Article

QSRs shift models to 'go where the consumers are'

Mobile initiatives, bigger marketing budgets, franchising growth and unprecedented headwinds grabbed headlines this year for the QSR segment.

December 16, 2014 by Alicia Kelso — Editor, QSRWeb.com

In a sure sign of solid economic recovery, the big stories that emerged in 2014 included franchising and growth, large marketing and mobile investments and modified restaurant models to keep pace with fast casual's staggering growth.

Driving these investments is the consumer, who is firmly positioned in the driver's seat thanks to the advent of social and mobile technologies. As Dunkin' Brands CEO Nigel Travis said earlier this year, "We are doing a lot of research and will go where the consumer is."

The top six (off-the-menu) stories for the QSR segment in 2014 were:

Mobile

More than 60 percent of Americans now own a smartphone and brands are scrambling to get their attention directly through their device. This year saw a lot of activity in the mobile space, buoyed by giants such as McDonald's (Apple Pay), Burger King (PayPal) and Subway (Softcard) adding mobile payment capabilities.

Taco Bell released its new app in the fall – featuring ordering – that the brand called its "biggest innovation since the drive-thru." KFC is also rolling out mobile ordering with its partner Tillster. 

Even smaller chains are jumping on the mobile bandwagon: Cousins Subs added mobile ordering, Chick-fil-A and Dairy Queen are deploying payment options, Auntie Anne's and Roy Rogers both added mobile loyalty programs this year, while Taco Time launched mobile gifting.

Mobile is, quite simply, becoming a consumer expectation. Consider Dunkin' Donuts' DD Perks program: Launched in the beginning of 2014, it now includes more than 2 million members. Ten million customers have downloaded the brand's mobile app.

Expect this pace of adoption and utility to increase in 2015, with McDonald's jumping into the loyalty and ordering space.

Franchising and growth

After a five years of retraction and flatness, franchising and growth took off in the past year, especially overseas. According to the Franchise Times, the percentage of chain locations outside of the US has increased every year since 2000, with particular acceleration in the past year. The number of franchised locations grew by 10.3 percent, compared to 1.3 percent for domestic locations.

The average franchise system now has 36.3 percent of its locations outside of the US, nearly two full percentage points higher than 2012. 

An example of international explorers in 2014 include:

• Auntie Anne's, Israel and Aruba
• Wetzel's, Brazil entry
• Cold Stone, Kenya
• Popeyes, Turkey, Canada and Turkey
• Quiznos, Taiwan and China
• McDonald's, Vietnam entry
• Burger King, Brunei and Sri Lanka
• Dunkin' Donuts, Brazil, Sweden
• Doc Popcorn, Chile, Peru
• Carl's Jr., Canada, India and Honduras
• Krispy Kreme, China, Bangladesh, South America
• Dairy Queen, Vietnam entry
• Baskin-Robbins, Canada and Crimea
• KFC, Zimbabwe and Bolivia
• Rita's Italian Ice, Philippines
• Cinnabon, Morocco

Domestic growth wasn't exactly put on the back burner. Some QSRs are stepping things up stateside, in both new and existing markets. Dunkin' Donuts, for example, continued its voyage West, with new locations opening in California. Travis said the brand has the potential to reach 20,000 units in the US. 

Sonic also has big plans, aiming at 1,000 new restaurants within the next 10 years. The company extended a presence in New York and California to kick things off this year. 

Culver's, Popeyes, Del Taco, Baskin-Robbins, Dairy Queen, El Pollo Loco, Roy Rogers, Rita's, Captain D's, Krispy Kreme and Arby's all celebrated a host of net new units this year as well.

Marketing and social budgets jump

This year's marketing budgets jumped by double digits year over year, further indicating recovery. And what an exciting year it was for brand campaigning. Taco Bell's foray into the breakfast daypart, for example, included a breakfast phone mystery, as well as a few jabs at perennial breakfast champion Ronald McDonald. 

Arby's shifted its entire focus to its protein lineup with its new "Meatcraft" campaign, led by new CMO Rob Lynch (a Taco Bell veteran). And, in May, Burger King abandoned its 40-year-old "Have It Your Way" slogan for "Be Your Way." 

Other notable campaigns this year included McDonald's "Our Food. Your Questions" transparency initiative and Jersey Mike's new "A Sub Above." KFC kicked off 2014 with its "How Do You KFC?" campaign, and Tim Hortons marked its 50th anniversary this year with the reintroduction of classic menu items and a 1960s theme. 

Sonic (Two Guys), Wendy's (Red) and Popeyes (Annie) relied heavily on their spokespeople to carry their marketing weight, with much success.

On the social front, Taco Bell jumped into Snapchat and Tumbler, while Wendy's launched a short film series in Italian to celebrate its Tuscan chicken LTO. Wendy's, Pretzelmaker and McDonald's both also dabbled with Snapchat.

IPO/private equity activity heats up

With 288 deals and $95.2 billion raised, 2014 will end with record activity in the US IPO markets, according to an EY Global IPO Trends report. As of December, the number of listing was at its highest point since 2000 and is a 27-percent increase over 2013. Restaurants were very much at play with this trend. Notable filings this year include Papa Murphy's, El Pollo Loco and Habit Burger.

EY Global expects the momentum to continue in 2015. Rumors have swirled around possible IPOs for Bojangles, Café Rio and Shake Shack.

This year has also been a boon for private equity investments in the restaurant industry:

• The parent company of Checkers and Rally's restaurant chains was sold to Sentinel Capital Partners earlier this year. Sentinel Capital also added TGI Friday's and Newk's Eatery to its roster.
• An affiliate of Apollo Global Management finalized its acquisition of Chuck E. Cheese's in February. 
• And Global Franchise Group, which is the parent company of Great American Cookies, Pretzelmaker, Marble Slab Creamery and MaggieMoo's, acquired Hot Dog on a Stick in August.

Fast casual aspirations

As fast casual continues to significantly outpace other segments' growth (traffic up 8 percent compared to an otherwise flat industry), a number of QSRs are experimenting with new concepts or are changing up their models all together to get a piece of the action.

The New Year will be telling for McDonald's and its new, fast casual-esque "Create Your Taste" platform, which allows customers to build their own burger via a kiosk, and then have that burger delivered to their table. The company plans to roll out the initiative to 2,000 locations in 2015. 

Wendy's consistently brands itself as having a fast casual experience at a quick-service price. The brand launched two new salads this year aimed directly at the fast casual crowd. 

Yum! Brands has been dipping its toes in the hot segment as well – KFC Fresh opened in Canada, on the heels of KFC eleven's debut last year in the US. Yum also opened Super Chix and Banh Shop, while its Taco Bell brand debuted the U.S. Taco Co. and Urban Taproom in California. 

El Pollo Loco, fresh off of its IPO, has found solid ground with its "QSR Plus" positioning. And Arby's touted its new "fast casual-inspired design" during its opening in White House, Tennessee. 

Strong headwinds

In October, Firehouse Subs CEO Don Fox said the headwinds facing the restaurant industry at the moment are unprecedented in his 40 years of experience. Most of these challenges are expected to not only continue in 2015, but also accelerate, including:

• Record-high commodities. Culver's COO Phil Keiser said he expects beef to remain stubbornly high until at least 2016.
• Minimum wage. Protests for $15 an hour are growing, while a handful of cities have increased their wage levels, including Seattle and Chicago.
• Data breaches. Until the new EMV standards are put into place – in October 2015 – security risks will haunt merchants who continue to accept magnetic-stripe credit cards. The data breach trend affected Dairy Queen and Jimmy John's in 2014, among other major brands.
• The National Labor Relations Board ruling. When the NLRB ruling held McDonald's Corporate accountable for its franchisees' wage theft accusations, it sent a shock through the entire franchising community. The final ruling is pending, with franchisors watching closely to gauge how this sweeping decision could affect them. 

Headline grabbers

The top 5 QSR headlines of 2014 were:

• Burger King and Tim Hortons unite to form Restaurant Brands International, the third largest QSR chain in the world. The move relocated Burger King's headquarters to Canada and had some crying foul over tax inversions. 
• McDonald's woes continue. The Golden Arches have lost plenty of luster this year, with global sales continuously declining in its flagship markets and a Hail Mary "Experience of the Future" initiative planned in '15 to right the ship.
• Chick-fil-A passes KFC as the top-selling chicken chain in the US. The news was reported in March and based on data from Technomic. 
• KFC China navigates another major supply chain crisis. After showing signs of recovery from a supply chain scandal in its flagship China business in 2013, KFC was dealt another similar blow in the summer when an undercover report showed its meat supplier selling expired products. Considering a majority of Yum! Brands' profits come from its KFC China business, the second wave of scandals has hit the company's stock hard. 
• Taco Bell jumps into breakfast. The millennial-friendly brand was previously known for its Fourth Meal business, and relentlessly attacked breakfast frontrunner McDonald's during its introductory marketing barrage. The company has already turned a profit from its morning menu. 

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