Consumer sector report: another turbulent year for QSRs as inflation bites

We heard the restaurant industry was hoping for a “normal” 2022 following the 2020-21 rollercoaster ride – a period characterised by intense waves of COVID-19 and widespread business uncertainty. However, it has been “another up and down year so far”, a former director at NPC International Inc said. “If you look at the industry numbers as a whole, QSR sales are basically flat and traffic is down again, so it’s been another turbulent year.” 

Our expert said they expect sales to remain “flattish” through H2 2022 as traffic wanes in response to inflation-led price increases. “Consumer spending has been pretty strained recently, and at the same time, the cost of doing business has increased.” All eyes should be on food prices over the coming months, they said. Food price volatility is expected to continue through H1 2023 and should begin to normalise by H2 2023 – but prices are unlikely to deflate to prior levels.  

Which QSR players are best positioned to weather a recession?

The former NPC director said past recessions have shown that QSRs fare better than full-service restaurants, with the likes of McDonald’s and Wendy’s (burger), and the pizza category, “typically the segments within QSR that fare the best”.

However, some players may have a steeper hill to climb. A former executive at Sizzling Platter LLC noted that consumers tend to trade down in a recessionary environment, which, combined with declining traffic, could become untenable for those already struggling. “I actually think going into a recession you’re going to see another shakeout,” they said. 

The former NPC director also questioned the resilience of Panera Bread on the basis of cost. “Are you going to go to Panera and pay USD 12 to get that chicken sandwich, or can you go to Wendy’s and get that same sandwich for USD 5 or USD 6?” McDonald’s is still perceived as the value leader, we heard, with its app and rewards programmes playing a role in this (click here to view a recent Forum Interview on McDonald’s).

We heard that any player looking to increase their prices at a time when traffic is declining should “think that through”. Instead, “it may be effective to really focus on things that create traffic”. Value is currently the biggest driver of traffic, and traffic, we were told, is “critical for success in a time of recession”.

Which QSR segments could drive the most growth?

The former Sizzling Platter executive highlighted breakfast – which is “seeing an uptick in sales” – as a growth opportunity that has not been fully realised. “It’s an inexpensive dining occasion that solves a need for a population on the go.” Chicken as a category is also seeing “significant growth”, we heard, and pizza is also strong. “I do think that your Pizza Hut category, Domino’s, Little Caesars, Papa John’s, all of those, I think they’re going to be pretty well-positioned going forward for a period of time.” 

The chicken space is “interesting”, they added, with Chick-fil-A the industry favourite, but newer players nipping at its heels. “I think there is going to be some shakeout on that,” our expert said. “I would look for Raising Cane’s, Bojangles to a lesser degree, Popeye’s to a lesser degree, but some of these others competing for that niche.”

At the same time, consumers are embracing health and wellness, with brands including Panera Bread, Sweetgreen and Chipotle among the best-placed to benefit from this trend, a former VP at Sweetgreen said. 

How are QSR wages expected to trend?

The former NPC director said there are two sides to the labour challenge: there are more restaurants than pre-coronavirus, but considerably fewer workers. This is being reflected in public surveys which point to longer wait times, closed dining rooms, reduced hours, and lower staff satisfaction, they added.

The former Sizzling Platter executive noted that, to reduce costs, many operators have continued to “run lean” after being forced to do so during the pandemic. For example, some operators have realised they can run a more profitable labour model with only a drive-through. Still, our experts do not see wages dropping. According to the former NPC director, wages are “still going up” and should continue to do so in the near term. 

What technology investments are QSR players making?

Since COVID-19, the number of delivery channels has proliferated across the industry. Pandemic challenges have also ignited new thinking around store design, customer experience and team operations. Experts we have spoken to say customer ownership and the ability to nurture relationships are critical.

We heard that third-party marketplaces such as DoorDash can be a double-edged sword. For example, the former Sweetgreen VP said 70% of digital orders must be incremental to break even on a margin basis. When an order does not come directly through a restaurant’s platform, “probably 30% of that 70%” is cannibalised, they added.

Order management across channels is a “critical capability” but our experts have observed a lack of innovation among point-of-sale companies. However, as we heard, this has “created a landscape of start-ups who are trying to help restaurant companies move more quickly and integrate in the digital world”.

Although perhaps not exciting on the face of it, forecasting tools are driving growth at companies including Sweetgreen, we heard. Loyalty programmes and personalised marketing are also gaining momentum, as well as data centres to drive incremental transactions, frequency and order suggestions. Digital menu boards are also enabling segmentation based on location and even weather. “I think you’ll see more menu-management capabilities, inventory management capabilities and better forecasting by channel and ingredient,” the former Sweetgreen VP said. 

In terms of industry leaders and laggards, we heard that Panera Bread “started investing long before anyone else” and now has full control over its ecosystem and consumer experience. Chipotle and Sweetgreen also have a higher level of control than many of their peers thanks to their dedicated digital production lines. Starbucks, we were told, is moving away from its reliance on third parties. “My stack rack, if we’re going to do one, two and three, would be Panera one, Sweetgreen two and Chipotle three,” the former Sweetgreen VP said.  

What does the future hold for QSRs?

The QSR industry is seemingly in a precarious state but most players, we were told, should be able to weather the storm. Forum Interviews suggest the current operating environment will ultimately favour investors who focus on operators with robust underlying fundamentals and long-term viability. 

Innovation will play a fundamental role in not just this but determining what the future landscape looks like. With more orders being placed off-premise than ever before, experts say the number one theme for QSRs should be integrating the customer experience with back-of-house operations. Understanding customer demand trends, mindsets and shifting behaviours is also non-negotiable if brands are to nurture a loyal – and growing – customer base. “The most important thing is to own your customer, to have your customer use your web and mobile ordering experience, to be in your loyalty programme,” the former Sweetgreen VP said.

The millennial influence – the industry’s largest target audience – is “still super strong”, the former Sizzling Platter executive added. “They want a food story, they want local foods, they love a bargain.”