Fast-Food Chains’ Growth in U.S. May Have Peaked

For most of its history, the fast-food business in the U.S. has been characterized by rapid and dependable growth. From founder Ray Kroc’s first restaurant in Des Plaines, Ill., in 1955, McDonald’s (MCD) became a chain of more than 700 stores in the U.S. within 10 years. By 1983 there were 6,000, and for the next two decades the company opened about 360 U.S. outlets every year on average. Smaller rivals Burger King Worldwide (BKW) and Wendy’s (WEN) had impressive early growth stories of their own.

In recent years, however, the companies that made Big Macs and Whoppers into icons of American pop culture have seen robust domestic expansion disappear from their menus. Sales at restaurants open for at least 13 months slipped 0.2 percent last year in the U.S. at McDonald’s and 0.9 percent at Burger King for the U.S. and Canada. Even including newly opened locations, which experience rapid growth rates in their early months, sales at the major fast-food chains grew only 1.1 percent last year, compared with 4 percent in 2012, according to Euromonitor International.

Slower sales growth has many industry watchers forecasting the once unthinkable: the peaking of burger joint growth in the U.S. “Traditional fast food—McDonald’s, Sonic (SONC), Wendy’s, KFC, Taco Bell—are fairly well-saturated in this country with not a lot more room left for growth,” says Peter Saleh, senior research analyst at brokerage Telsey Advisory Group.

The big chains already may be reacting to the shift in a surprising way: by selling more of their company-owned U.S. outlets to franchisees. In 2013, Wendy’s said it was selling more than 400. Yum! Brands (YUM), which owns KFC and Taco Bell, got rid of 214 restaurants last year and 468 in 2012. McDonald’s offloaded 200 stores this year, including an undisclosed number in the U.S. Burger King owns less than 1 percent of its U.S. locations.

Some Wall Street analysts encourage such “refranchising,” because it transfers the cost of running restaurants onto franchisees, which in turn helps the parent company’s bottom line. Others say the big chains, which are increasingly global, are simply insulating themselves from a U.S. business that has topped out as fleet-footed competitors appeal to a new generation of diners who prefer healthier meals they can build and customize themselves.

The fast-food chains are looking to their international businesses for growth, as the middle classes in China, Brazil, and other emerging markets embrace American-style eats. Last year, McDonald’s got about two-thirds of its revenue outside the U.S., compared with about half in 1994. And more than half of sales at Yum! Brands comes from its 6,380 stores in China.

In 2013, McDonald’s added only 121 stores in the U.S. (after subtracting the number of U.S. stores that were closed during the year). So to boost revenue, it needs to sell more food at each location. That’s not happening—U.S. same-store sales have slid or been unchanged for nine straight months—and it’s getting harder to increase sales as consumer habits change and the competition ramps up.

McDonald’s and its big rivals have tried to adapt by adding more healthful options—chicken sandwiches, salads—to the menu. But because they built their business selling burgers and fries, the traditional chains mostly attract people who like burgers and fries.

Diners who say they prefer to eat healthier aren’t choosing McDonald’s over relative newcomers such as Chipotle Mexican Grill (CMG). Last year, Don Thompson, McDonald’s chief executive officer, acknowledged that the company’s salads weren’t selling well—making up only 2 percent to 3 percent of U.S. sales, compared with 13 percent to 14 percent for the chain’s Dollar Menu, which includes burgers and hash browns. The fast-food giant took slow-selling Caesar salads off its menu last fall. Burger King recently axed its lower-calorie Satisfries from most stores. Other healthful fast-food flops include McDonald’s McLean Deluxe hamburgers and multigrain crust at Pizza Hut.

New fare also complicates and bogs down kitchens that were optimized to quickly churn out burgers and fries. That’s why drive-through times have gotten slower for the major chains over the past decade, reducing the quick-service draw for some fast-food diners. It takes at least 30 seconds longer to get through a McDonald’s drive-through now than it did in 2003, according to studies by QSR magazine and Insula Research. The trend is true for Burger King and Wendy’s, too.

Photograph by Alamy

Part of fast food’s problem is demographic. McDonald’s, Wendy’s, and Burger King typically appeal more to customers with lower incomes than those patrons who frequent some of today’s faster-growing restaurant chains. That’s why they all have their own versions of value or dollar menus. In the wake of the recession, lower-income diners have been spending less on restaurant meals. In 2012 those with annual household incomes of less than $70,000 spent an average $1,718 a year on food away from home. That’s a 2.2 percent decrease from 2003, according to data from the Bureau of Labor Statistics.

Households with incomes that exceed $150,000 a year are shelling out more for away-from-home eating, spending an average $6,585 in 2012, a 2.7 percent gain in the past decade. And they’re spreading their money among a bewildering array of fast-casual chains, from familiar brands such as Chipotle to less-known ones such as Protein Bar, which sells quinoa-filled burritos and chicken chili.

Chipotle’s sales at established stores rose 5.6 percent in 2013. Those at Yum!’s restaurants were unchanged, while McDonald’s and Burger King saw declines. “The main growth has been through Chipotle and Five Guys and these sort of brands that cater to people with a bit more money,” says Andy Brennan, lead industry analyst at researcher IBISWorld.

Millennials, who will drive the consumer economy in coming years, don’t share their parents’ addiction to fast food—nor to the one-Great-American-Meal-fits-all mentality that long characterized the industry. Well aware of that dispiriting fact, McDonald’s is testing a Build Your Burger concept in California, where customers can choose different buns and toppings, including grilled mushrooms, jalapeños, guacamole, and creamy garlic sauce. Whether younger consumers can look beyond the long-standing rap against older burger-and-fries chains remains to be seen. “It’s not that these companies don’t get it,” says Ravi Dhar, director of the Center for Customer Insights at Yale University. “They do, but they’re kind of stuck.”

If the article suppose to have a video or a photo gallery and it does not appear on your screen, please Click Here

4 September 2014 | 10:00 am – Source:

Leave a Reply

Your email address will not be published.