Inside Track by Paul Charity

A few things struck me about the American eating-out industry when I ventured across to the National Restaurant Association’s annual Chicago jamboree a fortnight ago.

First of all, there’s the sheer scale of it. There’s 40 companies with system sales in excess of a billion dollars - McDonald’s, with $32 billion of sales, is three times the size of the number two company, Subway. There’s 400 restaurant companies that have system-wide sales of $50m or more, according to the Technomic guide to the US’s Top 500 restaurant chains.

The second item that struck me forcibly is the size and sophistication of American food-service franchising. I counted 70-plus different franchisors offering to sell their retail content. Franchising is a powerful expansion tool, which has attracted considerable American private equity backing (franchise fees average around several hundred thousand dollars and there’s the royalty fees on top).

It’s the power of franchising, for example, that has allowed the highly-rated “better burger” offer Smashburger, founded in 2008, to grow to $134m of system sales this year - with plans to grow to 500 stores and $425m of system sales by 2013.

Franchising is comparable, it seems to me, to the tenanted model in the UK in that good and growing system sales means harmonious relations between franchisor and franchisee, while the opposite results in tension. So it is that Taco Bell franchisees are currently agitating over concern about the company’s marketing and value strategy.

Whilst in Chicago, I attended Technomic’s “Growth Chain Conference” to get an overview of which segments and operators are performing best. The industry is both more transparent and more opaque than ours. There are 85 publicly listed restaurant companies to allow visibility at the top end but there’s no Companies House equivalent to track private companies’ profits.

Generally, and not surprisingly, limited service restaurant chains have performed better than full service in the past year, based on keener price points. In the limited-service burger arena, it’s been McDonald’s year in consistency terms with five quarters of positive growth, hitting 5.3% in the third quarter of 2010, but dipping to 2.9% in the first quarter of 2011 - the company has 14,027 units in the US. Hardee’s, with 1,689 stores, deserves a special mention with three quarters of very strong performance peeking at 8.3% sales growth in the last quarter of 2010, but still achieving twice McDonald’s sales growth in the first quarter of this year.

The limited-service pizza arena has had a tough few years in the States, with 2010 a mixed year. Domino’s and Pizza Hit bucked the trend with sales growth in high single digits, but both slumped into negative territory in the first quarter of 2011 against very strong comparatives.

The largest chicken restaurant player KFC and the largest Mexican food specialist Taco Bell have had poor years, with the latter seeing flat sales and KFC down by high single digits for a couple of quarters. The winners in this speciality limited service sector have been Starbucks (five quarters of consistent high single-digit growth), cafe format Panera (although its sales have been also slowing for five quarters) and Mexican grill format Chipotle (whose sales have been growing in like-for-like terms for five quarters).

A swathe of restaurant chains in the full-service varied menu and full-service family style sector have been treading water. Brands like Cheesecake Factory and Buffalo Wild Wings have recorded sales growth below inflation or marginally negative.

The steak menu market is proof that sales can be stabilised even in high price-point offerings - it declined by a whole 10% in 2009 but saw a nominal sales gain in 2010 of 1%.

Overall, there are, as you’d expect, winners and losers in every category although the biggest slowdown has been in high-end restaurants. “You simply can’t finance them,” Technomic executive vice president Darren Tristano tells me.

Innovation alive and well
There’s modest growth of 2.6% in eating-out forecast for the US for the rest of 2011. But the US industry is worth $361.1 billion in annual sales currently - the top 500 chains account for two-thirds of total sales.

According to ONS statistics, the out-of-home food and drink market in the UK is worth £70bn a year, making the American market worth slightly less than four times as much. There were no fewer than 19 new entries to the Technomic list of America’s Top 500 restaurant chains and innovation is alive and well.

Technomic lists 60-plus emerging chains to watch aside from the new entries. The chains to watch vary from fairly mainstream too much more esoteric. Take, for example, Bubba Gump Shrimp Company, one of whose outlets I visited on Chicago’s Navy Pier. It’s a restaurant brand inspired by the 1995 movie Forrest Gump and its fictional shrimping business, Bubba Gump Shrimp Co. Its menu offers some 15 shrimp specialities, including fried shrimp, popcorn shrimp, shrimp po’ boy and coconut shrimp.

Next May, M&C Report is to organise a study visit to Chicago that combines a tour emerging US restaurant concepts in the city and a visit to the National Restaurant Show. E-mail Paul Charity on paul.charity@wrbm.com to register a provisional interest in attending.

*M&C Report is offering copies of the 2011 Technomic Top 500 Chain Report for £995. The publication, for which M&C Report is the sole UK distributor, contains a US full restaurant industry update, ranks the performance of the top 500 companies in sales terms, examines current US trends and charts emerging companies. E-mail Alan Totten on Alan.Totten@wrbm.com to order a copy.