Category Archives: Growth

Taco Bell overtakes Burger King as 4th-largest U.S. chain

Taco Bell Overtakes BK 4th-Largest U.S. Chain

Leslie Patton
Bloomberg
https://www.sfgate.com/business/article/Taco-Bell-overtakes-Burger-King-as-4th-largest-12629994.php

Lovers of chalupas and crunch wraps have spoken: Taco Bell is now bigger than Burger King.

The Mexican-themed chain eclipsed its burger rival in U.S. sales last year, becoming the fourth-largest domestic restaurant brand, according to a preliminary report by research firm Technomic. McDonald’s, Starbucks and Subway Restaurants held on to the top three spots.

Taco Bell’s systemwide sales — the total sales of restaurants that carry the brand — jumped 5 percent in the U.S. to about $9.8 billion in 2017. The company, owned by Yum! Brands, has made inroads with indulgent fare, along with $1 items that appeal to budget-strapped millennials.

The ranking change also underscores the surging popularity of Mexican-inspired fare. Last year marked the first time that Taco Bell has overtaken Burger King, the data showed.

McDonald’s, Taco Bell, IHOP and other chain restaurants have hidden health gems in their menus

Though Burger King has fared better than many restaurants brands in recent years, it hasn’t kept pace with its biggest burger rivals — McDonald’s and Wendy’s Co. — or chains like Taco Bell. Its domestic sales rose just 1.5 percent in 2017, according to the Technomic report, which will be finalized in March.

Burger King faces a “resurgent McDonald’s,” David Henkes, senior principal at Technomic, said in an interview. Upscale burger chains, such as Shake Shack Inc., also are threatening its market share.

Taco Bell, meanwhile, has drawn customers with wacky new foods, including fried-chicken taco shells, and a marketing campaign dubbed “Live Mas.” In January, the chain introduced $1 nacho fries.

“They certainly continue to do pretty well, and bring out some interesting and new menu items,” Henkes said. “They’ve done a good job of connecting with the millennials and Gen Z.”

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Filed under Burger, Fast Food, Growth, Mexican, Sales, Tacos

New York City once repelled fast-food chains. Now it is their hottest market

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By Aaron Elstein
http://www.crainsnewyork.com/article/20171106/SMALLBIZ/171109948/new-york-city-once-repelled-fast-food-chains-now-taco-bell-chik-fil-a-and-more-think-its-the-place-to-eat-fast-food

The busiest place in town during lunch hour is the Chick-fil-A at the corner of West 37th Street and Sixth Avenue, where a fried chicken sandwich is sold every six seconds. To keep the frenzy from turning into a free-for-all, staffers are trained to be scrupulously polite. “I always ask them, ‘Did you bring your smile to work today?'” said the restaurant’s owner, Oscar Fittipaldi, who opened the Atlanta-based chain’s first standalone New York outpost two years ago.

The Garment District franchise sells more than 3,000 sandwiches a day, often with a side of waffle fries, and generates about $13 million in revenue, Crain’s estimated based on data from Fittipaldi. That means it sees the same revenue as Balthazar, the chic SoHo brasserie where the average check is $70, nearly seven times a typical Chick-fil-A tab.

The company wouldn’t comment on Fittipaldi’s revenue, but his success is clearly drawing a slew of followers. Chick-fil-A has plans to open roughly 12 more restaurants in the city, starting next year with a 5-story, 12,000-square-foot emporium in the Financial District. In September Taco Bell announced plans to triple its current 25-store city footprint, and Five Guys, which has grown to about 20 restaurants here since 2009, will soon be opening another one near Fittipaldi’s Chick-fil-A.

New York City is quickly becoming the capital of fast-food nation. More chains are moving in to replace diners and other independent restaurants forced out by relentlessly rising rents. Although many chains have broadened their menus and are experimenting with fast-casual dining, the bread and butter for most remains fried meat and a hefty soft drink.

“Fast-food chains used to draw a skull and crossbones around New York when they were looking for places to expand,” said Gary Occhiogrosso, who runs consulting firm Franchise Growth Solutions. “Now they all want to be here.”

In 2008 the Center for an Urban Future began tracking the growth of local chain retailers and restaurants, and counted about 5,400 city locations. By last year the figure had grown by more than a third, to 7,300. What struck Executive Director Jonathan Bowles was that one sector was responsible.

“All the growth is in food,” Bowles said.

Today New York is home to 3,419 chain-restaurant locations, according to the Department of Health. Leading the march is Dunkin’ Donuts, which has 596 city stores, a 75% increase since 2008. Over the past four years, meanwhile, the number of independent restaurants has declined by 8%.

Chain ganging
While chains still represent a minority of the city’s 26,546 restaurants and bars, their growth is startling because fast-food purveyors have been a popular punching bag for city officials for more than a quarter century. Former Mayor Michael Bloomberg banned trans fats from cooking oils and forced fast-food restaurants to post calorie counts for all menu items so people could better understand the health implications of what they were eating. Earlier this year the city also required restaurants to post sodium content.

Gov. Andrew Cuomo targeted the industry with legislation raising the minimum wage for fast-food workers until it reaches $15 per hour at the end of next year. And Mayor Bill de Blasio has singled out fast-food companies, claiming they are especially exploitive of their 65,000-strong New York workforce.

“If you want an example of how the 1% have gotten wealthier on the backs of working people, here you have it: the fast-food industry,” he said last year.

So why are these restaurants growing in such a seemingly hostile environment? Turns out, the environment isn’t so hostile after all.

A record 4.4 million New Yorkers are employed, and many want something fast and cheap for lunch. Tourism has doubled in the past 20 years, to more than 60 million, and many visitors look for familiar fare to munch on. And while there appears to be a glut of fast-food restaurants across the country—which experts see as a growing threat to the industry as a whole—New York is still relatively underrepresented. According to the Department of Labor, only 2% of the city’s private-sector employees work in limited-service restaurants, compared with 4% nationally.

“There are some big opportunities for fast food in New York because foot traffic is tremendous,” said David Henkes, a senior principal at consulting firm Technomic. “For the chains, premier locations here are all about showing their colors and strength.”

Those premier locations don’t come cheap, but fast-food joints are well-positioned to pay the rent because many of the busiest locations are company-owned or controlled by large operators. The city’s leading Wendy’s franchisee, for example, is The Briad Group, a New Jersey–based firm with 21 locations in the five boroughs, plus about 60 TGI Fridays and at least two Hilton hotels.

Fast-food restaurants are also expanding to create more locations to distribute their food to home-delivery outfits like UberEats and Seamless, said Nick Colas, co-founder of market analysis firm Datatrek Research. “The best way to get orders quickly to people who use these services is to have restaurants scattered around the city,” he said.

That growth is not only changing city storefronts; it’s also making New York’s traffic worse. Because fast-food restaurants often have little storage space, they require frequent food deliveries, which means more trucks on the streets. Mark Solasz, a vice president at Master Purveyors, a Bronx-based firm that supplies meat to about 400 restaurants, including local chains such as burger spot J.G. Melon, said the only way he can cope with soaring demand is by deploying bigger vehicles. “We’re sometimes doing three deliveries a day,” he said. Last month the mayor responded to the growing crush by announcing a pilot program banning deliveries on the city’s most congested streets during morning and evening rush hours.

At the same time, overall restaurant-industry sales are stagnating, so the name of the game is to seize market share from rivals. The environment plays to the strength of fast-food giants with vast marketing resources and purchasing power. And it helps explain why share prices of McDonald’s and the company that owns Burger King and Popeyes are up 53% and 49%, respectively, over the past 12 months.

In addition, steakhouses catering to the expense-account set have struggled: Del Frisco’s stock is down 2%. “Momentum is really on the side of quick-service restaurants,” Henkes said.

Before the Big Mac
Fast food came to New York relatively late. The first McDonald’s in Manhattan, at the corner of West 96th Street and Broadway, did not open until 1972, seven years after Wall Street bankers took the company public. The response was rapturous.

“A rush of pleasure surges through my body as it makes contact with my tongue,” a Village Voice reporter wrote. “The ecstasy is complete as I swallow the first bite of a Big Mac.”

The thrill didn’t last. In 1974 McDonald’s attempt to open an Upper East Side location was greeted by a group called the Friends of 65th Street, who gathered 15,000 signatures demanding the Golden Arches stay out. The New York Times wrote a disapproving editorial, and McDonald’s slunk away. “For the first time, we were on the defensive,” an executive said, according to John Love’s book, McDonald’s: Behind the Arches.

That was just the beginning of fast-food’s woes in New York. In 1986 McDonald’s agreed to begin disclosing nutritional information after state Attorney General Robert Abrams began investigating how the company marketed its McNuggets. Burger King followed in 1991, under pressure from the Dinkins administration’s Consumer Affairs commissioner, Mark Green. The 2004 movie Super Size Me also caused a big stir by documenting how filmmaker Morgan Spurlock gained 24 pounds after exclusively eating at McDonald’s for a month.

Fast food has long been linked to ill health. But it looks as if calorie postings are not doing much to stem demand. In a study last year, researchers at New York University found that only about 1 in 12 customers chose a healthier option after seeing calorie counts on fast-food menus.

“Dietary changes are more difficult than anything we’ve tackled,” said Beth Weitzman, an NYU professor of public health and policy. “We all really struggle to find what’s right.”

But even as scores of Burger Kings and McDonald’s set up shop in the city, other chains decided coming here wasn’t worth the bother, especially since it was tough to find enough space to accommodate their restaurants’ cookie-cutter formats.

“New York, especially Manhattan, was seen as just too hard,” recalled Lisa Oak, a former executive in charge of real estate at Subway.

But in the 1990s, the sandwich chain took a leap and moved into Manhattan even though it meant squeezing into storefronts as small as 300 square feet. There are now around 140 Subways in Manhattan, plus about another 300 throughout the rest of the city.

“People who lived in the suburbs and worked in the city were waiting for us,” Oak said.

In short order the rush was on, led by upstarts challenging the established chains. In 2003 Chipotle Mexican Grill debuted in Manhattan, and the next year restaurateur Danny Meyer opened the first Shake Shack, in Madison Square Park. In recent years the old warhorses have counterattacked. The number of Popeyes in the city has grown by 60% in less than a decade, to 90. Arby’s, which opened its first New York location in 1980, in Penn Station, expanded into Brooklyn in 2010, and a spokesman said, “We believe Manhattan and the boroughs are prime for future development.” The Checkers burger chain has doubled its footprint in the city over the past five years, according to Bowles’ research, to 37 locations.

Meanwhile, some independent restaurateurs have learned that the best way to fight the big chains is to start their own.

Made to order
In 2012 Danny Hodak opened Taboonette, a fast-food offshoot of Taboon, the full-service restaurant he runs in Hell’s Kitchen. Inspiration came from listening in his car to McDonald’s founder Ray Kroc’s memoir, Grinding It Out.

“I loved systems and finding procedures that solved problems,” Hodak said.

Today Taboonette does great business from its location near Union Square because the kitchen can serve up restaurant-quality kebabs or a falafel dish with a side of rice, salad and a Yemeni hot sauce called zhug in just three minutes. It costs about $13, which is considerably more than what most fast-food outfits charge for meals. With his 900-square-foot space generating $1.8 million in revenue, Hodak plans to start looking for franchisees to spread his concept around Manhattan.

“I feel a real sense of urgency because so much competition is coming,” he said.

Indeed, many fast-food giants are trying to mimic Hodak’s success and capitalize on changing tastes by offering high-end fast food. Several of the Taco Bell restaurants coming to the city will have a cantina format, in which alcohol might be served and diners will be invited to linger. For his part, Hodak plans to take a page from the big players and install a kiosk to take customer orders in a bid to make lines move faster.

Across the city, fast-food restaurateurs are installing automated kiosks at a rapid rate to replace human order-takers, whose wages are rising. At Shake Shack’s 19th and newest location in the city, on Astor Place, customers can place orders only via kiosks, though employees, dubbed hospitality champs, are on-site to help tech-challenged diners use the devices. Automation explains why employment growth at fast-food places has been cut in half over the past year and is running two-thirds below its 2011 rate, according to state Labor Department data.

“While new limited-service restaurants continue to open in the city,” said Andrew Rigie, executive director of the New York City Hospitality Alliance, “employment growth in the sector has increased at a much slower pace since New York started its minimum-wage experiment.”

Demand for kiosks means more work for Alejandro Swaby, director of sales at tech-services firm Cervion Systems. He charges $149 a month to rent a kiosk—”Equal to 15 sandwiches,” he said—and believes the devices have potential beyond fast food. He is talking to full-service restaurants about installing them at their bars to make it easier for diners to order a snack while waiting for a table. Swaby said he much prefers the pizza at Campania on his native Staten Island to any chain’s and sees kiosks as a way to help independent operators maximize profits as fast-food giants muscle in.

“I’m not anti-employee at all,” he said, “I’m pro–independent restaurant.”

The rising minimum wage is also opening doors for Avi Sharon, who runs a produce wholesaler in Long Island City called Adams Apple. After selling commercial time on Howard Stern’s radio show and cars in California, Sharon took over his father’s business serving mom-and-pop stores three years ago and invested $200,000 in machinery that peels onions, dices tomatoes and cuts carrots. He now supplies such fast-food restaurants as Wok to Walk and Maoz Vegetarian, a Mediterranean-themed chain.

“With the minimum wage going up, I figure there’s no way a fast-food place can sell a burger for $2.99 unless they hire someone like us,” said Sharon, who is planning to buy another $400,000 worth of equipment.

Greasy gourmand
Mike Abrusci, 29, is a native suburbanite who likes stopping by the nearest Taco Bell after gigs at comedy clubs before heading to his home in Ridgewood, Queens.

On a recent afternoon at the Union Square location, Abrusci ordered a Crunchwrap Supreme filled with guacamole and potatoes, which he described as “a quesadilla on steroids,” and a 7-Layer Burrito for later. His bill rang up to $14.

Growing up in Central Islip, Long Island, Abrusci and his buddies would hang out at Taco Bell after school. He loves the city and its variety of restaurants, but fast food fits his budget, and hitting the familiar chains has proved reassuring.

“One day I was feeling anxious about being in the city. I went to a Target, walked around and felt better,” he said. “Taco Bell does the same thing for me.”

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Filed under Chicken, Fast Casual, Fast Food, Fries, Growth, Health, Quick Service, Revenue, Sandwiches, Technology, Uncategorized

Technomic’s Take: The Changing Face of Foodservice Purchasing

Dave_articleBy David Henkes, Senior Principal on August 17, 2017
https://www.technomic.com/newsletters/technomics-take/changing-face-foodservice-purchasing

Independent restaurants have been central to the success of both foodservice distributors and food and beverage companies serving the industry. They are more profitable (mostly due to inefficiencies of the purchase process and pricing practices that aren’t transparent), and their health has been a stabilizing force in an industry where many chains (particularly large casual-dining chains) have struggled to grow as saturation, value issues, competition and lack of differentiation have impacted their success.

However, while independents are generally healthy (relative to the rest of the industry), distributors and manufacturers cannot assume that these operators will continue to drive incremental profitability. As costs increase at the operator level, due to commodity swings, labor costs, rent and other input costs that continue to rise, operators are increasingly looking for options that are perceived to save them. As a result of this changing nature of foodservice purchasing, Technomic estimates that there is $1 billion to $2 billion in additional manufacturer profitability at risk over the next five years. This will be driven by the following:

Penetration of GPOs is continuing across all foodservice segments, but critically we see that many GPOs are now focused on growing share within the independent restaurant segment. Recent Technomic research indicates that nearly 14% of independent operators are active within GPOs and a larger number than ever before are considering joining in the near future.

While chains don’t have the same growth trajectory that they did several years ago, they continue to add units, and smaller midsize chains continue to excel. Most of these operators negotiate directly and receive contract pricing, further reducing the profitability of the market place.

Most major noncommercial segments (not only healthcare, but colleges, B&I, etc.) are heavily driven by contract pricing. For most of these segments, actual discretionary purchases that are not part of a GPO or foodservice management firm contact amount to 10% or less of their purchases.

These dynamics have several major implications for the foodservice industry, most notably:

  • Distributors and manufacturers have less leverage as chains and group purchasing organizations become power buyers. To a large degree, the growing nature of contracted procurement in foodservice has prompted many of the mergers and acquisitions over the past several years.
  • Distributor economics don’t work as well with contracted business. Most of this is cost plus and distributors, who covet the higher profitability of the true independent operator, need to become much more efficient in terms of logistics and drop sizes in an environment where the margin is generally under 10%.
  • GPOs have taken their negotiated prices meant for certain customers and have extended them into adjacent operator segments, often without manufacturer or distributor approval, further suppressing margins throughout the value chain.
  • The nature of the operator sales call, particularly for manufacturers, changes to one where they are not truly selling their products or solutions, but working to ensure compliance with a contract. It also impacts the fees and compensation that manufacturers are willing to pay to brokers and distributors, given that manufacturers often perceive selling to a GPO account to be less valuable to the manufacturer than bringing in a higher-margin independent account.

Technomic predicts that over 70% of the foodservice purchases will be contracted within the next five years (up from about 65% today) and the industry needs to be prepared as this shift continues. Margins, which have already been compressing over the past several years, will continue to tighten, and forward-thinking companies should strategically address this as part of longer range strategic planning and work to manage the change proactively to ensure the continued health and strength of the business. To do so, Technomic recommends that companies:

Fully understand the sales and volume incrementality of GPO and other contract business relative to the lower overall margin.
While lower margin, contracted business can be desirable if it provides incremental sales or volume opportunities. Manufacturers and distributors must understand and view GPOs and other contracted business in light of strategic priorities and which segments, products and entities will drive growth. While often lower margin, contract business can benefit distributors by increasing drop size and giving primary distributors a bigger share of purchases.

Understand and expand upon your leverage.
Contracted business is often viewed negatively because of the perceived loss of control of the operator. However, understanding key leverage points is critical, particularly for manufacturers to create pull at the operator level to avoid the commodity trap.

Audit contract compliance.
Another reason that GPOs and other contracted business is often viewed negatively is due to compliance and the complex nature of the purchase. Auditing and managing trade-spending programs, understanding true cost to serve and having dedicated personnel to oversee contract compliance are all best-in-class methods of reducing the leakage of funds that can have a negative impact on profitability.

Construct proper guardrails to ensure that higher margin business remains profitable.
Contract pricing should only be used for the entities for which that pricing is intended; manufacturers and distributors must ensure that guardrails are in place to avoid price-extendibility, where favorable pricing based on the contract is offered to other operators.

Realize that sales force realignment may be necessary.
As the industry heads toward higher share of contracted business, the nature of the sales call is changing. This may necessitate deployment of sales as activities change from demand creation to driving compliance.

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Filed under Casual Dining, Distributors, GPOs, Growth, Health, Independent Restaurants, Manufacturers, Uncategorized