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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.”
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.