Special Report | December 2013 | By Barney Wolf

2013: A Year In Review

Nine stories that shook up the limited-service industry in the last year.

Quick service restaurants added new menu items in 2013, like Wendy's pretzel bun
Wendy's Pretzel Bacon Cheeseburger was one of the biggest product launches in 2013.
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Despite a year filled with turmoil in Washington, the limited-service restaurant industry showed moderate growth and promise in 2013, thanks in part to creative new ideas and products, plus another good gain from fast-casual units.

With issues such as sequestration, a payroll tax increase, the government shutdown, and the Affordable Care Act hanging over the industry, it’s perhaps not surprising that gains have only been nominal, despite employment increases and an improving economy.

“The good news is that there’s still growth,” says Hudson Riehle, senior vice president of the National Restaurant Association’s (NRA) Research and Knowledge Group. But it’s also “the most modest growth in the past four years.”

Through three quarters, traffic was up 1 percent at quick-service restaurants and 6 percent at fast casuals, according to NPD Group, a research and consulting firm.

The 2 percent payroll tax hike hit consumer spending early. “When that went up at the beginning of the year, we saw restaurant traffic slow down, and [operators] had to go back to discounting,” says Bonnie Riggs, restaurant industry analyst at NPD.

In addition, the 16-day government shutdown in October represented a $24 billion hit to the economy and “took a toll on consumer confidence,” Riehle says.

The economy has been the No. 1 issue in recent years among operators polled by the NRA in its annual Industry Forecast, and it affected much of the industry in 2013. Here, we take a look at the top nine stories from the year and what they suggest for the future of quick service.

Value menus get a makeover

This year may go down in the annals of history as the year single-price value menus bit the dust. For a range of reasons, from rising costs to changing consumer tastes, the nearly quarter-century-old concept of value menus—a series of items all priced around $1—is giving way to multi-level pricing and a wider variety of food.

“It was inevitable that stratification was going to happen,” says Dennis Lombardi, executive vice president of foodservice strategies at WD Partners, a Dublin, Ohio–based design and consulting company. “It was like trying to keep gasoline at $1.”

“Five to seven years from now, there will be no dollar menu. It will just be the value menu.”

Wendy’s, which introduced the single-price value menu in 1989, launched its Right Size, Right Price menu systemwide in January with items from 99 cents to $1.99.

“We looked at six items priced at 99 cents, because that is still a critical price point, and others under $2, because that is still a good value,” says spokesman Denny Lynch.

In the fall, McDonald’s Dollar Menu transformed into the Dollar Menu & More, merging the brand’s $1 items with others up to $2 and the 20-piece nuggets for $5. Some other restaurant companies also began offering multi-priced value menus.

“This is an evolutionary process,” Lombardi says. “Five to seven years from now, there will be no dollar menu. It will just be the value menu.”

Brands turn to the IPO

After two years without a limited-service restaurant company launching an initial public offering, two brands made the plunge in 2013.

Fast-casual mainstay Noodles & Co., based in Broomfield, Colorado, raised $96.4 million with its initial public offering (IPO) in early July, while Chicago-based sandwich-maker Potbelly brought in $108 million with its October IPO.

Noodles sold 5.37 million shares at $18 each, and started trading at nearly twice that price. The Potbelly IPO was for 7.5 million shares at $14 apiece, well above the original price range of $9–$11, and shares opened trading at $28.66.

“There are not a lot of growth names in the consumer cyclical stocks,” says R.J. Hottovy, a restaurant industry analyst with investment firm Morningstar. “As a result, the market is willing to overpay for concepts that are viable and have growth potential.”

A few other companies are reportedly looking at going public, including Checkers Drive-In Restaurants Inc. and Focus Brands Inc., parent of Cinnabon and Moe’s Southwest Grill.

Starbucks continues its evolution

Starbucks wasted little time this year integrating acquisitions made in 2011 and 2012. In short order, the company expanded the availability of Evolution Fresh juices, introduced La Boulange artisan baked goods, and opened its first two Teavana Fine Teas + Tea Bar locations.

“Whatever we bring into the store, we want it to be enhancing to the customer experience and complementary to our leadership position in coffee,” chief executive Howard Schultz told investors in the fall.

Evolution Fresh also launched standalone Evolution Fresh stores and opened a new factory this year. Meanwhile, La Boulange products are now in more than half of Starbucks’ 7,000 U.S. company stores, and a La Boulange lunch concept is being tested.

“Starbucks has been pretty smart,” says Melissa Abbott, senior director of culinary insights at The Hartman Group, a Bellevue, Washington–based research and consulting firm. “They are capitalizing on categories customers want but may not easily have access to.”

“Better pizza” explodes

Fast-casual pizza is not new, but the number of upstart limited-service chains built around artisan, quickly baked pizza is soaring.

Since brands like MOD Pizza, Your Pie, and Uncle Maddio’s pioneered the space in the late 2000s, nearly a dozen fast-casual pizza efforts have popped up around the country, including Project Pie, Blaze Pizza, and The Pizza Studio. This year, the nation’s fifth-largest pizza company, Sbarro, opened its own fast-casual pizza iteration, Pizza Cucinova, in Columbus, Ohio.

More brands are on the way.

“We’re seeing the same grand proliferation being set up that we saw with the better-burger concept,” Lombardi says. “This is part of the customization consumers demand.”

Some efforts have big money behind them, including Los Angeles–based PizzaRev, backed financially by Buffalo Wild Wings. Others feature experienced operators, such as Denver’s Live Basil, created by Smashburger founders Tom Ryan and Rick Schaden.

Most fast-casual pizzerias emulate Chipotle’s wildly successful model, with premium or organic ingredients used to create pies, including build-your-own versions, along an assembly line. The pizzas are baked in a few minutes in very hot ovens.

Fast-casual pizza brands are mostly regional for now, but operators spent 2013 selling franchise rights to seemingly every major market in the U.S.

Pretzel bread becomes the “it” ingredient

The last year was a banner year for new product launches and limited-time offers. Operators carefully combined new ingredients to create menu items that grabbed the attention of consumers seeking more flavor, healthier components, and better value.

Perhaps no item captured the public’s attention this year quite like the pretzel bun. These salty-sweet rolls have been carriers at some regional and casual eateries for years, but the Pretzel Bacon Cheeseburger at Wendy’s this summer pushed them into quick service in a major way.

“We were able to discover an artisan bakery that could produce a great product and still supply 6,200 restaurants,” Lynch says, noting that the brand first succeeded with flatbread offerings. “We tested [the Pretzel Bacon Cheeseburger] in three markets in January, and people began talking about it on social media.”

Sonic followed suit by adding hot dogs on pretzel buns, dubbed Pretzel Dogs. Wendy’s went on to put chicken on its bun, and Dunkin’ Donuts rolled out its Pretzel Roll Roast Beef Sandwich.

“The pretzel bun and other creative bread carriers are an offshoot of the artisnal trend that has been growing,” says Mary Chapman, director of product innovation for Chicago-based restaurant research and consulting firm Technomic. “People are interested in trying different types of breads, and these pretzel buns have a great taste and texture.”

Line between quick service, fast casual continues to blur

More restaurant companies and entrepreneurs used 2013 to open new fast-casual concepts. Among the many fast-casual eateries to greet customers this year were Built Custom Burgers from the Counter; Two Madres Mexican Kitchen from Wienerschnitzel’s parent, Galardi Group; and SlowBones Modern BBQ from Boston Market founder, Kip Kolow.

Add to that a multitude of fine-dining restaurant chefs across the country who expanded their own fast-casual eateries, like Spike Mendelsohn with his Good Stuff Eatery—which announced a franchise program in October—and Rick Bayless, whose Tortas Frontera is opening in Philadelphia after years of growth in Chicago.

“There was a lot of scaled-down dining after the recession, and fast-casual restaurants, by focusing on quick service and fresher, higher-quality ingredients, have been the place to go for many of these consumers,” Hartman Group’s Abbott says.

Quick-service restaurants fortified their menus with more premium items to compete, although some are going beyond that to create their own fast-casual concepts. Yum! Brands’ KFC, for example, opened KFC Eleven in Louisville, Kentucky, featuring “hand-crafted food.”

On the other hand, Red Lobster decided to cut bait with its Seaside Express, a fast-casual lunch concept being tested at two of chain’s full-service restaurants in Florida.

Better-for-you foods steal more menuboard real estate

Making kids’ meals healthier was a big deal in 2012, and better-for-you menu items for adults moved to the front this year.

“Consumers are looking for ligher, healthier choices,” NPD’s Riggs says. “You have to have these choices on the menu for those who want them, although most people eating out want to indulge. Even diners not eating light say they want those options on the menu.”

The federal government’s announced intention to ban trans fats could impact some limited-service restaurants, but many of the largest ones already moved away from using the saturated fats. Increasingly, most operators are featuring at least some healthier options.

McDonald’s, which put calorie counts on its menuboard in anticipation of another federal regulation, unveiled McWraps, which are made-to-order wraps with chicken, greens, cucumbers, and sauce. Burger King launched lower-fat, lower-calorie Satisfries, and Chipotle added tofu Sofritas.

“We’re seeing the same grand proliferation being set up in pizza that we saw with the better-burger concept. This is part of the customization consumers demand.”

Concurrently, consumers are seeking to discover more about their food. Chipotle, known for its commitment to local produce and naturally raised meats, now labels its ingredients with genetically modified organisms on its website.

“Transparency is clearly foremost in many consumers’ minds,” Abbott says. “Does their meat come from a happy cow? What are the sustainable measures being used? Chipotle has clearly raised the bar and put a spotlight on this issue.”

Chipotle stirs up conversation with viral video

When Chipotle developed “The Scarecrow” game and companion animated short film, the idea was to get people thinking about the source of their food and how it is prepared. What the chain got was a lot of buzz and controversy, particularly for the innovative and emotional Moonbot Studios–produced, anti-factory farm film, which went viral with 7.5 million views on YouTube.

The short depicts food production literally as a factory with unappealing cartoon images of animals being treated inhumanely. At the end, the idea of making burritos with fresh, natural products wins out.

Some critics loved the film and its message of sustainable farming, while others thought it unfairly depicted modern farming. Vegetarians saw an anti-meat message, while others found Chipotle hypocritical, because the chain sells a lot of beef, chicken, and pork.

For the company’s part, the film and game were created “to simply show that there are different ways of growing and raising food,” says spokeswoman Danielle Winslow, “and our goal at Chipotle is to constantly look for better, more sustainable practices.”

Political battles spill into quick service

As the country’s politicians have grown increasingly more partisan, those clashes have spilled over into the business world, including in the restaurant space.

“This whole idea of taking political stands has been growing, for good and bad,” says Technomic’s Chapman. “One group protests a company, and another rallies behind it.”

Whether it stems from a request from one chain to refrain from bringing firearms into its stores or viewpoints expressed about the Affordable Care Act, customers’ reactions to companies' political opinions are often angry and can be lasting.

Most restaurants strive to remain above the fray. That was even the case in August, when hundreds of quick-service restaurant workers conducted one-day strikes and walkouts in 50 cities to protest low wages.

Companies generally responded with measured comments about the strike, which had little impact, but which did earn several national headlines. The most conciliatory may have been from McDonald’s, which issued a statement, saying, “We respect our employees’ rights to voice their opinions,” and welcomed them back to work.