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    2014’s Top 9 Stories

  • The stories that made this year one of the most eventful in industry history.

    Taco Bell
    Taco Bell made a splash in 2014 with its breakfast menu, which included the Waffle Taco.

    It’s fair to say that 2014 has been as eventful a year for quick-service restaurants as the industry has seen in quite a while. Changing demographics and sharper competition have sparked a variety of innovations, but also exposed some weaknesses. And the unrelenting march of technology is changing the restaurant business landscape, particularly when it comes to mobile phones.

    Restaurant traffic has been basically flat this year, according to market research company The NPD Group, although the fast-casual sector saw an 8 percent gain in the third quarter. Operators remain generally upbeat. The National Restaurant Association’s (NRA) Restaurant Performance Index, which tracks the U.S. industry’s health and outlook, marked its 20th consecutive month above 100 in November, signifying continuing expansion. Improved employment conditions and higher consumer confidence are key drivers of this optimism, says Hudson Riehle, senior vice president of the association’s Research and Knowledge Group.

    “When more people are employed, there is less time for home meal preparation,” Riehle says. “Secondly, it increases income levels,” so people have more money to eat out, he adds. The national unemployment rate dropped to 5.8 percent in October, down from 7.2 percent a year earlier and the lowest level since spring 2008.

    Also driving optimism? Most operators surveyed by the NRA reported better or equal same-store sales this year.

    “We’ve seen an uptick in same-store sales in the back half of the year,” says R.J. Hottovy, restaurant analyst with investment firm Morningstar. “Sales correlate with the unemployment rate, but restaurants are also doing a better job with menu innovations.”

    In a year as big as this one, these were the top nine stories that made the biggest impact on the limited-service restaurant industry.

    Burger King aquires Tim Hortons

    The restaurant industry normally sees big acquisitions each year, but few, if any, like Burger King’s planned purchase of Canada-based coffee-and-doughnut icon Tim Hortons for a whopping $11.25 billion. The purchase would create the world’s third-largest quick-service restaurant group.

    “There’s been more M&A activity in general as credit conditions have improved. Money is cheap to borrow and corporate interest rates are low.”

    “Tim Hortons is a very good company that Burger King believes has a lot of untapped potential,” says Mark Kalinowski, lead restaurant analyst at Janney Capital Markets. He and other analysts believe Burger King could accelerate Tim Hortons’ international expansion, especially in the U.S., where the Canadian company has only a regional presence. In addition, Tim Hortons’ expertise could help Burger King improve its breakfast options.

    It’s also about Burger King’s growth. “There is a continued expectation by the investment community—Wall Street—for publicly traded companies to continue to grow,” says John Gordon, founder and principal of San Diego–based Pacific Management Consulting Group.

    Burger King will move its headquarters from Miami to Canada after the deal closes, a plan some critics say is to dodge higher corporate taxes in the U.S., saving millions of dollars annually. The company has repeatedly denied those claims.

    There were plenty of other deals in the quick-service restaurant sector this year. S&P Capital IQ, which provides market data and analysis, says 179 restaurant industry–related mergers and acquisitions were announced through November, compared with 171 for all of 2013. The $18.7 billion value of this year’s deals dwarfs last year’s $1 billion.

    Private equity firm Sentinel Capital Partners made two limited-service acquisitions: Checkers Drive-In Restaurants, operator of more than 800 Checkers and Rally’s restaurants, and fast casual Newk’s Eatery. The amounts were not disclosed.

    Another private equity firm, Apollo Global Management, bought CEC Entertainment Inc., parent of Chuck. E. Cheese’s, for $950 million, while JAB Holding, owner of Peet’s Coffee & Tea and Caribou Coffee, purchased Einstein Noah Restaurant Group for $374 million. And Buffalo Wild Wings, one year after investing in fast-casual pizza brand PizzaRev, took a majority stake in Rusty Taco.

    “There’s been more activity in general as credit conditions have improved,” Gordon says. “Money is cheap [to borrow] and corporate interest rates are low.”

    Mobile ordering hits tipping point

    One trend that appears to have reached a tipping point for restaurants is mobile technology, led by payment tools.

    NRA research finds that 90 percent of Millennials—the 18–34-year-old demographic coveted by restaurants today—own smartphones. And two in five said they would pay for quick-service restaurant orders by a wireless device if possible.

    Starbucks is one of the biggest players in the mobile-ordering space with its digital wallet, which is tied to its loyalty program. Chief executive Howard Schultz told investors in October that customers using mobile devices made nearly 7 million transactions per week, or 16 percent of its U.S. purchase activity. Growth has been almost 50 percent a year, Schultz said, and “the real growth is yet to come.”

    Other companies are looking at mobile payments, including Subway, which partnered with Softcard to create an app allowing users to pay for items, redeem loyalty points, and more. But analysts consider October’s launch of Apple Pay the real game changer.

    “The big thing is Apple’s doing it,” says Jared Isaacman, chief executive of Harbortouch, which provides payment services and technology to businesses. “Even if you are not an Apple fan, they have a big global following.”

    In the first three days Apple Pay was available, more than 1 million consumers signed up.