 A Precursor Year
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CHARTS
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SEGMENTS
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When the price of a gallon of gas is approaching that of a quick-serve value meal and a full tank could buy a meal for two at Ruth’s Chris, you’ve got to wonder when people will choose getting back and forth to work over the drive-thru at lunch.
As a general rule, when disposable personal income is tight, quick-serve and fast-casual restaurants fare better than their casual and high-end cousins because people will shift their purchases downward. That held true in 2007 but the potential downside hasn’t deminished.
“There was quite a bit of success given the economy,” says Darren Tristano, executive vice president of Technomic Inc. By providing a greater value with a better price point, Tristano says, limited-service restaurants were able to out sell casual-dining establishments. The limited-service segment grew at 4.9 percent in 2007, according to Technomic.
Forty-three of the top QSR 50 chains had sales growth compared with 44 in the 2006 QSR 50 and 46 in 2005. For example, there was essentially no unit count change at McDonald’s and Burger King, but both had decent growth in systemwide sales, annual unit volumes, and same-store sales. More than a dozen chains had double-digit increases in sales.
Not everyone had a good year, though, and the overall slope of success pointed south as the year wore on.
Dennis Lombardi, executive vice president of foodservice strategies for retail and foodservice consulting firm WD Partners, says, “2007 started OK, then got gloomy. Little did we know it was a precursor to 2008.”
Lombardi says that as consumers became aware of the decrease in their disposable income, they were left feeling pessimistic about the future.
That downturn meant annual unit volumes declined at 21 of the top 50, compared with eight in 2006. Many chains saw comparable store sales decline as the year wore on. Starbucks, one of Wall Street’s usual shining stars, saw sales in its stores decline toward the end of the year and hit only 1 percent sales in first quarter 2008.
In an economy continuing to turn slower, the outlook for 2008 is not very bright. Technomic issued a press release in May lowering its foodservice industry growth forecast from 3.6 to 2.2 percent, noting that “limited-service restaurant growth has slowed substantially.” The firm expects limited-service to grow by only 3 percent.
One key factor affecting 2008 growth has been the change in monetary and capital markets, Lombardi says. Securing new development capital, the key to driving unit growth, will be difficult.
On top of that, Technomic’s Tristano expects economic conditions to influence pricing in the near future. “Many chains don’t want to lose customers, but they must [consider price increases] to keep the profits,” he says.
Unfortunately, consumers are already weary from price increases at the pump and the grocery check-out. It might not be all gloom and doom, but there’s a good chance the brown-bagged peanut butter and jelly sandwich will become quite popular.