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.


Yum! Brands becomes a hit machine

The innovations keep coming from Yum! Brands. That’s especially the case at Taco Bell, beginning at the beginning: breakfast. The company launched its nationwide morning menu this year, heightening the battle for first-meal customers. With Waffle Tacos and grilled A.M. Crunchwraps, the company is putting its own stamp on breakfast.

“We’re focused on being a better, more relevant, and more accessible Taco Bell for our consumers,” Rob Poetsch, director of communications, says in an email.

The brand also added new menu items, including the Quesarito—a combination quesadilla and burrito—and launched a mobile ordering and payment app that it believes “will be the biggest innovation in [quick service] since the drive thru,” Poetsch says.

Taco Bell’s innovations didn’t stop there. It also debuted a fast-casual concept, U.S. Taco Co. and Urban Taproom, that it is testing in California.

“Taco Bell is very innovative,” says Bev Cain, senior vice president of operations for restaurant consultant Sandelman & Associates. “You look for something to resonate with consumers, and Taco Bell has long been a dissonant voice against burger chains.”

There were other innovations at Yum this year. Pizza Hut, for example, began a major menu refresh in November. The new menu, titled the “Flavor of Now,” retains favorites like the Supreme and Meat Lover’s Stuffed Crust pizzas but introduces 10 new crust-edge flavors, five new signature sauces, four drizzles, and five new ingredients, such as sliced banana peppers and salami.

Pizza Hut’s menu rollout, which began November 19, is the result of a year of planning, during which more than 200 ingredients and flavors were tested. Some items, such as the barbecue and creamy garlic Parmesan sauces, had been parts of previous limited-time offers. Guests can create their own pies or choose a signature pizza, a list that includes 11 new options. Meanwhile, the new Skinny Slice menu offers five large pizzas with 230 or fewer calories per slice.

On top of all that, Yum is testing two new fast-casual concepts, Super Chix and Banh Shop, that take advantage of emerging consumer trends.

Gas goes down, beef goes up

Restaurant operators have been concerned since last year about rising beef prices resulting from drought conditions in parts of the country. What no one expected was the big drop in oil prices.

Gasoline, which was averaging nearly $3.70 a gallon this summer, declined sharply to an average $2.78 in November, according to the American Automobile Association. That’s good for restaurants because “it leaves more money in consumers’ pockets,” the NRA’s Riehl says.

But rising food prices are a major issue. Beef prices hit a record high in October, and ground beef was 22.4 percent higher than a year ago, according to the U.S. Department of Agriculture. Prices of broilers and turkeys set record highs in October, and pork hit a new high in September as fallout continues from a virus that forced millions of pigs to be destroyed this spring.

Dairy prices, notably cheese and butter, set record highs in the summer but have fallen back some since. Corn and wheat prices are low, however, thanks to a good growing year.

“Food-cost increases have been the top operator challenge,” Riehle says, noting statistics from the Restaurant Performance Index. “One in three operators now say it is the top challenge they face.” That’s up from just 8 percent a year ago.

Restaurants can’t pass along all the higher prices to consumers without risking losing business, he adds, which has kept menu inflation to 2.3 percent.

McDonald’s funk continues

The numbers have been ugly at the nation’s largest restaurant company. McDonald’s has recorded 12 consecutive months of U.S. same-store sales declines, and the 4.1 percent tumble in September was the company’s biggest monthly slide in 11 years. Profits declined four straight quarters.

There are plenty of reasons for the slump, including sharp competition, operational complications from an expanding menu, and a perception by some that the food is not as good as what’s available at fast casuals, despite its push toward upscale coffee drinks and premium sandwiches.

“It’s a combination of things,” Hottovy says. “Some of it is self-inflicted. There have been some marketing missteps, and some of the new products were not as well received as expected. Plus, McDonald’s has done less to stand out among its peers.”

The company is also a victim of its own success, he adds, as others add breakfast and beverages—two categories it had helped pioneer. “It’s almost too large to be nimble with innovation,” he says, adding that sourcing enough ingredients to roll out a new item nationally takes far longer than other companies.

McDonald’s CEO Don Thompson said in October that the company is taking steps to turn around the U.S. business. In 2015, that will include simplifying menus, allowing local operators more control over their offerings, and giving customers more options to customize their food.

Chipotle gets creative with packaging

Chipotle Mexican Grill has long used its packaging to deliver a message about the company’s origins, philosophy, and food. This year, the company decided to add the musings of various thinkers, authors, comedians, and actors.

Dubbed “Cultivating Thought,” the packaging initiative added mini essays, accompanied by illustrations, to cups and bags as a way to encourage creative thinking among consumers.

“Customers seem to like these vignettes, and the program generated significant media and social media conversation when it launched,” says Chipotle spokesman Chris Arnold.

The initiative features authors and commentators like George Saunders, Malcolm Gladwell, Toni Morrison, Judd Apatow, and Sarah Silverman. The essays vary in topic, but are all designed as “two-minute readings” that are printed on bags and cups. Writer Jonathan Safran Foer, who developed the idea for Chipotle, has complete editorial control over the series’ content, and the packaging allows for roughly 1,700 characters with spaces.

Sandelman & Associates’ Cain says the Cultivating Thought initiative is a clever way to stand out in such a competitive field.

“With today’s fragmented media, it’s hard for anyone to get the same reach out of media dollars as they did in the past,” she says. “It’s difficult to cut through the clutter.”


Minimum wage debate heats up

President Barack Obama raised the minimum wage to $10.10 an hour for federal contractors and would like to see that expanded to all workers, something not likely to go anywhere in the new Republican-led Congress. But voters in four states—Alaska, Arkansas, Nebraska, and South Dakota—took matters into their own hands, approving ballot measures to hike minimum wages. Legislatures in 10 other states did the same, as did residents in three California cities.

Restaurant association officials in several of the states warned that raising the minimum wage would adversely impact eateries, resulting in delayed hiring of entry-level employees and reducing raises for experienced ones. Meanwhile, workers at quick-service chains across the U.S. held one-day demonstrations in August, seeking to increase their hourly pay to $15.

Some restaurant companies are trying to meet in the middle with employees by boosting benefits. Starbucks, for instance, started a new program that provides free online college education to thousands of its U.S. employees and partial tuition for many others.

(More) celebrity chefs flock to fast casual

While there’s nothing new about celebrity chefs establishing fast-casual restaurants, a large number of famous cooks announced plans this year to enter the space. Roy Choi, José Andrés, Joshua Skenes, Carla Hall, and Chris Jaeckle are among the chefs who revealed their intentions to open fast-casual concepts.

Choi, who became an industry icon with his Kogi BBQ food trucks, has said this push by well-known chefs going into fast casual follows in the footsteps of Wolfgang Puck, Rick Bayless, Bobby Flay, Danny Meyers, and others who made up the “first wave.” But Choi, in particular, wants to take the movement even further by building his health-focused quick serve, Loco’l, into a national brand found in the same strips as McDonald’s, Wendy’s, and Burger King.

“This just shows how far fast casual has come and its appeal,” says Elizabeth Friend, senior foodservice analyst at Euromonitor International, a global market intelligence firm. “Consumers are seeking more expensive dining occasions.”

Brands take the IPO plunge

This has been a strong year for limited-service restaurant companies looking to go public. As of the end of November, four companies, all previously controlled by private equity firms, took the plunge with an initial public offering (IPO) of stock.

“Part of it is the valuations are healthier now,” Kalinowski says, noting that the stock market is at record levels and investors are hungry for new stock offerings. “You’re certainly more likely to take a concept public if you’re getting a fair, if not a generous, valuation.”

At the same time, “some of the companies too small to take public a few years ago are now large enough that it makes sense,” he adds.

Zoes Kitchen, the Plano, Texas–based Mediterranean chain, raised $100.6 million in April; take-and-bake pizza operator Papa Murphy’s, based in Vancouver, Washington, had a $64 million offering in May; and Irvine, California, burger chain Habit Restaurants raised $90 million last month.

The largest IPO was by Costa Mesa, California–based El Pollo Loco. The veteran quick-service chain sold shares in July to raise $107.1 million. A secondary offering last month raised another $200 million.

Breakfast, Burgers, Fast Casual, Finance, Growth, Marketing & Promotions, Menu Innovations, Ordering, Pizza, Sandwiches, Special Reports, Burger King, Chipotle, McDonald's, Pizza Hut, Starbucks, Taco Bell, Tim Hortons