Operators should make sure that their price thresholds are in line with what consumers are willing to pay (keeping in mind that consumers may report lower thresholds than they would actually accept). Research for Technomic’s Value and Pricing Consumer Trend Report found a “sweet spot” between what consumers consider optimal and what they’ll pay without complaint for each meal in each restaurant segment.

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3-2014_exhibit_4

Base: 1,800 consumers aged 18+ Source: The 2013 Value and Pricing Consumer Trend Report, Technomic

Snacks provide a unique pricing opportunity because women are willing to pay more for snacks than men are. For example, while the average consumer would pay $5 for a snack, women aged 25‒34 would pay $6.50. A number of chains, from coffee-café Starbucks to quick-service burger chain SONIC, have experimented with “happy hours,” during which they sell snacks at a special price. And while some fast-casual bakery cafés are seen by consumers as offering only unhealthy pastries for snack time, Au Bon Pain has built afternoon traffic with female-pleasing small plates like hummus with cucumber and Thai peanut chicken with snow peas.

“Fresh” and “premium” descriptors can increase consumer price thresholds.Nearly half of consumers say they would be likely to purchase—and to pay more for—food or beverage that is fresh; 37% say the same about premium options. Operators may be able to justify higher price points on food and beverage billed as fresh, homemade, premium, authentic, local, natural, organic, seasonal or sustainable. They should carefully consider both what such terms could mean when applied to their offerings and how to adjust their price threshold.

Value and Low Prices Help Justify Restaurant Visits

The good news for restaurant operators is that good value makes consumers feel better about eating out: 57% say they can eat out more often if meals are low in cost, and 52% say low prices help them justify the money they spend eating out.

Base: 1,500 consumers aged 18+ Source: The 2013 Value and Pricing Consumer Trend Report, Technomic

Base: 1,500 consumers aged 18+
Source: The 2013 Value and Pricing Consumer Trend Report, Technomic

Key Takeaways

The value equation involves multiple inputs, but price and quality both play strong roles in all segments. Deal-seeking in restaurants has become ingrained behaviour, and consumers don’t expect to change. Operators must find ways to adjust prices, deals and portions so they can still make money. Price and value promotions can effectively drive traffic. But be careful what you’re driving traffic to; you probably don’t need more business on Friday night. Freshness, quality and customisation can help justify higher prices.

There is pent-up demand for restaurant meals. Consumers who are looking for low prices are doing so to eat out more often. Older consumers seek value and “worth,” while younger diners have a more straightforward desire for deals; operators should consider strategies that don’t alienate any part of their customer base.

Darren Tristano is Senior Managing Director of Technomic Inc., a Chicago-based foodservice consultancy and research firm. Since 1993, he has led the development of Technomic’s Information Services division and directed multiple aspects of the firm’s operations. For more information, visit http://www.technomic.com.