Subway’s Sales Continue To Slow, 5 Factors That The Brand Should Consider Before Changing It’s Path

October 23, 2017

Subway’s sales struggles continues much like the rest of the over-bloated restaurant industry. Consumers are faced with so many options for meals away from home and restaurant operators are seeing their profit margins squeezed so tightly that many operators are losing money, closing their doors or putting their units up for sale. Today’s battle is over share of stomach and driving more diners to order from the restaurant whether it’s for dine-in, takeaway or delivery. So before sandwich giant Subway considers developing new brands or making acquisitions, they should review the current industry landscape and consider these 5 issues that affect their business:

1. Industry Saturation – although the recent recession forced many operators out of business, the downturn has also created an opportunity for chain restaurants to expand and increase their restaurant base. Franchising continues to create opportunity for new owners and entrepreneurs adding restaurants with the intention of becoming multi-unit operators. Inexperience has led many to close their doors or sell off their operations at dimes on the dollar.  Operators run an average of 5 percent profit margins and for all those that succeed in double digits, many are breaking even or losing money.  Within the quick-service and fast casual sandwich segment, chains have continued to expand regionally and nationally. Fast casual chains Jimmy Johns, Jersey Mike’s and Firehouse Subs have continued to open locations across the US, providing high-quality freaky fast subs and fresh made-to-order, portable meals. Demand continues to grow for these subs but each location struggles to build momentum when stores open nearby with $500,000-$800,000 in annual sales. More restaurants water down demand for existing stores.

2. Consumer Price Value Equation – Subway created a terrific success with $5 footlongs or what many consider 11-inchers. In fast food, the $5 price point is golden and it’s difficult to compete when so many four and five dollar value meals continue to satisfy value-seeking consumers. Little Caesar’s $5 hot-n-ready pizza and Steak n’ Shake’s $4 value meals create significant price value for lower income and younger consumers.  With Subway’s higher price points, the brand has increased the gap from fast food. Quality hasn’t improved enough to gain ground on the higher priced, higher quality offerings from fast casual brands so consumers continue trade up to fast casual for quality and trade down to fast food for price.  Subway remains on the fence in no-man’s land.

3. Technology Expectations – Technology continues to appeal to consumers, especially GenZ and Millennials. Brands that have been aggressively investing in technology like Dominos have continued to see strong same store sales growth. The trick is to make it simple for older consumers and easy for younger consumers who expect smart phone apps. Ordering applications are incentive to use a brand but rewards for frequency and loyalty are what drives customers to keep your app relevant and build their frequency. Getting free food is another strong form of value and helps develop deeper behavior towards ordering habits. Just like the reduced need for cash has made the wallet obsolete, punch card systems aren’t cool and are often lost or forgotten.  Integrated loyalty programs are more contemporary today. Free Wifi can also create a lingering opportunity for customers and create that third place for customers to escape from home or work.

4. Staying Fresh – Fashion changes with each passing season and year-to-year. Many brands wait 7-10 years to update their interiors and it can take 3-4 years for a big system like Subway to update to a new décor across their entire system. It can be costly and a store may close to update their interior. Some of the most important features today are added for comfort and efficiency.  Televisions provide distraction for single diners, USB and electrical outlets provide customers with added value to charge their devices and seating configurations can improve the experience for different occasions. Restaurants are often used for communal study groups with large tables, comfortable seating for social occasions and booths for business meetings. Although many Subway restaurants are designed for takeout, improving the appeal for a broader array of occasions can drive greater traffic to a location. The entire location doesn’t have to be remodeled if continuous evolution and updating can take place and customers can see the change.

 5. Broad Menu Offering – Today’s sandwich chains have broadened the menu to include soup, salad and side items. Often, side options create craveability and can increase check average. The typical Subway order includes a sack of chips and a drink.  At most deli’s, soup, salads and dessert provide strong opportunity to impulsively upgrade your meal into a more profitably order. Signature sides especially designed to accompany new, innovative sandwich lines, seasonal desserts that drive comfort and perhaps a whole or sliced pickle can give customers more options at Subway to keep their customers from going elsewhere. Finally, adding new beverage options to the mix can be another way to build their customer counts.  Beverage only and snack occasions are great off-peak traffic drivers and can keep stores busy all-day.

Subway should consider a barbell strategy for their menu offering. Offer smaller sandwiches for high value ($3-$4), larger sandwiches for middle of the road ($4-$5) and build into a higher quality premium sandwich line ($6-$8) that competes with fast casual brands. Investing in their dining room to make it more occasion friendly and improving their technology to simplify the experience will give customers greater reason to use Subway more frequently. Innovation will be a strong driver but you have to understand what the customer wants and give it to them.  Overall, Subway has a successful brand, broad customer base and fills a big gap in the industry. Before leadership overlooks what made the brand a global leader and changes course, they should consider smaller, meaningful adjustments to what the customer wants.

Darren Tristano

 


Where the consumer dines is still a big question but simplicity is still the answer for consumer meal purchases.

September 19, 2017

A wave of options are now available for restaurant meal delivery like Grubhub, Postmates and Uber Eats but can American consumers afford to pay $12-$15 for the convenience?  For those who purchase meal kit delivery from Blue Apron or groceries from Instacart, the time is still a concern as they prepare, cook and serve a meal to their family, and don’t forget the cleanup afterwards.  Today’s customer isn’t just looking for affordable restaurant quality, they are looking for simplicity.  For consumers willing to take the time to pick up their takeout meals, there is a new service available that may shift their behavior from delivery to self-serve pickup.

MealpalA new platform from startup MealPal creates a subscription service that allows users to subscribe to a list of restaurants for takeout lunches or dinners.  The service will be available in the US, UK, Canada and Australia.  The fixed fee will fall around $7 for dinner and $6 for lunch providing a selection of restaurant entrees available for pickup.  This model allows the participating restaurant to choose a signature meal that they can plan for demand and which better insures quality execution.  The restaurant can build a margin on the higher volume item and still make money on the transaction.

Although many consumers are comfortable with delivery fees, the broader lower and middle income consumer will find this service more affordable and accessible.  Within the urban markets, younger consumers will find this a high-value that allows Millennials and older GenZ the opportunity to purchase restaurant quality meals more frequently.  Older Boomers that are retiring will have options to purchase meals within their budgets and enjoy their lifestyle.

After receiving $20 million in funding, MealPal is in a strong position to leverage their platform because according to the company, they are making a margin on each order today.  Leveraging technology toward future profits has been the strategy of many startups but showing profitability this early on will drive chances of success long into the future.

As consumer behaviors evolve and trends change, restaurants offerings have become very complex. A focused meal option with MealPal can be easier for restaurants to execute and consumers to keep it simple.


Innovation in chocolate may help to reverse the decline in chocolate demand

September 13, 2017

Chocolate, a craveable comfort food has seen declines in consumer demand over the recent years.  So much that big chocolate companies have been forced to reduce staff and focus on greater innovation and solutions.  How do you make chocolate better?

pibk-chocolateSeveral trends are impacting the chocolate industry, driven by younger Millennial and GenZ consumers aged 12 to 40:

  • Premiumization is driving specialty products that are higher priced and promise better quality
  • Natural and real ingredients are in demand requiring the elimination of artificial flavor and colors
  • Fair trade practices are expected from younger consumers for suppliers to pay fair wages
  • Spicy and Savory flavor trends are driving chili pepper, bacon and sea salt ingredient combinations
  • Health and Wellness concerns are pushing manufacturers to reduce sugar and sodium content

The cost of cocoa beans have been rising and consumers are very price sensitive to paying more for their chocolate which is squeezing margins and lowering demand especially in Europe.

A recent discovery by Barry Callebaut, the first in 80 years gives us Ruby, naturally pink chocolate.  Pink chocolate isn’t new but what is new is that it has been manufactured without using artificial coloring.  Made from the ruby cocoa bean, the processing provides natural pink coloring through the use of the ruby bean.  This new innovation offers a berry flavor that is unique, offering a less bitter, sour flavor that combines with the sweetness of chocolate.

Subject to FDA approval, the Ruby Pink Chocolate is sure to be a hit on Valentine’s Day but more importantly, it should be a hit with millennial consumers.  Known for gravitating to “what’s new and what’s next”, this new chocolate likely will be considered a generation-defining product that is different from “what their parents eat”.  The buzz alone from this innovation will provide ample reason to sample the new product.  Chocolate is still considered one of the world’s affordable indulgences and we should expect to see innovations like Ruby Chocolate Martini’s, Pink Hot Chocolate, Cake Pops Hot Lava Cakes.


Supermarkets looking to add restaurants to grow sales

September 12, 2017

With the oversupply of restaurants driving tough competition in the foodservice market, supermarket brand Kroger Co. looks to add to the supply by expanding their strategy to include restaurants.  Kroger aims to expand to a 360 degree focus in an effort to increase share of stomach and consumer wallet.

According to Technomic, supermarket foodservice is expected to grow 6.5 percent in 2017, outperforming lackluster restaurant industry growth.  Strong competition from meal delivery brands like Blue Apron and HelloFresh are putting pressure on the supermarket chains with meals delivered to the consumer’s doorstep.  With the threat of AmazonFresh grocery delivery, food retailers have to find new ways to keep customers coming through their doors.

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Kitchen 1883, named to include the year Kroger Co. was founded, will give Ohio-based Kroger a way to utilize some of their existing square footage to maximize sales per square foot.  With so much competition from big-box stores and warehouse clubs like Target and Costco, the traditional supermarket “center-of-the-store” has seen tough times as consumers find greater value in stocking up elsewhere.  Whole Foods has found success with their 365 Everyday Value products and has found good traction with their foodservice offerings.   Expanding from retail food to foodservice is a natural migration but requires some very specialized focus and differentiation in the approach.

Often, retailers underestimate the effort needed to shift into prepared foods and restaurant operations.  Success requires hiring and training experienced foodservice professionals.  Cross training cashiers and stock handlers very often creates a poor environment.  It’s necessary to create a separate strategy, utilizing dedicated staff who with food handling, food safety experience.  Building a menu that resonates with value and targets the appealing menu items that taste great can also be a difficult task for even the most experienced restaurant operators.  Lastly, creating an environment that is clean and comfortable for patrons can make or break a concept as the customer experience has to lead to return visits and frequency.

For Kroger to succeed, the Kitchen 1883 will have to facilitate existing customer trial and maximize the convenience factor for shoppers.  There will be strong opportunities for quick breakfast and lunch occasions, snacking and beverage stops and takeout opportunities for dinner.  Poor service can tarnish the brand, but good service can lead to increasing their share and trying to give customers another reason to shop Kroger more frequently.


Mom-and-Pop Restaurants are Trouncing America’s Big Restaurant Chains.

July 1, 2017
‎May‎ ‎16‎, ‎2017‎ ‎4‎:‎00‎ ‎AM

 

There’s a limit to unlimited breadsticks after all.

Americans are rejecting the consistency of national restaurant chains after decades of dominance in favor of the authenticity of locally owned eateries, with their daily specials and Mom’s watercolors decorating the walls.

It’s a turning point in the history of American restaurants, according to Darren Tristano, chief insights officer at Chicago-based restaurant research firm Technomic.

Free-marketing websites, such as Yelp Inc., have boosted the fortunes of independents in the age of McDonald’s, Cracker Barrel, Domino’s, Taco Bell, Olive Garden — the list goes on. In a shift, annual revenue for independents will grow about 5 percent through 2020, while the growth for chains will be about 3 percent, according to Pentallect Inc., an industry researcher in Chicago. Sales at the top 500 U.S. chains rose 3.6 percent last year. The gains were larger, 3.9 percent, for the whole industry, Technomic data show.

Closing Locations

Large chains seem rooted in the American experience. But times, and tastes, are changing. Customers these days believe locals have better food, service, deals and even decor, the Pentallect report said.

Sales are reflecting that. Last year, revenue was up 20 percent at DineAmic Group in Chicago, which owns nine different restaurants.

Honors System

Donna Lee

Source: Brown Bag Seafood
At Chicago’s Brown Bag Seafood Co., where sales jumped 63 percent in 2016, lunch customers can grab a cookie out of the “honors system” mailbox for just $1. There are homey touches, like a watercolor painting of the Clark Street Beach in nearby Evanston, Illinois, that founder Donna Lee’s mother painted.

Lee started Brown Bag in 2014 after realizing chains didn’t do it for her. “It feels like you’re there only and solely to get your food quickly and get out the door,” she said. “There really is no charm.”

Daily-Catch powerbox

Source: Brown Bag Seafood

Brown Bag’s top seller is its daily-catch powerbox with grilled fish — barramundi was on the menu on a recent weekday — served atop quinoa, wild rice and spinach for $9.99. A nearby Panera Bread Co., which has more than 2,000 locations in 46 states and Canada, charges the same price for a strawberry poppyseed salad with chicken.

Some chains are trying to imitate the success of smaller, independent brands. At Maggiano’s Little Italy, which has 52 locations and is owned by Chili’s parent Brinker International Inc., traffic has been on the wane. Same-store sales dropped 1.6 percent in the most recent quarter for the fourth-straight decline.

Maggiano’s has new menu items and meals that cater to customers’ allergies and diets — think vegetarian, vegan and the occasional gluten-free ravioli. The chain updated its menu to include executive chef photos and short bios, and in February it introduced an emblem of millennial hip: brunch.

“The experience of dining out has become much more important than it was before,” said Larry Konecny, chief concept officer.

Bullish on Mom

Restaurant suppliers also have noted the trend. Diners prefer the experience, service and value offered by independent restaurants, Pietro Satriano, chief executive officer of US Foods Holding Corp., said during a conference call this month. “Growth with independents was very solid” in the latest quarter, he said.

While national chains advertise like crazy, mom and pops depend mostly on word of mouth and Yelp reviews.

“It’s not the same barriers to entry that there were, that if you put up this group of restaurants that you have to have this big TV campaign. No, you don’t,” said John Gordon, restaurant and franchisee consultant at Pacific Management Consulting Group in San Diego.

It’s “authentic” and Instagram-able experiences that diners are searching for these days, Gordon said. “It’s not experiential to sit in a rundown McDonald’s.”

Full Story: https://www.bloomberg.com/news/articles/2017-05-16/mom-and-pop-joints-are-trouncing-america-s-big-restaurant-chains


Growth of ‘Ghost’ Restaurant Concepts Proves Delivery-Only Trend Has Legs

April 14, 2017

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Whether you call them virtual restaurants, app-based establishments or headless concepts, it’s impossible to deny the recent rise of delivery-only food businesses around the country.

Restaurateurs are desperate to stem the profit-letting in their struggling sector (especially in the fast-casual world), and this new round of digital-driven establishments solves a variety of perennial industry problems. Add to this the growth of third-party delivery companies, consumers’ increasing comfort with mobile ordering and the recent explosion of meal-delivery kits like Blue Apron, and conditions seem ripe for this idea to blossom.

But first, what are these front-of-house-free restaurants?

A few examples:

David Chang, of Momofuku fame, is the A-list name behind delivery-only Ando in New York City. It offers “second-generation American food” like bibimbap, fried chicken and cheesesteak egg rolls. Orders are accepted via the restaurant’s website or app and third-party services like Seamless. Delivery expanded recently to include more of Manhattan. The business came about as a partnership with Expa, a startup lab with connections to Uber.

In Chicago, home to several virtual restaurants with more on the way, Lettuce Entertain You Enterprises recently debuted Seaside, a delivery- and carryout-only operation that shares a kitchen with its Oyster Bah restaurant.

New York-based startup Green Summit Group expanded to Chicago, rolling out nine virtual operations out of one shared kitchen. Since its launch, Green Summit has raised $3.6 million and is anticipating $18 million in sales this year among all locations, according to the Chicago Tribune.

Even traditional family-dining brands are taking note of these ghost restaurants.

“I’m fascinated by some of the virtual kitchens that don’t have a brand, that are only supported by a kitchen,” Denny Marie Post, CEO of Red Robin Gourmet Burgers and Brews told Restaurant Business magazine earlier this year.

So, does the headless trend have legs?

In short, yes.

It appeals to the on-demand generation that’s grown up watching Netflix on the living-room couch. And it’s a good mesh with the gig economy that has given rise to third-party delivery services. States like Colorado, with legalized recreational marijuana, are expected to be primed for expansion of delivery-only concepts.

Even better for restaurant operators and innovators, these virtual establishments address nearly every foodservice-industry pain point.

They are cost-effective. Without the need to waste square footage on dine-in capabilities, these headless operations can run in a smaller footprint compared to traditional operators. There’s no need to hire a designer, account for parking space or spend money on decor and server uniforms (or servers for that matter). Rent is much cheaper for these locations since they can be built in warehouse space and in lower-rent districts. Lastly, the need to invest in costly renovations for service and seating areas is no longer required for these operators.

In Chicago, for example, Green Summit Group’s nine headless restaurants operate out of a shared 2,000-square-foot kitchen that was once home to a dine-in burger establishment.

These kitchens can also act as commissaries for food-truck or catering offshoots.

With so much attention focused on reducing operating costs and keeping labor expenses in check, this new approach will become very appealing to operators who leverage ordering and delivery services and avoid the dining-room distractions. By putting most of the focus on the food quality and preparation, the strategy is sure to deliver praise and strong reviews. Expect to see continued growth in the “ghost” restaurant space.


Why Chipotle’s Southeast Asian chain couldn’t make it work

March 16, 2017

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By Becky Krystal
https://www.washingtonpost.com/news/going-out-guide/wp/2017/03/11/why-chipotles-southeast-asian-chain-couldnt-make-it-work/?utm_term=.7c03019833f5

All 15 locations of ShopHouse, the Southeast Asian fast-casual restaurant owned by Chipotle, will close on March 17. The closings, first reported by Nation’s Restaurant News on Thursday, left fans distraught.

But it was easy to see the move coming after Chipotle announced in October that it was halting investments in the brand. Instead, the burrito giant’s spinoff aspirations will focus on two other endeavors: Pizzeria Locale and Tasty Made, a pizza joint and a burger place, respectively. “We just didn’t believe that ShopHouse warranted continued investment,” Chris Arnold, a spokesperson for Chipotle, said in an email.

ShopHouse, which opened its first location in 2011 in Dupont Circle, offered customizable rice, noodle and salad bowls inspired by the cuisines of Thailand, Vietnam, Malaysia and Singapore. It represented a glimmer of hope for diners interested in something different and at least marginally more nutritious than what was served at most fast-casual chains.

But selling Southeast Asian cuisine proved to be a losing gamble in an industry dominated by burgers and sandwiches. The top 10 quick-service and fast-casual brands, as ranked by U.S. sales in 2016’s QSR 50, an annual list published by industry publication QSR magazine, don’t include any restaurants serving Asian cuisine. The list is topped by the likes of McDonald’s, Starbucks, Subway, Burger King and Taco Bell.

Even when QSR broke out supposed “ethnic” brands — the label is a bit of a stretch — the results aren’t that impressive. Taco Bell was ranked at No. 5; further down the list are Chipotle (12), Panda Express (22), Qdoba (34), Del Taco (37) and Moe’s Southwest Grill (43). Only one Asian concept made the top 50: Panda Express, a chain perhaps best known for its fried, sticky orange chicken, which is a far cry from ShopHouse’s grilled steak seasoned with fish sauce, or its sweet and sour tamarind vinaigrette.

Those Southeast Asian flavors were unfamiliar to many Americans. Darren Tristano, president of market research firm Technomic, said that when the brand launched, he believed the biggest challenge would be getting consumers to see that Southeast Asian cuisine wasn’t outside the norm. “When your core focus is on that, it just makes it very, very difficult,” he said. He points to Mexican, Italian and Chinese as the big three when it comes to popular international flavors, while Japanese and Greek make the cut to a lesser extent.

In an interview last year with The Post, ShopHouse brand director and co-founder Tim Wildin said he wanted to work with traditional Asian ingredients, noting that Thai flavors in particular had a universal appeal. He acknowledged there was a bit of a learning curve when customers complained the food was too spicy. But there wasn’t necessarily a need to “Americanize” the food, he said, just a need to communicate better.

ShopHouse probably could have improved its communication in at least one other way, said Sam Oches, editorial director of Food News Media, which produces QSR magazine. He said the brand didn’t do enough to promote itself as innovative and unique, which is ironic given the way Chipotle was able to establish a reputation as a trailblazer in the industry.

ShopHouse was “pretty ahead of the curve,” Oches said, adding that Asian fast-casual restaurants are now increasingly popular with millennials.

In the last five years, several have opened in Washington, including Buredo, SeoulSpice, Maki Shop and Four Sisters Grill. Had ShopHouse debuted now, or even just a few years later than it did, it would have entered a market still lacking immediate competitors but perhaps one more receptive to its food. Oches expects that 10 or 15 years from now, the top 10 quick-service brands may not look too different from today, but the rest of the list will likely include more concepts serving Asian cuisine, which are just now scaling up to compete.

ShopHouse may also have partially been a victim of Chipotle’s greater struggles. Following outbreaks of food-borne illness at its restaurants, the company has seen a sharp decline in sales. From 2015 to 2016, revenue dropped more than 13 percent, to $3.9 billion, according to the company’s most recent earnings report, released last month. The decrease in net income was staggering, from about $476 million in 2015 to around $23 million in 2016. “It’s startling how far their fall from grace has been,” Oches said of the brand he described as once being the most bankable restaurant company in America.

[A year after food safety scares, Chipotle has a new set of problems]

Jettisoning ShopHouse may be at least one way the burrito chain is attempting to trim the fat and refocus on its core business, especially considering that, at the time the company announced it was pulling back on ShopHouse, Chipotle chairman and chief executive Steve Ells said that the concept “was not able to attract sufficient customer loyalty and visit frequency to make it a viable growth strategy.”

While ShopHouse only launched a small family of locations, the expansion might have actually made success more difficult to achieve, Technomic’s Tristano said. ShopHouse may have worked best as a single location or limited regional chain, he said, especially as the fast-casual market matures, with possibly not enough customers to go around.

Instead, the brand was diluted between two coasts, with eight locations in the Washington area, five locations in California and another two around Chicago. Had it been able to establish itself as a major player with good recognition in one region, it could have performed better, Tristano said.

But the locations also speak to the demographics that prompted Wildin to pick Washington for the first ShopHouse: urban, diverse, young professionals. Limited appeal, in other words, was baked into the concept before it was barely off the ground.