ibisworld industry report 72221a fast food … 14, 2014 · fast food restaurants in the us october...

WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2014 1

IBISWorld Industry Report 72221aFast Food Restaurants in the USOctober 2014 Andy Brennan

Fast track: Restaurants will expand their menus as they fight to retain their share of customers

2 About this Industry2 Industry Definition

2 Main Activities

2 Similar Industries

3 Additional Resources

4 Industry at a Glance

5 Industry Performance5 Executive Summary

5 Key External Drivers

7 Current Performance

9 Industry Outlook

11 Industry Life Cycle

13 Products & Markets13 Supply Chain

13 Products & Services

15 Demand Determinants

16 Major Markets

17 International Trade

18 Business Locations

20 Competitive Landscape20 Market Share Concentration

20 Key Success Factors

20 Cost Structure Benchmarks

22 Basis of Competition

23 Barriers to Entry

23 Industry Globalization

25 Major Companies25 McDonald’s Corporation

26 Yum! Brands Inc.

27 Subway

29 Wendy’s Company

32 Operating Conditions32 Capital Intensity

33 Technology & Systems

34 Revenue Volatility

35 Regulation & Policy

36 Industry Assistance

37 Key Statistics37 Industry Data

37 Annual Change

37 Key Ratios

38 Jargon & Glossary

www.ibisworld.com | 1-800-330-3772 | [email protected]


This industry is composed of restaurants where patrons pay for quick-service food products before eating. Purchases may be consumed on-site, taken out or delivered. Gross revenue is derived from both franchised and company-owned stores. Franchise

fees are not accounted for in total industry revenue. This industry specifically excludes coffee and snack shops. Most of the industry’s establishments also sell beverages, such as water, juice and sodas, but usually not alcohol.

The primary activities of this industry are

Operating quick-service restaurants

Operating fast-food services

Operating drive-thru and take-out facilities

44529 Specialty Food Stores in the USEstablishments in this industry primarily retail confectionery goods and nuts that are not packaged for immediate consumption.

72211a Chain Restaurants in the USEstablishments in this industry primarily include chain and franchised restaurants that provide food services to patrons who order and are served while seated and pay after eating.

72211b Single Location Full-Service Restaurants in the USEstablishments in this industry primarily include single-location, independent or family-operated restaurants that provide food services to patrons.

72232 Caterers in the USEstablishments in this industry primarily provide individual event-based food services.

72233 Street Vendors in the USEstablishments in this industry are primarily engaged in preparing and serving meals and snacks for immediate consumption from motorized vehicles or nonmotorized carts.

72241 Bars & Nightclubs in the USEstablishments in this industry includes bars, taverns, pubs, lounges, nightclubs and other drinking places that primarily prepare and serve alcoholic beverages for immediate consumption.

Industry Definition

Main Activities

Similar Industries

About this Industry

The major products and services in this industry are

Asian

Burgers

Chicken

Mexican

Pizza and Pasta

Sandwiches

Other


About this Industry

For additional information on this industry

www.entrepreneur.com Entrepreneur

www.nrn.com Nation’s Restaurant News

www.restaurant.org National Restaurant Association

www.bls.gov US Bureau of Labor Statistics

www.census.gov US Census Bureau

Additional Resources

IBISWorld writes over 700 US industry reports, which are updated up to four times a year. To see all reports, go to www.ibisworld.com


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2008 10 12 14 16 18Year

Consumer spending

SOURCE: WWW.IBISWORLD.COM

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Revenue Employment

Revenue vs. employment growth

Products and services segmentation (2014)

42%Burgers

8%Mexican

14%Sandwiches

7%Other

10%Asian

10%Chicken

9%Pizza and Pasta


Key Statistics Snapshot

Industry at a GlanceFast Food Restaurants in 2014

Industry Structure Life Cycle Stage Mature

Revenue Volatility Low

Capital Intensity Low

Industry Assistance None

Concentration Level Medium

Regulation Level Medium

Technology Change Medium

Barriers to Entry Low

Industry Globalization Low

Competition Level High

Revenue

$198.9bnProfit

$9.9bnWages

$50.5bnBusinesses

150,841

Annual Growth 14-19

2.0%Annual Growth 09-14

1.4%

Key External DriversConsumer spendingHealthy eating indexConsumer Confidence IndexAgricultural price index

Market ShareMcDonald’s Corporation 17.8%Yum! Brands Inc. 11.1%Subway 6.7%Wendy’s Company 4.5%

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FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 37



Key External Drivers Consumer spendingIndustry growth is sensitive to changes in consumer spending. During the recession, for example, the spike in unemployment led to declines in consumption levels, including the consumption of fast food. When personal consumption expenditure is high, however, consumers are more likely to spend money on eating out at industry restaurants. Consumer spending is

expected to increase in 2014, providing a potential opportunity for the industry.

Healthy eating indexThe healthy eating index is expected to increase slowly in 2014 as consumers become increasingly aware of issues related to weight and obesity, fatty-food intake and food safety issues. This factor particularly affects the often meaty and greasy fast food industry. Despite any

Executive Summary

Over the past five years, the Fast Food Restaurants industry has grappled with changing consumer preferences moving away from unhealthy foods and a saturated food service landscape that has kept prices low. In comparison with other operators in the hospitality sector, fast food restaurants performed relatively well during the recession due to their low price points and the extra convenience they offer. However, since the recession, heavy competition from other segments in the food services sector has forced fast food operators to emphasize low prices in a continuing battle to attract cash-strapped

consumers. As a result, industry revenue is expected to grow at an average annual rate of 1.4% to $198.9 billion over the five years to 2014. In 2014, growth is expected to be modest, with an estimated increase of just 1.4%, as the broader economy continues to work toward a full recovery.

Over the past five years consumer-eating habits have changed as people have become increasingly health conscious and demanded alternatives to traditional greasy fast food options. While major fast-food retailers have responded by expanding the number of

healthy menu items, the general trend toward health awareness has decreased demand for traditional fast food restaurants. In response, major chains like McDonald’s have expanded their menus to include healthier options such as salads, fruit and smoothies. Furthermore, due to slow domestic growth, many major chains have invested in their international operations as part of a long-term strategy to focus on emerging economies. Fast-food restaurants view China in particular as a market that has strong potential for growth and long-term profitability.

The industry is expected to perform marginally better over the next five years as the domestic economy improves and consumers continue to seek convenient meal options. While no severe revenue declines are expected, fast food restaurants will continue to operate in a slow-growth environment as many segments of the industry have reached a saturation point. Successful operators will need to adapt to changing consumer preferences as the traditional concept of fast food evolves to include a wider variety of options. As plenty of opportunities remain for new fast food concepts and products, the industry’s long era of growth is far from over. As a result of these trends, industry revenue is expected to grow at an annualized rate of 2.0% over the five years to 2019 to $219.3 billion.

Industry PerformanceExecutive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage

Fast food chains will invest in healthy options and specialty markets to rebuild revenue


Industry Performance

Key External Driverscontinued

long-term aggregate declines in healthy eating, consumers are now more aware of the health issues associated with fatty foods and are increasingly going out of their way to avoid them, which is a potential threat for the industry.

Consumer Confidence IndexChanges in consumer sentiment have a significant effect on household expenditure on discretionary items, including fast food. When customers are optimistic about the economy, they spend more on these items. Consumer sentiment is expected to increase in 2014.

Agricultural price indexThe agricultural price index represents nominal prices received by farmers for all US agricultural products (both livestock and crops) and is also a strong indicator of the prices fast food restaurants can expect to pay for the ingredients that go into preparing meals. When the price of meal ingredients increases, it typically results in lower profit margins because operators generally cannot pass on the entire cost to consumers. The agricultural price index is expected to decline during 2014.

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Healthy eating index


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Consumer spending



Improved consumer spending

The industry comprises establishments where consumers pay for quick-service food products that are consumed on-site, taken out or delivered. As a consumer-focused industry, fast food restaurants rely heavily on levels of consumer spending and confidence. Over the past five years, consumer spending has increased at an average annual rate of 2.3%. While

consumer spending declined during the recession, many consumers flocked to fast food restaurants throughout this period and during the subsequent recovery, as they provided convenient meals for cash-strapped consumers. This has put the industry at a competitive advantage over full service restaurants where the average check is typically higher.

Consumer trends drive new strategies

Consumers have become increasingly health conscious, and major fast food retailers have responded by expanding the number of healthy options on their menus. For many fast food chains, this factor has become a cornerstone of their marketing strategy, enabling them to target a new segment of the market and also renewing interest in their products. Subway, for example, was one of the first restaurants to capitalize on the health and weight concerns of consumers and successfully market the health benefits of its sandwiches. Similarly, after sales plummeted in response to health

concerns about its food, McDonald’s introduced a healthy choices menu, which has primarily driven its rebounding revenue.

Over the past five years, fast food operators have performed with varying degrees of success depending on the products they offer and their method of service. Fast casual restaurants that do not offer table service, but provide a higher quality of food and ambiance compared with traditional fast food restaurants, have been experiencing particularly strong growth over the past five years. For instance, fast casual

The Fast Food Restaurants industry has bounced back from the recession over the five years to 2014, as convenient and affordable food remains popular with consumers. While the low price point of the industry’s products meant that fast food restaurants outperformed other segments of the food services sector during the recession, industry revenue still dipped in 2009. Over the five-year period, the industry’s response to changes in consumer preferences away from processed foods high in sugar, fat and salt, has helped spur demand. Over the five years to 2014, revenue is expected to grow at an average rate of 1.4% per year. In 2014, revenue is

expected to grow an additional 1.4% to total $198.9 billion.

Current Performance

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Industry revenue




Consumer trends drive new strategiescontinued

restaurants such as Chipotle and Five Guys that offer customizable, gourmet meals have stolen market share away from operators such as McDonald’s and Burger King. As a result, major players have introduced their own fast casual concepts. For example, Yum! Brands opened its first

KFC Eleven restaurant in Louisville, KY, in 2013, offering products such as rice bowls and salads not traditionally associated with KFC. The total number of industry establishments has increased at an average annual rate of 1.7% over the five years to 2014 to 236,333 locations.

Wages and profit The average industry profit margin has improved over the past five years; however, fast food restaurants have still been subject to slim profit margins. Despite higher sales volume, customers have retained a preference for lower-priced items since the recession, which has restricted the ability of operators to raise their prices. High product turnover has therefore been critical to the success of operators. Industry profitability is estimated to rise to 5.0% of total industry revenue in 2014.

Part of the improvement in profit margins has been the ability of fast food

restaurants to keep wages under control. Apart from purchases, wages are the highest cost fast food operators are exposed to, and any reduction in wages usually means higher operator profit margins. Over the five years to 2014, total industry wages are estimated to increase at an average annual rate of 1.3% to $50.5 billion, which is at a slower rate than revenue. Still, the industry remains highly labor intensive due to its service-orientated nature. Labor is required throughout every aspect of the supply chain, from front-of-house service to waiting tables and cooking food.

Overseas expansion Due to slow domestic growth, many fast food chains have increased their overseas stores to access faster growing markets. The long-term strategy of most major chains involves international expansion. Consequently, international sales represent an increasingly larger part of operators’ total revenue, which has been the case for McDonald’s. China in particular is a market that has huge potential to drive long-term revenue and profit. During the recession, Yum! Brands decided to increase its focus on its China

growth strategy. While Yum has had some setbacks in China and is facing increased competition from other Western food chains, the move is expected to pay healthy long-term dividends.

Fast food chains have increased their overseas stores to access faster-growing markets



New ways to expand Competition will likely intensify over the next five years, especially within the domestic market. This factor will involve significant price-based competition and a growing emphasis on the regular introduction of new products. Additionally, most fast-food chains will introduce new healthy food alternatives and expand their current product lines. Major operators will seek to expand revenue and profit by offering healthier alternatives to red meat products, such as chicken burgers, pasta and fresh salads. They will also likely continue to diversify into new areas, such as cafes and full-service restaurants that may do business under different names at new locations.

Many domestic operators will also continue to expand internationally, and this move will likely be the largest source of revenue and profit growth for major players over the next five years. Asia and the Middle East are regions where domestic fast-food brands have

not saturated the market yet and where some operators are thriving. However, strong international revenue growth and expansion will likely limit domestic expansion and domestic revenue growth opportunities, which are covered in this industry.

Over the next five years, industry profitability is expected to improve only marginally because of ongoing competition in the low-growth, saturated domestic market. By 2019, average industry profit is expected to sit at 5.3% of revenue. Operators that experience stagnant domestic profit will likely increase their focus on international expansion to grow company-wide profit margins. Companies will also try to emulate McDonald’s by expanding their beverage options to include more coffee-based drinks and smoothies. These low-cost and high-profit menu items offer a quick way for companies to perk up their revenue and fatten their bottom line.

Industry Outlook

The Fast Food Restaurants industry will continue to play an influential role in the United States food services sector over the next five years. The industry’s ability to provide convenient food at a low price will remain popular, especially with consumers seeking affordable food options. However, the industry will remain highly competitive, forcing fast food chains to compete on price, which will ultimately restrict the industry’s revenue and profit growth. As a result, industry revenue growth is expected to be flat, increasing at an average annual rate of just 2.0% to $219.3 billion over the five years to 2019.

Fast food restaurants will benefit as the economy continues to improve over the next five years. The national unemployment rate is expected to decline

to a more normalized level and consumer confidence will improve as the economic outlook brightens. This will lead to greater consumer spending, which is estimated to increase at an average annual rate of 2.6% over the five years to 2019. Additionally, fast food restaurants are expected to continue to expand their menu options away from highly processed foods that are high in fat to cater to changing consumer preferences. This product innovation will play a large part in the industry’s growth over the coming years.

As personal consumption improves, people will be more likely to buy fast food



Establishments and employment

Although the domestic economy is projected to grow at a healthy pace over the next five years, operators will continue to face intense competition, which will limit the number of new establishments that open. Companies that offer unique, customizable and healthy food products will likely experience the strongest growth in new establishments. Also, as companies such as Burger King pursue a franchise-only strategy, this will drive growth in the number of establishments as chains are less restricted by the large capital investment that is required to open a new restaurant. Over the next five years, the number of companies is forecast to increase at an average rate of 1.3% per year to 160,575 in 2019.

In the next five years, employment is projected to grow at an average annual rate of 0.6% to 3.8 million by 2019. This

number will be partly inflated by the increasing use of part-time employees to meet peak customer service periods. Despite the long-term trend of declining wages due to the increasing automation of food preparation, wages and employment are forecast to increase over the next five years in line with revenue. IBISWorld projects that the average industry wage will increase from $13,704 per worker in 2014 to $14,591 in 2019, with total industry wages growing 1.9% per year on average over the five-year period.

Greater use of part-time workers in fast-food restaurants will cause employment to grow


Industry PerformanceThe rate of new store openings has slowedOperators are concentrating on international openingsThere is heavy price-based competition

Life Cycle Stage


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DeclineShrinking economicimportance

Quality GrowthHigh growth in economic importance; weaker companies close down; developed technology and markets

MaturityCompany consolidation;level of economic importance stable

Quantity GrowthMany new companies; minor growth in economic importance; substantial technology change

Key Features of a Mature Industry

Revenue grows at same pace as economyCompany numbers stabilize; M&A stageEstablished technology & processesTotal market acceptance of product & brandRationalization of low margin products & brands

Specialty Food StoresFrozen Food Wholesaling

Dairy WholesalingSingle Location Full-Service RestaurantsFast Food Restaurants



Industry Life Cycle The Fast Food Restaurants industry is firmly entrenched in the mature stage of its life cycle. Over the 10 years to 2019, industry value added, which measures an industry’s contribution to US GDP, is forecast to grow at an average rate of 2.2% per year, compared with estimated annualized GDP growth of 2.5% over the same period. Thus, the industry has exhibited slow and steady long-term growth, at a slightly slower pace than the economy as a whole. For this reason, many chain operators are seeking higher growth in overseas markets. The number of establishments is expected to grow at a nominal average rate of 1.4% per year over the ten years to 2019.

Significant shifts in consumer preferences have also had an impact on the industry over the past five years. Demand for healthy foods, for example, has increased because consumers have become more health conscious in recent years. In an attempt to maintain consumer interest in the fast-food market, operators like McDonalds have introduced a range of healthy option to their menus. Furthermore, fast casual restaurants that do not offer table service, but provide a higher quality of food and ambiance compared with traditional fast

food restaurants, have been experiencing particularly strong growth over the past five years. Relatively new players like Chipotle and Five Guys that offer customizable, gourmet meals have stolen market share away from traditional fast food operators such as McDonald’s and Burger King.

The rate of technological change within the industry is moderate, but the rapid increase in internet penetration and smartphone usage over the past five years has presented fast food restaurant operators with the opportunity to engage with customers on a number of new levels. Many small fast food operators have utilized online advertising, informative and interactive company websites and social media such as Twitter and Facebook to increase their brand recognition and revenue. Furthermore, technology is also being used to boost profit margins, improve service levels and to help minimize labor costs, reducing food waste, improving business processes and improving meal experiences. For example, new systems and technology are designed to ensure quality service and reduce customer waiting time such as electronic ordering systems linking the front counter with the kitchen as orders are taken.

This industry is Mature


Products & Services The Fast Food Restaurants industry is segmented based on the main type of food served. The diverse nature of the industry means many restaurants do not fit neatly into one category. For example, many prominently burger chains also serve chicken or Mexican-based dishes. Fusion cuisine, which combines elements of different culinary traditions, have become increasingly popular. This is increasingly the case as fast food operators chase increasingly fragmented consumer segments. Also, breakfast has become an increasingly lucrative segment of the Fast Food Restaurants industry as operators deal with stagnant sales in the lunch and dinner time slots. Given these considerations, IBISWorld has segmented fast food restaurants based on their core offering.

BurgersBurgers are almost synonymous with fast food and top 50 fast food chains are dominated by restaurants specializing in burgers. Burgers are heavily immersed into American culture and has therefore been a major driver of the industry’s

growth over the past half-century. Over the past few decades American restaurants have increased their hold of the entire food-service market due to the growth of chains such as McDonald’s, Wendy’s and Burger King. However, over the past five years many traditional burger chains have struggled with flat or declining sales as consumers move away from generic brands towards niche or gourmet offerings. The ‘better burger’ trend, which includes operators such as Five Guys and In-N-Out Burger and places an emphasis on food quality and customizable burgers, has been the best performing part of this segment over the past five years.

ChickenChicken has long been a popular fast food menu item and the majority of non-chicken chains now dedicate growing menu space to chick items due to the meat’s perceived health benefits. Chicken wraps and chicken salads have been used by major burger chains as a way to combat consumer unrest about unhealthy fast food. The biggest chains in the

Products & MarketsSupply Chain | Products & Services | Demand Determinants Major Markets | International Trade | Business Locations

KEY BUYING INDUSTRIES

9901 Consumers in the US Households are the key driver of demand for this industry’s products.

KEY SELLING INDUSTRIES

42442 Frozen Food Wholesaling in the US This industry supplies frozen foods to industry operators.

42443 Dairy Wholesaling in the US This industry supplies dairy products to industry operators.

42444 Egg & Poultry Wholesaling in the US This industry supplies poultry products to industry operators.

42446 Fish & Seafood Wholesaling in the US This industry supplies seafood to industry operators.

42447 Beef & Pork Wholesaling in the US This industry supplies meat products to industry operators.

42448 Fruit & Vegetable Wholesaling in the US This industry supplies fruit and vegetables to industry operators.

Supply Chain


Products & Markets

Products & Servicescontinued

chicken segment are Chick-fil-A, KFC and Popeyes Louisiana Kitchen. Chick-fil-A has recently surpassed KFC as the number one fast food restaurant chain in this segment with just a fraction of the restaurants, partly due to its greater focus on breakfast and differentiated menu that includes a greater array of milkshakes, ice cream and wraps.

Asian foodThere are estimated to be over 40,000 Chinese restaurants in the United States, with the majority of these fast food restaurants that pay for quick-service food products before eating. However, unlike other food types, there are relatively few Asian chain restaurants. Panda Express is the largest Asian fast food chain in the United States, with just over 1,500 units. The business model of Asian fast food restaurants, which often rely on family labor or undocumented workers to fulfill cooking and serving duties, doesn’t suit the franchise model that other fast food restaurants rely on. Also, most of the public equates Chinese food with economical pricing, which makes it difficult for chains to raise prices.

Asian food is a diverse category that can be broken down into a number of

regional styles based on the peoples and cultures of those regions. The main broad types include: East Asian (including Chinese, Japanese, and Korean restaurants); Southeast Asian (including Vietnamese, Thai and Malaysian restaurants); and South Asian (including Indian, Sri Lankan and Bangladeshi restaurants). Other variations such as Middle Eastern and Central Asian cuisines have been included in the ‘Other’ category for the purposes of this report.

Asian food remains popular in states with high Asian populations, such as California and New York, but is also popular in a variety of geographic locations due to its diversity. Society’s adoption and acceptance of ethnic foods in general has increased over the past half-century as tastes have developed and people become more adventurous in trying other cuisines. Higher rates of global travel and increased exposure to new cultures have also driven growth in the popularity of ethnic cuisine.

MexicanStaples of Mexican cuisine include corn, beans, and chili peppers. Mexican restaurants are known for their intense and varied flavors and variety of spices.

Products and services segmentation (2014)

Total $198.9bn

42%Burgers

8%Mexican

14%Sandwiches

7%Other

10%Asian

10%Chicken

9%Pizza and Pasta



Products & Markets

DemandDeterminants

The industry is sensitive to factors that affect the growth in household disposable income, which gives consumers the ability to spend money on out-of-home dining. Household disposable income is sensitive to changes in labor market growth (i.e. the unemployment rate) and movements in tax and interest rates. High gas prices also negatively affect disposable incomes.

Demographic trendsThe changing age structure of the population is influencing change within the industry. Baby boomers are a major group that influences industry revenue growth. Not only do they comprise significant percentage of the population, they also generally have the highest amount of disposable income to spend on restaurant meals. US Census Bureau household expenditure data indicates that households with incomes of more than $50,000 account for about 70.0% of the total personal expenditure on food eaten outside of the home. Of this group, households in the highest income quintile provide about

30.0% of the total away-from-home food expenditure. The most important factor driving the highest household income group to spend in restaurants is the pressure of work and lack of time.

Health consciousnessRising health consciousness has a direct effect on industry operators as American consumers become increasingly concerned about fat content, fried foods and salt content, especially when dining out. As such, rising concerns over the nutritional value of restaurant meals are likely to influence demand for certain foods on menus, thus encouraging industry players to alter their product mix. It is also expected to affect overall performance for industry players by rewarding operators who expand their menu choices to include a range of healthy meal options among other more indulgent food items.

ConvenienceConvenience and value for one’s money and time are other important demand

Products & Servicescontinued

Mexican cuisine has had a large influence on the Southwest of the United States. In states such as Texas, where variations such as Tex-Mex have been adopted, Mexican style restaurants can account for well over 20.0% of all establishments. Growing immigration has contributed to a rise in Mexican food consumption over the past five years, driven in part by a rise in the Hispanic population, which now accounts for about 17.0% of the total population in the United States. The traditional Mexican food heavyweight has been Taco Bell. However, over the past five years Chipotle, which offers quick service while providing customizable and higher-quality food, has been the best performing fast food restaurant in terms of sales. Chipotle has been the envy of the

industry as it has been able to grow quickly despite stagnant sales throughout the rest of the industry.

Pizza and pastaPizza restaurants typically serve a menu of house and custom pizzas alongside pasta, salad and other Italian-influenced cuisine. Due to the wide influence of Italian immigrants in American culture over the past century, many regional forms of pizza have developed. This segment has become increasingly defined as a carryout or delivery food. Pizza franchises such as Dominos, Pizza Hut and Papa John’s now largely focus on carryout or delivery services and have been able to access higher profit margins through this business model.


Products & Markets

Major Markets

The major markets for the Fast Food Restaurants industry can be segmented based on a number of factors including income, age, geographic location and family structure. Consumption patterns of fast food differ from full-service restaurants where income is a more important determinant of demand. Consumers of fast food are typically budget-conscious and enjoy the convenience of fast food compared with sit-down restaurants. According to a 2011 study by the University of California, Davis, people’s visits to fast food restaurants increase with their incomes up to a certain point. However, as household income reaches a certain level (around $60,000 to $70,000), visits to fast-food restaurants decline, and are replaced by full-service and sit-down dining at higher prices. For this reason,

the biggest consumers of fast food in the US are lower-middle income households.

Households in the lowest income quintile, or those households with an annual income of less than $20,260 in 2011 (latest available data), cannot easily afford to eat out often at fast food restaurants where prices can be unattainable. Therefore, many of these households rely on programs such as the Food and Nutritional Service’s Supplemental Nutrition Assistance Program (commonly referred to as SNAP), which does not allow food stamps to be used for restaurant purchases.

The industry’s major markets distribution has not changed dramatically over time as spending patterns within income brackets are relatively established. Fast food did become more popular with middle class households

DemandDeterminantscontinued

determinants. Recent social trends such as busier lifestyles, heavier workloads and longer working hours, have helped boost demand for restaurant services and convenience food as time-poor consumers look to cut down cooking

time and make better use of their spare time. Moreover, restaurants have become more of a place for family get-togethers, special occasions, and social meetings for cash-rich and time-poor consumers.

Major market segmentation (2014)

Total $198.9bn

23.9%Third quintile of incomes

21.0%Fourth quintile of incomes

20.8%Second quintile of incomes

19.9%Highest quintile of incomes

14.4%Lowest quintile of incomes



Products & Markets

International Trade As a retail industry, the Fast Food Restaurants industry is not technically engaged in importing or exporting products, so international trade is not relevant to the industry. However, a number of industry players have overseas operations and earn a significant portion of their revenue overseas. Many large operators have established franchised operations internationally. Given the

mature stage of this industry’s life cycle in the domestic market, with changes in customer profiles and tastes, many major operators are seeking to increase their growth in revenue and earnings through further global expansion. In recent years, the large fast food chains, including Yum! Brands and McDonald’s, have earned an increasing amount of their revenue outside of the United States.

Major Marketscontinued

during the recession as consumers traded down from full-service restaurants. However, the corresponding decline in spending by the lowest quintile households meant that the

distribution between income demographics remained relatively steady over the past five years. This is expected to continue over the five years to 2019.


Products & Markets

Business Locations 2014

MO1.9

West

West

West

Rocky Mountains Plains

Southwest

Southeast

New England

VT0.2

MA2.2

RI0.4

NJ3.0

DE0.3

NH0.5

CT1.0

MD2.2

DC0.4

1

5

3

7

2

6

4

8 9

Additional States (as marked on map)

AZ1.9

CA12.0

NV1.0

OR1.3

WA2.2

MT0.3

NE0.6

MN1.5

IA0.9

OH4.1 VA

2.8

FL5.3

KS0.9

CO1.7

UT0.9

ID0.5

TX7.9

OK1.2

NC3.2

AK0.2

WY0.2

TN2.1

KY1.4

GA3.2

IL4.2

ME0.4

ND0.2

WI1.6 MI

3.0 PA4.0

WV0.6

SD0.2

NM0.6

AR0.9

MS0.9

AL1.5

SC1.6

LA1.4

HI0.6

IN2.0

NY7.1 5

67

8

321

4

9


Mid- Atlantic

Establishments (%)

Less than 3% 3% to less than 10% 10% to less than 20% 20% or more

Great Lakes


Products & Markets

Business Locations The industry’s business locations are largely distributed according to population. Since the industry provides quick meals to consumers, successful operators need to be located near their customer base. As a result, the Southeast has the highest concentration of franchised establishments and a higher proportion of employment and revenue. There are also large proportions of establishments in the Mid-Atlantic and West regions, and the smallest proportion in the Rocky Mountains region. California, the state with the largest portion of establishments, is also the state with the largest population.

Various academic studies have acknowledged that fast food restaurants are more prevalent in low-middle and middle-income neighborhoods and become less prevalent in the highest-income neighborhoods. This distribution is reflected in the industry’s major markets, where these demographics are the industry’s largest

consumers. High-income areas tend to have a greater concentration of full service restaurants as opposed to fast food establishments.

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Distribution of establishments vs. population



Cost Structure Benchmarks

The Fast Food Restaurants industry’s flat growth over the past five years has meant that many operators have struggled with low profit margins. The industry has high product turnaround, but its low profit margins make it vulnerable to any adverse changes in demand, including recessionary declines. Changes in household preferences, in disposable incomes and other health and food safety concerns also influence demand.

ProfitIndustry profit is calculated as operators’ earnings before interest and taxes. Profit varies among players depending on the size of the operator, with larger operators benefiting from economies of scale. For large players such as McDonalds, profit margins at company-operated restaurants can be as high as 15.0-20.0% due to the large economies of scale the organization has access to. However, the

Key Success Factors Business expertise of operatorsBusiness expertise is required as this industry has high turnover but low margins; thus, losses are easily made.

Ability to franchise operationsFranchising both in the United States and overseas is now a significant component of this industry and can provide necessary support to owners.

Effective cost controlsCost controls are important in this low-margin industry, particularly related to minimizing food waste.

Product is sold at high profile outletsHaving high-profile locations for stores, with easy access, parking and drive-through services increases convenience for customers.

Access to multiskilled and flexible workforceIndustry operators need access to a good supply of skilled, casual workers to meet peak service demand periods.

Having a clear market positionClear market positioning gives operators a competitive advantage over competitors.

Market Share Concentration

IBISWorld estimates that in 2014, the top four players account for about 40.1% of available market share, giving this industry a medium level of concentration. Given the diversity of food styles and operations, nearly 48.0% of establishments are small-business operators that have nine or fewer employees. An additional 55.0% of establishments have between 10 and 99 employees.

Over time, the industry’s concentration has increased. Over the past five years there has been an increasing trend of the

major chain operators selling their company-operated stores to focus on franchising. The lower capital requirements and less risk associated with selling franchises has helped chains such as Burger King and Subway grow despite relatively flat restaurant sales. Between 2009 and 2014, the numbers of establishments and enterprises have grown slowly or remained stagnant, causing a marginal increase in industry concentration. Industry concentration is expected to continue increasing over the five years to 2019.

Competitive LandscapeMarket Share Concentration | Key Success Factors | Cost Structure Benchmarks Basis of Competition | Barriers to Entry | Industry Globalization

Level Concentration in this industry is Medium

IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:


Competitive Landscape

Cost Structure Benchmarkscontinued

profit margin of a small enterprise that operates only one restaurant will be much lower. IBISWorld estimates that in 2014, the average fast food restaurant will obtain a profit margin of 5.0% of revenue, up from a low of 3.6% during the recession of 2009. This explains the high turn-over rate of businesses and the highly competitive nature of the industry. Typically, an operator’s major costs are food and beverages purchased for sale and wages paid, and if these are not managed skillfully an operator’s profit margin will take a hit.

PurchasesFood and beverages are usually purchased from wholesalers, particularly from operators that can guarantee prompt delivery and quality. Fluctuations in the cost of food and beverages significantly influence industry revenue and profit. In the short term, many of these cost

increases cannot be passed on to the consumer or client. Therefore, menus, portion sizes and other inputs into food service have to be continually monitored. A major source of inefficiency is wastage due to fluctuations in demand, oversupply of meals or excess ingredients that cannot be used and subsequently spoil. IBISWorld forecasts that in 2014, purchases will account for an estimated 35.5% of an average operator’s revenue. This is up only slightly on 2009 as higher global demand for food has forced prices of some inputs higher, particularly fresh produce.

WagesOperators in the industry have high wage costs due to the labor-intensive nature of food preparation, cooking, serving and cleaning up. Over the past five years, labor costs have fallen slightly as a percentage of total revenue due to productivity gains by the industry’s

Sector vs. Industry Costs

■ Profi t■ Wages■ Purchases■ Depreciation■ Marketing■ Rent & Utilities■ Other

Average Costs of all Industries in sector (2014)

Industry Costs (2014)

0

20

40

60

Perc

enta

ge o

f rev

enue

80

1008.0

16.4

7.52.84.1

38.7

22.5

5.0

14.1

14.03.03.0

35.5

25.4




Basis of Competition The Fast Food Restaurants industry exhibits a high level of competition. Restaurateurs are required to compete against each other and against other industries in the broader food service sector such as full service restaurants (encompassing casual dining and fine dining), coffee shops, bars and hotels.

Internal competitionFast food restaurants compete with each other on the basis of price and quality. As a result of the high level of competition within the industry, profit margins are low for most industry operators, necessitating stringent cost and quality controls to maintain efficiency and minimize wastage. Operators also face strong competition based on quality. Premium ingredients and well-presented meals are highly regarded and can make the difference to consumers, who often judge a fast food restaurant by how it compares with others.

Restaurants also compete on the basis of location, style, ambience, hospitality and service. More than ever, restaurants are selling and marketing a meal experience to potential customers. As a result, it is important that the operator understands the positioning of the restaurant in the marketplace and the clientele they are attracting or wanting to attract. Significantly, the restaurant must consistently deliver on customers’ product expectations.

External competitionExternal competition arises from the broader food service sector. This includes fast-food restaurants and independent restaurants that offer dining and take-out services, as well as other retailers that serve food, such as convenience stores and supermarkets. When economic conditions are gloomy, consumers are more likely to trade-down to cheaper food options, putting pressure on fast food restaurants to lower prices.

Cost Structure Benchmarkscontinued

largest employers. These costs include wages and benefits, such as health, workers’ compensation and unemployment insurance. Growing labor intensity brings down menu prices and industry profitability; given the weak economic conditions and unemployment, cost increases cannot simply be passed down to consumers in the form of higher prices. Industry wage costs account for an estimated 25.4% of an average operator’s revenue in 2014.

Rent and utilitiesRent costs can be significant for an operator in this industry due to the need to be situated in a high-traffic location to attract passing foot traffic. Many businesses that operate under franchise agreements pay rent directly to the franchiser that also owns the building.

Over the past five years average industry rent as a percentage of revenue has increased as it has become increasingly common for enterprises to rent, rather than own, the property they operate out of. Utility costs are also considerable due to the energy-intensive nature of cooking, storing, cooling and cleaning.

Other costsOperators in the industry are subject to a range of other costs including professional fees, administrative costs and marketing or advertising. Due to the high number of franchised businesses operating in the industry, franchise royalties and other fees can account for a significant proportion of industry revenue. An additional marketing fee is sometimes paid to the franchiser as well.

Level & Trend Competition in this industry is High and the trend is Increasing



Industry Globalization

The Fast Food Restaurants industry’s overall level of globalization is low. The majority of enterprises are small businesses that are locally owned and serve a domestic customer base. However, there is a significant global component to the industry, namely the large chains that have considerable overseas operations, such as McDonald’s, Yum! Brands, Subway, Domino’s and Burger King. The trend towards international expansion has increased over the past five years due to the slower growth rate of the domestic industry compared with high-growth emerging economies. Both McDonalds and Yum! Brands earn about 60.0% of its sales overseas, while about 40.0% of

Burger King’s sales are derived from international markets and Subway earns about 30.0% of its sales outside of the US.

There are also a number of internationally-owned chains that operate in the United States, adding to the level of industry globalization. Over the past five years, chains such as YO! Sushi, Wegamama, Pret A Manger (all based in the United Kingdom), Nando’s (based in South Africa), Pie Face (based in Australia), Giraffas (based in Brazil) and Freshii (based in Canada) have all expanded their presence in the US industry. This has occurred as the US consumer has become increasingly enthusiastic about ethnic cuisine.

Barriers to Entry Given the franchise component of the Fast Food Restaurants industry, the barriers are typically low, given that an operator can lease premises, equipment, furniture and fittings from the franchisor, which cuts down the initial capital costs. Also, franchisors provide training, food and beverages, and some financial and accounting functions for a proportional share of revenue from their franchisees. These provisions lower operational costs and can also minimize some risks, especially for inexperienced hospitality industry persons entering the industry. Still, individual franchisees carry much of the day-to-day operational and management risks associated with their own business.

Industry concentration is low to moderate, with the top four players expected to garner about 41.2% of the available market share in 2014. This low concentration is an indication of the array of food concepts and styles available in this industry, with no

individual major player being dominant. Therefore, it is not extremely difficult for an operator to enter the industry with a new or existing food concept.

Industry regulation and licensing are significant, from health and food service regulations to licensing for liquor sales and general occupational health and safety issues (particularly in relation to safety in kitchen operations). Regardless, these issues do not create any insurmountable barriers to either entering or operating in this industry.

Barriers to Entry checklist Level

Competition HighConcentration MediumLife Cycle Stage MatureCapital Intensity LowTechnology Change MediumRegulation & Policy MediumIndustry Assistance None


Level & Trend Barriers to Entry in this industry are Low and Increasing

Level & Trend Globalization in this industry is Low and the trend is Steady



Industry Globalizationcontinued

International chains typically target affluent or middle-class customers in urban markets such as New York, Chicago, Washington, D.C. and Miami. Many international chains offer slightly different bents on traditional American concepts. For example, Pollo Campero, a Guatemalan chain with over 50 locations in the US, offers a more Latin American-

focused chicken menu, rather than trying to compete in the crowded Southern Fried Chicken space.

The industry will be subject to increasing globalization over the coming years. IBISWorld anticipates that US operators will continue to enter into the international market, particularly in the regions of Asia and South America.


Player Performance McDonald’s, the world’s biggest fast food operator, opened its first store in 1948 in San Bernardino, CA, and signed its first franchise agreement in April 1954. By 1957, McDonald’s had 14 stores and opened its first international store in Canada just ten years later. The company entered a high-growth phase during the 1970s, opening about 500 new stores each year. During the 1980s, however, growth slowed as competition from other quick-service operators increased. Competition intensified to an even greater extent during the 1990s. At that time, McDonald’s diversified within the quick-service industry by purchasing other operators and increasing its international investments. In 2013, McDonalds employed over 440,000 staff and earned $28.1 billion globally.

McDonald’s business model is primarily focused on the franchising of restaurants. Of the company’s 35,429 restaurants in 119 countries at the end of 2013, over 80.0% were operated by franchisees (with the remainder being company-operated stores). Franchises contribute to the company’s revenue through the payment of rent and royalties, usually based upon a percentage of sales. Franchises also pay an initial fee to the McDonald’s to establish a restaurant. Over the past five years McDonalds has undertaken a significant effort to modernize the format of its stores, many of which have not received a makeover in more than two decades. At the end of 2013, the company reported that 45.0% of its restaurant

interiors and exteriors reflect its contemporary restaurant design.

McDonald’s menu has traditionally consisted of a range of burgers, fries, desserts and beverages. Over the past decade, however, the company has introduced a range of healthier options, such as salads, to cater to changing consumer preferences. More recently, in response to anemic postrecession consumer spending on fast food, McDonalds has heavily promoted its revamped “Dollar Menu & More,” which offers items ranging from $1.00 to $5.00. These value menu items are designed to be sold as ‘loss-leaders,’ enticing customers into the store with the hope that they will pay for higher-margin products while there. The chain is also making a bigger push into the breakfast segment, where it is a market leader, by emphasizing the high quality of its McCafe coffee. The breakfast segment has become a battleground in the Fast Food industry over the past five years, as it is the only time segment that is currently growing.

Financial performanceOver the five years to 2014, McDonald’s US revenue is expected to increase at an average annual rate of 2.5% to $9.0 billion. As McDonald’s does not receive revenue from its franchised stores, the company’s performance in the fast food industry is best measured by system-wide sales, which includes revenue earned by company-owned stores and franchised stores. Based on this measure,

Major CompaniesMcDonald’s Corporation | Yum! Brands Inc.Subway | Wendy’s Company | Other Companies

59.9%Other

McDonald’s Corporation 17.8%

Yum! Brands Inc. 11.1%

Subway 6.7%

Wendy’s Company 4.5%


Major players(Market share)

McDonald’s Corporation Market share: 17.8%


Major Companies

Player Performance Yum! Brands Inc. (Yum) is a Louisville, KY-based fast food conglomerate. Until 1997, the restaurant chains within Yum! Brands were owned by PepsiCo, which publicly listed its restaurant operations to improve its cash flow. PepsiCo purchased Pizza Hut in 1977, Taco Bell in 1978 and KFC in 1986, and used these operations as outlets for its drinks. Until December 2011, Yum also operated the seafood restaurant chain Long John Silver’s and A&W Restaurants, which were sold off to major franchisees and strategic investors. In 2013 Yum employed about 523,000 staff and earned $13.7 billion in revenue globally. The company’s 40,000 company-owned, franchised and licensed

restaurants in more than 120 countries makes it the biggest fast food restaurant companies in the world in terms of outlets.

Similar to its competitors, Yum focuses on a franchise model, with over 80.0% of the company’s stores operating under franchise or license agreements. The franchise model contributes to Yum’s revenue through annual royalties and franchise fees. Yum’s strategy involves the opening of co-located, multi-branded, but different food-style restaurants in high-traffic areas. It is not uncommon to find a KFC, Pizza Hut or Tao Bill located next to each other within the same building. Over the past decade, Yum has moved aggressively to open new restaurants in

Player Performancecontinued

McDonalds’ market share of the Fast Food Restaurants industry in the United States is estimated to be 17.8% in 2014. US system-wide sales are expected to grow an annualized 2.7% over the five years to 2014 to $35.5 billion.

McDonald’s introduced a number of new products over the past five years, such as Premium McWraps, Egg White Delight McMuffins and an extended line-up of Quarter Pounder Burgers. While many of these products offer higher margins, the

expanded menus have reportedly slowed service in many McDonald’s restaurants and increased the incidence of incorrect orders, ultimately affecting sales. McDonald’s system-wide sales in the United States have struggled to gain traction over the past five years, as consumers continue to be hesitant about the economic outlook. The chain’s growth has been more impressive in Asia, Africa and the Middle East, where sales are outpacing domestic restaurants.

McDonald’s Corporation (US segment) – fi nancial performance

YearSales

($ million) (% change)Revenue

($ million) (% change)

Operating Income


2009 31,032.0 3.5 7,943.8 -1.7 3,231.7 5.6

2010 32,395.0 4.4 8,111.6 2.1 3,446.5 6.6

2011 34,172.0 5.5 8,528.2 5.1 3,666.2 6.4

2012 35,593.0 4.2 8,813.7 3.3 3,750.4 2.3

2013 35,856.0 0.7 8,851.3 0.4 3,779.3 0.8

2014* 35,497.4 -1.0 8,975.2 1.4 3,832.4 1.4

*EstimatesSOURCE: ANNUAL REPORT AND IBISWORLD

Yum! Brands Inc. Market share: 11.1%


Major Companies

Player Performance Subway is a privately owned fast food chain that primarily sells sub sandwiches. The chain is owned by holding company Doctor’s Associates Inc. All stores are franchised and the company only employs a small head office staff. Nonetheless, it has over 250,000 people working in its franchised stores globally. In the United States alone, Subway serves nearly 2,800 sandwiches every 60 seconds. Subway establishments sell custom sub sandwiches, salads and other

food items. The company markets its products as healthy alternatives to typical fast food. Founded in 1965 and headquartered in Milford, CT, Subway began franchising Subway shops in 1974 after opening up 16 individual shops on its own. Currently, Subway has over 40,000 restaurants operating in 102 different countries.

Over the past decade, Subway significantly boosted its marketing campaigns and has been at the forefront


China, particularly KFC restaurants, which has resulted in strong international revenue growth. In 2012, Yum completed the acquisition of China-based hot-pot company, Little Sheep.

Financial performanceOver the five years to 2014, Yum’s US revenue is expected to decline at an annualized rate of 10.1% to $2.6 billion. This represents a strategic decision by Yum to increase the franchising of its stores, thereby decreasing the revenue earned from retailing food and beverages as a result. The company has made a significant effort over the past two years to refranchise its company-operated stores to free up capital and cut operating costs.

As the majority of Yum’s stores are franchised, this revenue figure does not fully represent the extent of the annual food and beverage sales made through the company’s restaurants. IBISWorld estimates the company’s US system-wide sales will decline at an annualized rate of 1.2% to $22.1 billion over the five years to 2014. Yum has had a hard time rebounding from the recession as consumers have shifted their preferences toward fast casual food that offers higher quality at a similar price point. In particular, Yum’s KFC and Pizza Hut brands have performed poorly, with same store sales at those restaurants down over the past five years.

Yum! Brands Inc. (US segment) – fi nancial performance*

YearSales



Operating Income


2009 23,521 -0.7 4,473 -12.7 647 0.9

2010 23,583 0.3 4,120 -7.9 668 3.2

2011 22,449 -4.8 3,786 -8.1 589 -11.8

2012 23,583 5.1 3,352 -11.5 666 13.1

2013 21,466 -9.0 2,953 -11.9 684 2.7

2014* 22,110 3.0 2,628 -11.0 578 -15.5

*EstimateSOURCE: ANNUAL REPORT AND IBISWORLD

Subway Market share: 6.7%


Major Companies


of advertising toward a healthier demographic. Its current slogan, “Eat Fresh,” was implemented in 2002. The company chose this slogan to highlight its use of freshly baked breads and fresh produce in sandwiches made directly in front of customers, tailored to their exact specifications. Subway looked to capitalize on this characteristic to separate it from most fast food establishments. In 2000, Subway began running ads with Jared Fogle in the United States, a man who attributed eating Subway sandwiches as a key aspect of his weight-loss success. Jared proved to be a valued spokesman for the company, as his ad campaigns during the early 2000s were fundamental to Subway’s immense growth. In 2008, the company shifted away from its established healthy image to focus on its Five Dollar Footlong promotion (along with a number of variations of this theme in different countries), a campaign that coincided with the recession. The promotion has proven to

be successful in attracting new customers and boosting sales.

Financial performanceSubway is a private company and does not publicly disclose its financial results. However, based on sales per store, IBISWorld estimates that Subway’s US system-wide revenue will grow to $13.3 billion in 2014, up from about $10.0 billion in 2009, yielding annualized growth of 5.9%. This makes Subway one of the fastest growing companies in the industry over the past five years. The company has grown aggressively over the five-year period through its flexible franchise model and has surpassed McDonald’s as the number one fast food restaurant in the United States in terms of store numbers. Additionally, the societal shift towards healthy eating and increased media coverage about obesity, diabetes and heart disease has assisted the company’s rise as consumers gravitate toward convenient, but healthy, food options.

Subway (US segment) – fi nancial performance*

YearSales

($ million) (% change)Operating Income


2009 10,000 6.4 1,052 6.5

2010 10,600 6.0 1,117 6.2

2011 11,400 7.5 1,199 7.3

2012 12,100 6.1 1,261 5.2

2013 12,700 5.0 1,350 7.1

2014 13,300 4.7 1,400 3.7

*EstimatesSOURCE: IBISWORLD


Major Companies

The Wendy’s Company (US segment) – fi nancial performance*

YearSales



Operating Income


2009 8,388.0 -1.5 2,190.0 -2.7 103.9 33.9

2010 8,340.0 -0.6 2,117.0 -3.3 142.9 37.5

2011 8,500.0 1.9 2,161.3 2.1 133.3 -6.7

2012 8,600.0 1.2 2,231.3 3.2 109.3 -18.0

2013 8,754.8 1.8 2,213.9 -0.8 120.2 10.0

2014* 8,929.9 2.0 2,258.1 2.0 124.2 3.3

*EstimatesSOURCE: ANNUAL REPORT AND IBISWORLD

Player Performance

Wendy’s Company Market share: 4.5%

The Wendy’s Company is a Columbus, Ohio-based burger chain that is a major competitor of McDonald’s and Burger King in the burger segment of the Fast Food Restaurants industry. Wendy’s has over 6,500 restaurants in its global network, about 90.0% of which are based in the United States. The company also generates about 90.0% of its revenue domestically. Similar to its competitors, the majority (78.0%) of Wendy’s stores operate under franchise agreements, with the rest being company-operated stores. Wendy’s is also a franchisor of the T.J. Cinnamons and Past Connection chains and owns an 18.5% stake in the Arby’s fast food roast beef sandwich chain. In 2013, Wendy’s earned $2.5 billion in revenue globally and employed about 37,000 workers.

Wendy’s menus consist of a range of traditional burger chain items such as hamburgers, chicken sandwiches, fries, beverages and desserts. The company also serves a number of salads but has not developed a comprehensive range of healthy options such as competitors such as McDonalds. The company derives revenue primarily from sales at company-operated restaurants and franchise royalties.

In June 2011, Wendy’s sold a majority stake in its Arby’s brand, which was originally purchased in 2008, to Roark Capital Group for $430.0 million. Roark

owns about 82.0% of Arby’s, while Wendy’s owns the remainder. Following the sale, the company changed its name from the Wendy’s/Arby’s Group to The Wendy’s Company. The chain has also recently undertaken an initiative to sell a large number of its company-owned restaurants to franchises. Wendy’s sold 244 restaurants during 2013 and plans to sell 425 more in 2014.

Financial performanceIBISWorld estimates Wendy’s total domestic system-wide sales (consisting of revenue earned by franchised and company-operated stores) will grow at an annualized rate of 1.3% to $8.9 billion over the five years to 2014. Sales increased during 2012 and 2013, which was primarily driven by consumers spending more per transaction due to higher prices on certain menu items. However, the company has experienced the lingering effects of the recession, with slow growth in system-wide sales and a reduction in the number of customers visiting its stores. Ultimately, strategic price increases on the menu and a change in sales mix towards more premium products have helped negate a decline in system-wide sales. Overall, Wendy’s store count in the United States shrank over the past five years, as declining sales have forced a number of franchises out of business.


Major Companies

Other Companies Burger King CorporationEstimated market share: 4.5%Burger King Corporation is a Miami, FL-based hamburger chain founded in 1953. Burger King’s operative framework was inspired by the McDonald’s business model and the two fast food chains quickly became fierce competitors. Burger King primarily franchises restaurants, with about 90.0% of its 12,700 stores operating under franchise agreements. About 60.0% of the company’s restaurants are based in the United States. In 2013 Burger King earned $1.1 billion globally and employed about 2,420 staff in its company restaurants, support centers and field operations.

Burger King has been through a number of ownership changes over the past decade. On May 18, 2006, the company became a publicly traded entity after a $392.0 million public offering, with the majority of funds raised used by its private equity owners to retire debt. In September 2010, private equity firm 3G Capital purchased the company for $4.0 billion and subsequently installed a management team with orders to turn the struggling company around. In 2012, 3G Capital sold off a 31.0% chunk of the company to investment vehicle Justice Holdings. Part of this holding was then sold to shareholders on the New York Stock Exchange (NYSE), with the company renamed Burger King Worldwide.

When it was taken private by 3G Capital in 2010, Burger King’s strategy changed significantly. The company has made a concerted effort to sell more franchises with the aim of reducing the risk and overhead costs associated with running company-owned restaurants. Consequently, the company’s revenue has declined significantly over the past five years, as it is making less food sales and collecting more franchise fees; however, system-wide sales have grown. IBISWorld estimates Burger King’s US system-wide sales will reach $9.0 billion in 2014. Over the past five years the company has also employed a similar

strategy to McDonald’s and Wendy’s by adjusting its menu to focus on value deals such as the $1.29 Jr. Whopper.

Chick-fil-AEstimated market share: 2.5%Chick-fil-A is College Park, GA, fast-food restaurant that is best known for its boneless chicken breast sandwich. The company was founded in 1946, and the majority of its locations are in the southern region of the United States. Chick-fil-A has about 1,600 locations in 39 states. The company is making a strong effort to increase its number of locations in the Midwest and Southern California. The company is privately held and does not disclose financial results; however, sales are expected to equal $5.0 billion in 2014.

Domino’s Inc.Estimated market share: 1.9%Domino’s Pizza has its roots in Ypsilanti, MI, when the first store was opened in 1960. Since then, the company has grown to nearly 10,000 company-owned and franchised locations worldwide. Domino’s operates in all 50 states domestically and has locations in more than 70 countries; furthermore, it is the second largest pizza company in the world after Pizza Hut based on number of units and retail sales. Domino’s sells over 1.5 million pizzas globally each day.

Domino’s sales are primarily generated through its pizza delivery business and delivering its food in a timely manner. As such, the company focuses on securing its position within the Fast Food industry through providing convenient store locations and an efficient supply chain. This move also enhances the company’s carryout business. The company’s business model includes a store design with relatively low capital requirements when compared with other restaurant concepts. Domino’s current strategy also includes expanding its global presence to


Major Companies

Other Companiescontinued

take advantage of emerging markets outside of the United States.

Domino’s menu varies by region, but is primarily focused on Italian-American entrees and side dishes. The company’s menu has undergone a period of rapid change over the past five years. In 2010, Domino’s changed its pizza recipe, making significant changes in the dough, sauce and type of cheese used. The company also launched artisan-style pizzas in 2011 and added handmade pan pizza to their menu in 2012. Dominos also removed the word “Pizza” from its logo in 2012 to emphasize its nonpizza products, such as pasta, chicken, bread bowls, desserts and oven-baked sandwiches.

Domino’s is estimated to earn $3.8 billion in US system-wide sales in 2014, representing annualized growth of 4.0% over the past five years. Domino’s store count has registered moderate growth; however, its sales per store have increased at an impressive rate, due to the increased popularity and higher price points of its redesigned menu. The company’s artisan pizzas that have higher quality ingredients and garner higher profit margins have been particularly popular. Domino’s sophisticated web-based order and delivery system has also helped the company’s bottom line as it now derives over 40.0% of its sales from digital orders.


Capital Intensity The Fast Food Restaurants industry is subject to a low level of capital intensity. For every $1.00 the average restaurant in the industry spends on wages in 2014, it will spend an estimated $0.12 on the use and replacement of capital.

The industry is highly dependent on direct labor input across all areas of operation, from cashiers, to delivery and food preparation, to cleaning and operational management. Due to the service nature of the industry, many of these labor-intensive functions cannot be substituted by technology or machinery. To meet customers’ expectations and provide a quality and hospitable dining experience, a well-trained staff is required.

Some rise in labor productivity can occur from investment in technology. In

recent years, many operators have invested heavily in electronic ordering systems that are linked to the kitchen,

Operating ConditionsCapital Intensity | Technology & Systems | Revenue VolatilityRegulation & Policy | Industry Assistance

Tools of the Trade: Growth Strategies for Success


Labo

r Int

ensi

veCapital Intensive

Change in Share of the Economy

New Age Economy

Recreation, Personal Services, Health and Education. Firms benefi t from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labor skills are key to product differentiation.

Traditional Service Economy

Wholesale and Retail. Reliant on labor rather than capital to sell goods. Functions cannot be outsourced therefore fi rms must use new technology or improve staff training to increase revenue growth.

Old Economy

Agriculture and Manufacturing. Traded goods can be produced using cheap labor abroad. To expand fi rms must merge or acquire others to exploit economies of scale, or specialize in niche, high-value products.

Investment Economy

Information, Communications, Mining, Finance and Real Estate. To increase revenue fi rms need superior debt management, a stable macroeconomic environment and a sound investment plan.

Frozen Food WholesalingChain Restaurants

Dairy Wholesaling

Single Location Full-Service Restaurants

Fast Food Restaurants

Capital intensity

0.5

0.0

0.1

0.2

0.3

0.4

SOURCE: WWW.IBISWORLD.COMDotted line shows a high level of capital intensity

Capital units per labor unit


Accommodation and Food Services

Economy

Level The level of capital intensity is Low


Operating Conditions

Technology& Systems

Fast food operators regularly leverage technology to reduce labor and food costs to increase sales. They also use it to improve business processes, support growth, maintain current operations and improve meal experiences.

Quality of serviceThe majority of technological adoption by the industry aims to address new systems and processes that are designed to promote quality service and reduce customer wait time. Wireless electronic ordering systems that link front-of-the house orders to kitchen meal preparation are an example of such innovation. The increasing sophistication of the internet and mobile technology have also allowed industry players to reach wholesalers and suppliers online. This has allowed for increased efficiencies in coordinating supplies and other pre-prepared food items.

Larger chains also use data networks to send and receive business data to and from restaurants to monitor and analyze all aspect of the business. Through data analytics, operational efficiencies can be identified and improved on throughout a company’s network of stores.

Point of sale systemsMost operators now have point-of-sale systems in stores to speed up service, which helps lead to larger purchases on

average and cuts down on labor costs. Retailers are increasingly accepting credit card payments through devices such as Square, which connect directly to the store’s tablet device and facilitates ease of transaction. Customers can sign with their finger on a touchscreen rather than with a pen and have the receipt emailed to them. Some restaurants have adopted mobile technology, allowing for the ordering of coffees and food items via mobile applications and online.

Labor schedulingIt is increasingly common for chains to manage labor costs with just-in-time scheduling which is based on sophisticated algorithms built on data including last year’s sales trends, economic indicators and changes in weather. These computer programs predict in advance when demand will be high or low and allow managers to make adjustments to staffing levels.

Social mediaTechnology has also aided fast food restaurants with marketing. Social media such as Facebook, Twitter and Instagram allows savvy operators to connect directly with customers and tailor their brand’s message to target fragmented consumer segments.

Capital Intensitycontinued

allowing chefs to more efficiently process and prepare orders. This is especially true of chain operations, which can benefit from economies of scale. It is also increasingly common for chains to manage labor costs with just-in-time scheduling which is based on sophisticated algorithms built on data including last year’s sales trends, economic indicators and changes in weather. These computer programs predict in advance when demand will

be high or low and allow managers to make adjustments to staffing levels. These initiatives have helped some operators improve profit margins and grow revenue. However, the main beneficiaries of technological advancements are large chains. Smaller chains find limited benefits from increased capital investment, and therefore prefer to concentrate on training their staff to improve their service.

Level The level of Technology Change is Medium



Revenue Volatility The Fast Food Restaurants industry has a low-to-moderate level of revenue volatility. Over the five years to 2014, revenue volatility is expected to equal an average of 1.3%. Over the past five years, the industry has grown slowly, but consistently, much like the broader economy, lowering the industry’s volatility. The industry depends on consumer tastes and preferences, as well as levels of disposable income and consumer confidence. Restaurant spending is highly discretionary and easily substituted for lower cost options such as home cooked meals. As a result, changes in factors affecting incomes, such as taxes and unemployment levels, can directly affect industry revenue. However, some consumers will downgrade from full-service restaurants to lower-cost fast food during times of economic austerity, which helps to mitigate any dramatic decline in revenue for the Fast Food industry. Furthermore, there is a very

high household penetration rate for quick-service meals as Americans spend a large percentage of their total food budget on restaurant meals.

The diversity of foods served by the industry helps keep any volatility under control. The industry consists of a range of food products, from Asian restaurants, to traditional American restaurants and other ethnic cuisines, meaning that if tastes defer from one type of food towards another, the industry still captures the revenue. While demand for traditional fast food options high in fat, salt and calories is falling, there are a growing number of convenient, affordable and healthy fast food options available to consumers.

Industry revenue volatility is anticipated to level out over the next five years as the industry continues along a long-term low growth trajectory. An expected improvement in the domestic economy will lead to healthy consumer spending, benefiting fast food operators.


Volatility vs Growth

Reve

nue

vola

tility

* (%

)

1000

100

10

1

0.1

Five year annualized revenue growth (%)–30 –10 10 30 50 70

Hazardous

Stagnant

Rollercoaster

Blue Chip

* Axis is in logarithmic scale


A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment.

When a fi rm makes poor investment decisions it may face underutilized capacity if demand suddenly falls, or capacity constraints if it rises quickly.

Level The level of Volatility is Low



Regulation & Policy The Fast Food Restaurants industry is subject to a medium level of regulation that is increasing. There are regulations covering a range of areas, from food safety and standards, to labor conditions and franchising requirements. Most regulation is enacted and enforced at the state level, but many federal laws also apply.

Food safety and standardsThe industry is subject to laws and regulations relating to the preparation and sale of food, including regulations regarding product safety, nutritional content and menu labeling. The main agency responsible for providing guidance and regulation is the US Food and Drug Administration’s (FDA). The FDA’s Model Food Code, which is a best-practice guide to food handling and presentation, applies to this industry and is updated each year. The FDA Nutritional Value applies as well. Since 1996, the FDA regulations have set standards for nutritional values of individual foods and meals. If claims like “low fat” or “heart healthy” are on a menu, an owner must be able to demonstrate to officials that there is a reasonable basis for the claim. For instance, the meal may be based on a recipe from a health association or a recognized dietary group. Complete nutritional information, however, is not required to be on menus.

Most recently, the FDA has announced it will require the food industry to gradually phase out trans fats from food in an attempt to prevent illness and deaths. Trans fats are commonly used in processed foods to improve the taste or shelf life of foods and are believed to cause a number of health issues, including heart disease. While trans fats have been eliminated from many foods over the past decade due to stricter labeling requirements, many fast foods still contain small amounts. The plan to ban trans fats was announced by the FDA

in late 2013 and while no set time frame has been announced, IBISWorld expects the industry to quickly adapt to the new requirements and to use the new feature in marketing campaigns to promote the health benefits.

The Affordable Care Act requires restaurant companies such as ours to disclose calorie information on their menus. The Food and Drug Administration has proposed rules to implement this provision that would require restaurants to post the number of calories for most items on menus or menu boards and to make available more detailed nutrition information upon request.

Labor relationsThe industry employs a high number of young and low-skilled workers at hourly rates and, therefore, is subject to minimum wage and employee benefits regulations. Workers in the US are entitled to be paid no less than the statutory minimum wage, which as of 2014 was $7.25 per hour. Each state also formulates and regulates its own minimum wage, with some states implementing rates higher than the federal rate.

The implementation of the Affordable Care Act over the next five years will have a minor impact on the industry. Employers with 50 or more employees that work 30 hours a week will be required to provide healthcare coverage or pay a fine. However, the large majority of firms in the industry employ less than 50 staff. Most major operators are currently reviewing the potential impacts of the new law on their businesses.

Smoking bansSmoking laws are generally enforced at the state level as the US Congress has not attempted to enact any nationwide federal smoking ban. Smoking is banned in restaurants, bars and non-hospitality

Level & Trend The level of Regulation is Medium and the trend is Increasing



Industry Assistance Although the Fast Food Restaurants industry receives no formal assistance in the form of government aid or monetary compensation, there are industry associations that help the industry as a whole. For example, the National Restaurant Association provides industry news, research, sponsoring events, networking opportunities, and

representation, among other things. There are also organizations that provide the same services on a more local level.

Franchisees receive assistance from the franchise owner in the form of marketing, supply-chain management and purchasing. However, this comes at a cost in the form of an annual royalty and/or marketing fee.

Regulation & Policycontinued

workplaces in many states and some local jurisdictions ban smoking in outdoor areas. Each jurisdiction has developed legislation separately; however, most laws are relatively consistent. There are some differences pertaining to the circumstances in which ventilated smoking rooms are permitted and the distance smoking is banned outside a building. California was the first state to enact a statewide ban on smoking, with most other states imposing a ban in the mid to late 2000s.

Franchising lawsA large proportion of industry establishments are operated under franchise agreements. There are both federal and state laws governing franchising, which vary from state to state. Franchising is regulated at the

federal level by the US Federal Trade Commission and applied in any region within the United States. At the state level, various state agencies regulate franchises and laws vary between states. A state’s franchise laws usually only apply if the sale of a franchise is made in the state and the business is located in the state. Laws generally fall under three categories: disclosure laws, registration laws and relationship laws.

Under the FTC Franchise Rule there are three elements of a franchise: the franchise has a trademark under which the franchisee is given the right to distribute goods and services; the franchisor has significant control of or provides significance to the franchisee’s method of operation; and the franchisee is required to pay the franchisor at least $500 before opening for business.

Level & Trend The level of Industry Assistance is None and the trend is Steady


Key StatisticsRevenue

($m)

Industry Value Added

($m)Establish-

ments Enterprises Employment Exports ImportsWages ($m)

Domestic Demand

Consumer spending

($b)2005 178,125.1 58,461.4 207,396 135,937 3,514,631 -- -- 45,102.1 N/A 9,527.82006 180,919.8 60,770.8 211,023 137,611 3,620,389 -- -- 46,116.3 N/A 9,814.92007 181,194.8 61,002.3 217,992 139,835 3,640,517 -- -- 47,177.1 N/A 10,035.52008 185,885.5 61,434.7 217,938 141,274 3,671,781 -- -- 47,307.4 N/A 9,999.22009 185,128.5 59,550.3 217,622 140,747 3,577,393 -- -- 47,331.8 N/A 9,842.92010 190,469.8 63,045.5 220,492 142,964 3,514,483 -- -- 48,379.3 N/A 10,035.92011 193,129.3 64,312.0 225,122 145,395 3,588,288 -- -- 48,668.6 N/A 10,291.32012 194,754.1 64,074.1 228,723 147,285 3,620,583 -- -- 49,272.8 N/A 10,517.62013 196,051.0 65,088.9 232,611 149,052 3,653,168 -- -- 49,796.9 N/A 10,727.92014 198,865.6 66,421.1 236,333 150,841 3,686,048 -- -- 50,511.9 N/A 11,011.12015 203,240.6 68,085.6 240,115 152,651 3,712,415 -- -- 51,623.1 N/A 11,309.42016 206,289.2 69,106.9 241,379 154,383 3,729,653 -- -- 52,191.2 N/A 11,632.72017 209,589.8 70,212.6 243,698 156,263 3,748,365 -- -- 53,026.2 N/A 11,940.72018 214,829.6 71,967.9 247,191 158,436 3,777,535 -- -- 54,351.9 N/A 12,214.82019 219,341.0 73,698.6 249,745 160,575 3,803,155 -- -- 55,493.3 N/A 12,491.7Sector Rank 2/28 4/28 3/28 3/28 2/28 N/A N/A 3/28 N/A N/AEconomy Rank 42/1306 39/1306 42/1305 60/1305 6/1306 N/A N/A 28/1306 N/A N/A

IVA/Revenue (%)

Imports/Demand

(%)

Exports/Revenue

(%)

Revenue per Employee

($’000)Wages/Revenue

(%)Employees

per Est.Average Wage

($)

Share of the Economy

(%)2005 32.82 N/A N/A 50.68 25.32 16.95 12,832.67 0.412006 33.59 N/A N/A 49.97 25.49 17.16 12,737.94 0.422007 33.67 N/A N/A 49.77 26.04 16.70 12,958.90 0.412008 33.05 N/A N/A 50.63 25.45 16.85 12,884.05 0.412009 32.17 N/A N/A 51.75 25.57 16.44 13,230.81 0.412010 33.10 N/A N/A 54.20 25.40 15.94 13,765.69 0.432011 33.30 N/A N/A 53.82 25.20 15.94 13,563.18 0.432012 32.90 N/A N/A 53.79 25.30 15.83 13,609.08 0.422013 33.20 N/A N/A 53.67 25.40 15.71 13,631.16 0.412014 33.40 N/A N/A 53.95 25.40 15.60 13,703.54 0.412015 33.50 N/A N/A 54.75 25.40 15.46 13,905.53 0.412016 33.50 N/A N/A 55.31 25.30 15.45 13,993.58 0.412017 33.50 N/A N/A 55.91 25.30 15.38 14,146.49 0.402018 33.50 N/A N/A 56.87 25.30 15.28 14,388.19 0.402019 33.60 N/A N/A 57.67 25.30 15.23 14,591.39 0.40Sector Rank 25/28 N/A N/A 18/28 21/28 13/28 23/28 4/28Economy Rank 636/1306 N/A N/A 1206/1306 456/1306 593/1305 1244/1306 39/1306

Figures are inflation-adjusted 2014 dollars. Rank refers to 2014 data.

Revenue (%)

Industry Value Added

(%)

Establish-ments

(%)Enterprises

(%)Employment

(%)Exports

(%)Imports

(%)Wages

(%)

Domestic Demand

(%)

Consumer spending

(%)2006 1.6 4.0 1.7 1.2 3.0 N/A N/A 2.2 N/A 3.02007 0.2 0.4 3.3 1.6 0.6 N/A N/A 2.3 N/A 2.22008 2.6 0.7 0.0 1.0 0.9 N/A N/A 0.3 N/A -0.42009 -0.4 -3.1 -0.1 -0.4 -2.6 N/A N/A 0.1 N/A -1.62010 2.9 5.9 1.3 1.6 -1.8 N/A N/A 2.2 N/A 2.02011 1.4 2.0 2.1 1.7 2.1 N/A N/A 0.6 N/A 2.52012 0.8 -0.4 1.6 1.3 0.9 N/A N/A 1.2 N/A 2.22013 0.7 1.6 1.7 1.2 0.9 N/A N/A 1.1 N/A 2.02014 1.4 2.0 1.6 1.2 0.9 N/A N/A 1.4 N/A 2.62015 2.2 2.5 1.6 1.2 0.7 N/A N/A 2.2 N/A 2.72016 1.5 1.5 0.5 1.1 0.5 N/A N/A 1.1 N/A 2.92017 1.6 1.6 1.0 1.2 0.5 N/A N/A 1.6 N/A 2.62018 2.5 2.5 1.4 1.4 0.8 N/A N/A 2.5 N/A 2.3

2019 2.1 2.4 1.0 1.4 0.7 N/A N/A 2.1 N/A 2.3Sector Rank 23/28 13/28 11/28 13/28 21/28 N/A N/A 14/28 N/A N/AEconomy Rank 877/1306 736/1306 592/1305 605/1305 813/1306 N/A N/A 718/1306 N/A N/A

Annual Change

Key Ratios

Industry Data



Jargon & Glossary

BARRIERS TO ENTRY High barriers to entry mean that new companies struggle to enter an industry, while low barriers mean it is easy for new companies to enter an industry.

CAPITAL INTENSITY Compares the amount of money spent on capital (plant, machinery and equipment) with that spent on labor. IBISWorld uses the ratio of depreciation to wages as a proxy for capital intensity. High capital intensity is more than $0.333 of capital to $1 of labor; medium is $0.125 to $0.333 of capital to $1 of labor; low is less than $0.125 of capital for every $1 of labor.

CONSTANT PRICES The dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using the current year (i.e. year published) as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the “real” growth or decline in industry metrics. The inflation adjustments in IBISWorld’s reports are made using the US Bureau of Economic Analysis’ implicit GDP price deflator.

DOMESTIC DEMAND Spending on industry goods and services within the United States, regardless of their country of origin. It is derived by adding imports to industry revenue, and then subtracting exports.

EMPLOYMENT The number of permanent, part-time, temporary and seasonal employees, working proprietors, partners, managers and executives within the industry.

ENTERPRISE A division that is separately managed and keeps management accounts. Each enterprise consists of one or more establishments that are under common ownership or control.

ESTABLISHMENT The smallest type of accounting unit within an enterprise, an establishment is a single physical location where business is conducted or where services or industrial operations are performed. Multiple establishments under common control make up an enterprise.

EXPORTS Total value of industry goods and services sold by US companies to customers abroad.

IMPORTS Total value of industry goods and services brought in from foreign countries to be sold in the United States.

INDUSTRY CONCENTRATION An indicator of the dominance of the top four players in an industry. Concentration is considered high if the top players account for more than 70% of industry revenue. Medium is 40% to 70% of industry revenue. Low is less than 40%.

INDUSTRY REVENUE The total sales of industry goods and services (exclusive of excise and sales tax); subsidies on production; all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); and capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded.

INDUSTRY VALUE ADDED (IVA) The market value of goods and services produced by the industry minus the cost of goods and services used in production. IVA is also described as the industry’s contribution to GDP, or profit plus wages and depreciation.

INTERNATIONAL TRADE The level of international trade is determined by ratios of exports to revenue and imports to domestic demand. For exports/revenue: low is less than 5%, medium is 5% to 20%, and high is more than 20%. Imports/domestic demand: low is less than 5%, medium is 5% to 35%, and high is more than 35%.

LIFE CYCLE All industries go through periods of growth, maturity and decline. IBISWorld determines an industry’s life cycle by considering its growth rate (measured by IVA) compared with GDP; the growth rate of the number of establishments; the amount of change the industry’s products are undergoing; the rate of technological change; and the level of customer acceptance of industry products and services.

NONEMPLOYING ESTABLISHMENT Businesses with no paid employment or payroll, also known as nonemployers. These are mostly set up by self-employed individuals.

PROFIT IBISWorld uses earnings before interest and tax (EBIT) as an indicator of a company’s profitability. It is calculated as revenue minus expenses, excluding interest and tax.

VOLATILITY The level of volatility is determined by averaging the absolute change in revenue in each of the past five years. Volatility levels: very high is more than ±20%; high volatility is ±10% to ±20%; moderate volatility is ±3% to ±10%; and low volatility is less than ±3%.

WAGES The gross total wages and salaries of all employees in the industry. The cost of benefits is also included in this figure.

Industry Jargon

IBISWorld Glossary

BABY BOOMERS Consumers born between 1946 and 1964 who account for a major proportion of the population.

NET REVENUE Revenue from company-owned stores and franchise fees, but not franchised stores’ total sales.

POINT-OF-SALE (POS) The location where a transaction occurs at a retail establishment or store.

SAME-STORE SALES A retail measure used to assess the true performance of retail outlets by taking out the effect of new store openings and only looking at sales growth of existing stores.

SYSTEM-WIDE SALES Sales from both company-owned or managed and franchised or licensed outlets. System-wide sales excludes royalties and franchising revenue fees.

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ibisworld industry report 72221a fast food … 14, 2014 · fast food restaurants in the us october...

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