The Top 500 restaurant market is in a slump right now. With the lead dining brands’ same-store sales visibly lagging this past second quarter, some analysts and reporters are even using the phrase “restaurant recession.” At reporting chains, year-over-year same-store sales only increased half of a percentage point in quarter two, the slowest growth seen since 2010. Of note, full-service chains’ same-store sales declined nearly a full percentage point (-0.9%) in the same quarter, compared to 0.9% growth at LSR chains. Here are several reasons behind the current chain industry slowdown:
- Decline of large public brands. Just a few of the public chains with same-store sales declines in quarter two include Chipotle Mexican Grill, Applebee’s, Buffalo Wild Wings, Chili’s Grill & Bar and Outback Steakhouse. Chipotle’s struggles are common knowledge, and the full-service brands mentioned have been in the hot seat for some time now. Many legacy full-service brands are still failing to take risks by investing in fresh, modern brand image updates.
- Independent & fast-casual operator competition. Part of the reason large public brands are suffering is due to heightened independent and fast-casual competition; the market is diversifying to meet shifting consumer demands. Fast casuals are expanding more than 7% annually, stealing share from less nimble FSR and QSR chains, and independent growth is likely accelerating our forecast of 6% to 7%.
- RMS competition. Higher-quality and more unique prepared food offerings from supermarkets and c-stores are gaining ground at the peril of restaurant chains, particularly those with competing convenience and value platforms. Retailers are building on-site restaurants with specialized menus—from barbecue to oysters—and restaurant-quality ambiance. We project supermarket RMS alone to grow 8.5% to about $35 billion in 2017.
- A new definition of healthy. Gen Zers and Millennials are evolving the definition of healthy toward natural and organic processes and emotional attachments to sustainable practices. Many of the large public brands that have not developed reputations for better ingredients struggle to improve quality and price points in the eyes of younger consumers.
- Home meal delivery. Meal kit subscriptions from companies like Blue Apron, HelloFresh and Plated that contain recipes and fresh food to cook at home are one of the hottest topics in America’s food industry. They are generating ample investor and media interest and are currently valued at approximately $1.5 billion. Although we project them to grow to between $3 and $5 billion over the next 10 years, this is still just a drop in the $1.7 trillion food industry bucket.
AS I SEE IT, the bulk of lagging sales come from full-service chains, which will suffer the most from consumers’ changing dining habits in the coming years. Fast-food brands will maintain a large food-away-from-home share, but will find it increasingly difficult to grow if they continue emphasizing affordable and craveable fried and fattening foods. Independent operators will continue to adapt quickly and thrive among younger consumers. RMS and home meal kit growth will outpace restaurant growth, but likely won’t ever topple restaurants’ giant industry share. However, the foodservice landscape is changing, and restaurant chains that are not willing to innovate and take risks in this take-share market will likely find themselves ousted.
Note: This content originally appeared in the September 2016 issue of Technomic’s Foodservice Digest newsletter