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A new report from IBIS World shows that the QSR market should grow at a slightly higher tick from 2014 to 2019, compared to 2009-14. The annual growth rate for the years following the recession was 1.4 percent for this segment (which excludes snack and coffee shops).
IBIS World predicts the growth rate to be about 2 percent annually for the next five years. Driving much of this trend is the segment's bigger focus on value and menu expansions.
"Since the recession, heavy competition from other segments has forced fast food operators to emphasize low prices in a continuing battle to attract cash-strapped consumers," the report said.
There are a handful of other factors driving the QSR industry's growth, including improved consumer spending, overseas expansion and innovating to meet new consumer trends.
New consumer trends
To embrace rapidly changing trends, restaurants have expanded their menus. Many now feature a barbell setup, with a value menu and a premium menu; LTO pipelines are getting bigger; and there have also been more rollouts to meet the demand for healthier food.
For example, McDonald's has rolled out fruit options for Happy Meals, snack wraps and smoothies in the past five years. KFC has revamped its kids' meal to include fewer calories, and Burger King has introduced lower-calorie "Satisfries."
The demand for healthier away-from-home food has also provided an impetus for fast casual growth. The limited-service subsegment's concepts craft their marketing messaging around "healtheir," "higher quality" and customizable offerings.
While the Five Guys and Smashburgers have taken some share away from the McDonald's and Burger Kings, some QSRs have responded with their own fast casual-esque concepts or offerings. KFC launched its KFC eleven spinoff last summer, while Taco Bell's Cantina Bell menu provides an answer to Chipotle and Qdoba.
Wendy's has even launched an initiative called "A Cut Above," promising a fast casual experience at a QSR price.
In addition to seeking healthier, more convenient meals, customers are also still shell-shocked from the recession and continue to spend conservatively. Consequently, price-based competition is on the upswing as brands introduce deeper value menus.
According to The NPD Group, value menu visits were up 6 percent in the year ending August 2013, compared to the same period the year prior. A report from Rabobank cited macroeconomic pressures as one of the main drivers of the trend, with constraints on disposable income and falling consumer confidence. David Novak, CEO of Yum! Brands, recently said offering value is now a necessity because of today's economy.
Despite the continued trend toward value seeking, consumer spending has gone up 2.2 percent since 2009. According to the report, QSRs were one bright spot during the recession, and continue to provide "convenient meals for cash-strapped consumers" through the recovery. This has given the segment an advantage over full-service brands, and is reason to provide more premium offerings opposite of the value meals (eg, the Cantina Bell menu).
The recession isn't the only factor that changed consumer spending habits. Demographic shifts are also having a big impact, and brands are scrambling to find the golden marketing ticket to fit the trends.
For example, the report says baby boomers continue to influence revenue growth and have the highest amount of disposable income across the population. There is also the increasingly influential, digital savvy millennial to butter up. These are the fast-paced consumers pushing mobile, convenience and social media trends.
In addition to navigating spend thrift and diverse consumers, QSRs also face increasingly stiff competition — from other brands in the segment, brands in other segments, and coffee shops, c-stores, bars and hotels.
The report said QSRs compete with each other mostly on price and quality. As a result, profit margins are low for most operators, which necessitates strict cost controls.
Brands that are willing to embrace higher quality ingredients "can make a difference" for consumers, who often judge a restaurant by how it compares to others, the report said. Other competitive factors include location, style, ambience and service.
"It is important that the operator understands the positioning of the restaurant in the marketplace and the clientele they are attracting or wanting to attract. The restaurant must consistently deliver on consumer expectations," the report said.
Outside of the QSR segment, competition remains heavy, from independents that offer takeout services to supermarkets and c-stores that sell fresh food.
Competition to intensify
The report predicts the intense competition to accelerate within the next five years, which will force chains to compete even more on price and will stifle revenue growth.
The restaurant companies that will benefit most are those that evolve their menu to include healthier, non processed foods.
"Product innovation will play a large part in the industry's growth over the coming years," the report said. Operators can succeed by "adapting to changing consumer preferences as the traditional concept of fast food evolves to include a wider variety of options."
The industry's "long era of growth" is far from over, the report said. By 2019, industry revenue should be about $219.3 billion.
Finally, a significant driver of growth in the QSR segment is the focus on emerging international markets. Slowed domestic growth has caused brands to shift their priorities overseas and international expansion is likely to be the largest source of revenue and profit growth for major brands within the next five years.
"The trend toward international expansion has increased throughout the past five years due to the slower growth rate of the domestic industry," the report said.
IBIS World predicts accelerated entry particularly in Asian and South American regions.
Breakdown of market share
The report broke down the major players' QSR market share, including:
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