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FastFood-RestaurantsintheUS-IndustryReport.pdf
WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 1
IBISWorld Industry Report 72221a Fast Food Restaurants in the US October 2017 Andrew Alvarez
On the run: Operators will offer healthy menu items to appeal to changing consumer preferences
2 About this Industry 2 Industry Definition
2 Main Activities
2 Similar Industries
3 Additional Resources
4 Industry at a Glance
5 Industry Performance 5 Executive Summary
5 Key External Drivers
7 Current Performance
10 Industry Outlook
12 Industry Life Cycle
14 Products & Markets 14 Supply Chain
14 Products & Services
16 Demand Determinants
17 Major Markets
18 International Trade
19 Business Locations
21 Competitive Landscape 21 Market Share Concentration
21 Key Success Factors
21 Cost Structure Benchmarks
23 Basis of Competition
24 Barriers to Entry
25 Industry Globalization
26 Major Companies 26 McDonald’s Corp.
28 Yum! Brands Inc.
30 Subway
35 Operating Conditions 35 Capital Intensity
36 Technology & Systems
37 Revenue Volatility
38 Regulation & Policy
39 Industry Assistance
40 Key Statistics 40 Industry Data
40 Annual Change
40 Key Ratios
41 Industry Financial Ratios
42 Jargon & Glossary
www.ibisworld.com | 1-800-330-3772 | [email protected]
This report was provided to University of Baltimore (2126964928) by IBISWorld on 07 March 2018 in accordance with their license agreement with IBISWorld
WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 2
This industry comprises 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
(up-front costs associated with opening a franchise) are accounted for in industry revenue. This industry excludes coffee and snack shops. Most industry 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 US Establishments in this industry primarily retail confectionery goods and nuts that are not packaged for immediate consumption.
72211a Chain Restaurants in the US Establishments 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 US Establishments in this industry primarily include single-location, independent or family-operated restaurants that provide food services to patrons.
72232 Caterers in the US Establishments in this industry primarily provide individual event-based food services.
72233 Street Vendors in the US Establishments 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 US Establishments 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 Food
Burgers
Chicken
Mexican Food
Pizza and Pasta
Sandwiches
Other
Provided to: University of Baltimore (2126964928) | 07 March 2018
WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 3
About this Industry
For additional information on this industry
www.entrepreneur.com Entrepreneur Magazine
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 1000 US industry reports, which are updated up to four times a year. To see all reports, go to www.ibisworld.com
Provided to: University of Baltimore (2126964928) | 07 March 2018
WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 4
$ tr
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11
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2309 11 13 15 17 19 21Year
Consumer spending
SOURCE: WWW.IBISWORLD.COM
% c
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Revenue Employment
Revenue vs. employment growth
Products and services segmentation (2017)
42% Burgers
8% Mexican
14% Sandwiches
7% Other
10% Asian
10% Chicken
9% Pizza and Pasta
SOURCE: WWW.IBISWORLD.COM
Key Statistics Snapshot
Industry at a Glance Fast Food Restaurants in 2017
Industry Structure Life Cycle Stage Mature Revenue Volatility Low
Capital Intensity Low
Industry Assistance None
Concentration Level Low
Regulation Level Medium
Technology Change Medium
Barriers to Entry Low
Industry Globalization Low
Competition Level High
Revenue
$245.0bn Profit
$13.0bn Wages
$63.6bn Businesses
205,519
Annual Growth 17-22
1.6% Annual Growth 12-17
3.1%
Key External Drivers Consumer spending Healthy eating index Consumer Confidence Index Households earning more than $100,000
Market Share McDonald’s Corp. 15.2%
Yum! Brands Inc. 8.4%
Subway 4.6%
p. 26
p. 5
FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 40
Provided to: University of Baltimore (2126964928) | 07 March 2018
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Key External Drivers Consumer spending Industry growth is sensitive to changes in consumer spending. For example, during the recession, the spike in unemployment led to declines in consumption levels, including the consumption of fast food. However, when personal consumption expenditure is high, consumers are more likely to spend money on eating out at industry restaurants. Consumer spending
is expected to increase in 2017, providing a potential opportunity for the industry.
Healthy eating index The healthy eating index is expected to increase in 2017, 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
Executive Summary
Over the past five years, the Fast Food Restaurants industry has struggled with consumer preferences moving away from unhealthy foods and a saturated food service landscape that has kept prices low. Compared with other operators in the hospitality sector, however, fast food restaurants performed relatively well in the early half of the five years to 2017 due to their low price points and the extra convenience they offer. While 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 consumers, steady consumer spending has softened revenue losses over the period. As a result, industry revenue is expected to grow an annualized 3.1% to $245.0 billion over the five years to 2017. In 2017, growth is expected to reach 1.1% amid tempered consumer confidence and heightened competition.
Eating habits have changed as people have become increasingly health conscious, demanding 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. Many major chains have also invested in their international operations as part of a long-term strategy to focus on emerging economies due to slow domestic growth. Fast food restaurants view China in particular as a market that has strong potential for growth and long-term profitability.
Industry growth is expected to slow over the next five years as the domestic economy continues to improve. However, competition is expected to remain high. 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. Further, consumers will continue to seek healthy and convenient meal options. Successful operators will therefore need to adapt to changing consumer preferences as the traditional concept of fast food evolves to include a wider variety of options. Plenty of opportunities remain for new fast food concepts and products; nevertheless, competition will keep prices low, cutting into overall growth over the next five years. As a result of these trends, industry revenue is expected to grow at an annualized rate of 1.6% over the five years to 2022 to $265.7 billion.
Industry Performance Executive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage
As consumers continue to seek healthy and convenient meal options, operators will need to adapt their offerings to be successful
Provided to: University of Baltimore (2126964928) | 07 March 2018
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Industry Performance
Key External Drivers continued
food industry. Despite any 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 to the industry.
Consumer Confidence Index Changes in consumer sentiment have a significant effect on household expenditure on discretionary items, including restaurant dining. During a recession, consumer demand for lower-priced value products from restaurants increases. The Consumer
Confidence Index is expected to increase in 2017.
Households earning more than $100,000 Many food service establishments draw customers from higher-income households. Comprising the largest amount of discretionary income, consumers from this income bracket are more likely to spend a larger portion of their income on food away from home. Due to this factor, growth in the number of households with incomes of more than $100,000 benefits the industry. The number of households earning more than $100,000 a year is expected to increase in 2017.
% 68.0
65.0
65.5
66.0
66.5
67.0
67.5
2208 10 12 14 16 18 20Year
Healthy eating index
SOURCE: WWW.IBISWORLD.COM
$ tr
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10
11
12
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2309 11 13 15 17 19 21Year
Consumer spending
Provided to: University of Baltimore (2126964928) | 07 March 2018
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Industry Performance
Current Performance
The Fast Food Restaurants industry has experienced steady growth over the five years to 2017, as convenient and affordable food remains popular with consumers. While the low price point of the industry’s products typically places fast food restaurants with a competitive advantage over other segments of the food services sector, rising consumer sentiment, which has spurred a greater amount of spending on discretionary items such as meals, has increased competition overall. Furthermore, with the rise of fast-casual concepts and independent chains rapidly gaining market share, major industry operators have had to alter their offerings to effectively compete. During 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 2017, industry revenue is expected to grow at an annualized rate of 3.1%. In 2017, revenue is expected to grow an additional 1.1% to total $245.0 billion.
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2309 11 13 15 17 19 21Year
Industry revenue
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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 annualized rate of 2.5%,
which has spurred consumers to flock to fast food restaurants throughout the period, as they provide convenient meals at competitive price points. However, as consumer spending has increased, consumers have also increased visits to full-service restaurants, tempering industry growth somewhat over the past five years.
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 renew 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 achieved varying degrees of success among consumers.
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
Provided to: University of Baltimore (2126964928) | 07 March 2018
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Industry Performance
Consumer trends drive new strategies continued
compared with traditional fast food restaurants, have been experiencing particularly strong growth over the past five years. For instance, fast-casual 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. Additionally, with Shake Shack’s initial public offering in January 2015, fast-casual concepts are growing at a rapid pace and increasing their scale to compete more effectively with the industry’s larger juggernauts. As a result, major players have introduced their own fast-casual concepts. For example, Yum Brands opened KFC Eleven in Louisville, KY, in 2013, offering products such as rice bowls and salads not traditionally associated with KFC. However, the store was unsuccessful and closed in 2015. Since then, the company announced that it will open over 300 locations of its upscale version of Taco Bell. Named Taco Bell Cantina, the company plans to position these restaurants in high density areas, providing no drive-thru service and adding value-added menu items, such as alcoholic beverages, to pique the interest of consumers. Similarly, McDonald’s has also opened experimental locations that use fast- casual concepts to gauge the success of both new brand concepts and the reintroduction of more traditional offerings to consumers. Consequently, the total number of industry establishments has increased at an annualized rate of 1.7% over the five years to 2017 to 294,633 locations.
However, even as consumer spending has improved, some consumers have also remained less willing to spend on meals outside of the home. Instead, a confluence of factors ranging from volatile food prices, increased competition both from within the industry and externally, as well as
changes in consumer preference, have all worked to weaken foot traffic and overall sales for many operators. According to reporting from The Atlantic, as the price of food has fallen to unprecedented lows, some consumers have increased overall spending on food to cook at home, or have sought to dine on a budget when eating out, eating away at demand for industry operators whose average check is slightly higher than that of their independent, fast casual and fast food competitors. According to the Bureau of Labor Statistics, the Consumer Price Index for food consumed away from home and food consumed at home is expected to increase at annualized rates of 2.7% and 1.7% between 2017 and 2007, respectively. This has compelled many consumers to seek out alternatives to eating out at restaurants too often and search for deals. This increase in price has also contributed to the rise in popularity of prepared food. Consequently, more consumers, particularly time-poor consumers, have shown a preference for other low-cost concepts, such as the increased offerings from operators in the Convenience Stores industry (IBISWorld report 44512) and the Supermarkets and Grocery Stores industry (44511). Lastly, startups such as Blue Apron and other meal delivery services that facilitate consumers preparing their own meals have also challenged industry demand, providing a wider array of gourmet options to consumers who still seek convenience, yet prefer not to eat away from home. These factors have significantly increased the competitive landscape for industry operators. As a result, many operators have chosen to slash prices further to stay ahead of the pack, while many have also experienced declines in guest counts during the latter half of the five-year period, which has tempered revenue growth somewhat.
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Industry Performance
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. In particular, China’s market has huge potential to drive long-term revenue and profit. Over the past five years, 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. The company recently announced plans to separate its China business into an independent entity by 2017. This move is expected to provide stability for the company’s already-saturated markets, while enabling the new business to compete more efficiently and grow its market share in a still-growing market.
Wages and profit The average industry profit margin has declined slightly over the past five years; nevertheless, fast food restaurants have typically 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. Therefore, high product turnover has been critical to the success of operators. Industry profitability is estimated to reach to 5.3% of total industry revenue in 2017.
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 that fast food operators are exposed to, and any reduction in wages
usually means higher operator profit margins. Over the five years to 2017, total industry wages are estimated to increase at an annualized rate of 4.1% to $63.6 billion, which is a faster rate increase than that of 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 cleaning tables and cooking food. Furthermore, recent gains by employees and unions alike to increase the minimum wage in parts of the United States have also placed pressure on industry operators to increase wages. As a result, wages as a share of revenue are expected to increase over the five years to 2017.
The long-term strategy of most major chains involves international expansion
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Industry Performance
Industry Outlook
The Fast Food Restaurants industry will continue to play an influential role in the US 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 and service, which will ultimately restrict the industry’s revenue and profit growth. As a result, industry revenue growth is expected to be subdued, increasing at an annualized rate of just 1.6% to $265.7 billion over the five years to 2022.
Fast food restaurants will benefit as the economy continues to improve over the next five years. The national unemployment rate is expected to remain steady; however, consumer confidence is expected to sour somewhat thanks to the global economic outlook, particularly regarding the economic turmoil in Europe coupled with still-depressed economic forecasts pertaining to China. These trends are expected to hamper demand somewhat for industry operators; nevertheless, consumer spending is estimated to increase at an annualized rate of 2.0% over the five years to 2022. Steady gains in consumer spending are expected to mitigate any
severe decreases in spending at industry establishments, as more money in consumers’ wallets are expected to encourage greater spending, particularly for time-poor consumers returning to work. 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.
Nevertheless, despite the industry’s continued growth, intense competition will likely persist throughout the next five years. Fierce price-based competition from fast food and fast casual restaurants will place increased emphasis on product development. Furthermore, should food prices remain at record lows, consumers may buck the long-term trend toward eating out more often to save money by eating at home. According to data collected by the US Department of Agriculture, consumers spent more on groceries than at restaurants over 2016; this has contributed to an overall slowdown in restaurant sales, according to the National Restaurant Association. As a result, industry operators will need to continually innovate their menus and service offerings to stay relevant.
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, which will likely be the largest source of revenue
Industry profitability is expected to remain relatively stagnant
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Industry Performance
Industry landscape Although the domestic economy is projected to grow at a healthy pace over the next five years, operators will continue to experience 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. Moreover, the number of establishments will increase as companies like Burger King pursue a franchise-only strategy, since 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 annualized rate of 1.4% to 220,058 enterprises in 2022.
In the next five years, employment is projected to grow at an annualized rate of 1.6% to 4.9 million workers by 2022. This number will be partly inflated by the increasing use of part-time employees to meet peak customer service periods. However, IBISWorld projects that the average industry wage will increase only marginally, rising at an annualized 1.5% during the five-year period.
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 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.
Lastly, industry operators are expected to further invest in renovations and technology to improve service as well as update out-of-date aesthetics that may not appeal to consumers. For example, McDonalds recently announced major technology initiatives, including the rollout of self-serve kiosks in all of its US locations, as well as delivery service and the development of a mobile ordering system that consumers will be able to take advantage of through the company’s mobile app. Most significantly, the company announced the introduction of table service in all of its US locations. While seemingly antithetical to the concept of quick service, the company believes that
more point-of-sale (POS) options, coupled with increased customer service, is expected to lower lead times and improve overall customer satisfaction. Similarly, fast casual concept Bareburger has used POS services developed for mobile devices that enable them to take orders from consumers already sitting down.
Over the next five years, industry profitability is expected to remain relatively stagnant, largely due to ongoing competition in the low-growth, saturated domestic market. Average industry profit is expected to remain steady in 2022, representing no change from 2017, when profit was 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.
New ways to expand continued
Companies offering customizable and healthy food will experience the strongest growth
Provided to: University of Baltimore (2126964928) | 07 March 2018
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Industry Performance The rate of new store openings has slowed
Operators are concentrating on international openings
There is heavy price-based competition
Life Cycle Stage
SOURCE: WWW.IBISWORLD.COM
20
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% G
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% Growth in number of establishments
-10 -5 0 5 10 15 20
Decline Shrinking economic importance
Quality Growth High growth in economic importance; weaker companies close down; developed technology and markets
Maturity Company consolidation; level of economic importance stable
Quantity Growth Many new companies; minor growth in economic importance; substantial technology change
Key Features of a Mature Industry
Revenue grows at same pace as economy Company numbers stabilize; M&A stage Established technology & processes Total market acceptance of product & brand Rationalization of low margin products & brands
Specialty Food Stores
Frozen Food Wholesaling Chain Restaurants
Dairy Wholesaling
Single Location Full-Service Restaurants Fast Food Restaurants
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Industry Performance
Industry Life Cycle The Fast Food Restaurants industry is firmly entrenched in the mature stage of its life cycle. Over the 10 years to 2022, industry value added, which measures an industry’s contribution to US GDP, is forecast to grow at an annualized rate of 2.6%, compared with estimated annualized GDP growth of 2.0% during the same period. Thus, the industry has exhibited slow and steady long-term growth, at a slightly faster 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 annualized rate of 1.4% over the 10 years to 2022.
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 McDonald’s 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 several new levels. Many small fast food operators have used 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
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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.
Products & Markets Supply 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 and services segmentation (2017)
Total $245.0bn
42% Burgers
8% Mexican
14% Sandwiches
7% Other
10% Asian
10% Chicken
9% Pizza and Pasta
SOURCE: WWW.IBISWORLD.COM
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Products & Markets
Products & Services continued
Burgers Burgers 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 have 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 toward 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.
Chicken Chicken 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 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 food There 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, does not 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 many 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.
Mexican Staples of Mexican cuisine include corn, beans and chili peppers. Mexican restaurants are known for their intense and varied flavors and variety of spices. Mexican cuisine has had a large influence
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Products & Markets
Demand Determinants
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 trends The 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. Bureau of Labor Statistics household expenditure data indicates that households with incomes of more than $50,000 account for about 63.0% of the total personal expenditure on food eaten outside of the home. Of this group, households in the highest income quintile provide about 40.0% of
Products & Services continued
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 pasta Pizza 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.
Other Establishments outside of the aforementioned product segments comprise a range of different food options, performing with vary degrees of success over the past five years. Restaurants in this product segment include fast casual concepts, traditional quick service restaurants, as well as establishments serving but one item that may have local or regional popularity, but does not translate well to a national audience. Seafood concepts, for example, are prominent in coastal regions where fresh seafood is amply available, and where seafood factors largely into consumers’ daily diets. Fast casual concepts such as those serving highly specific offerings, such as salad, are also included in the other category, and have performed well over the five-year period. Lastly, quick-service concepts that do not fall under any specific category, such as those that offer a range of sandwiches and other items, are also included in this segment.
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 17
Products & Markets
Major Markets
The major markets for the Fast Food Restaurants industry can be segmented based on several 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 (about $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
Demand Determinants continued
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 consciousness Rising 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 a result, 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 that expand their menu choices to include a range of healthy meal options among other more indulgent food items.
Convenience Convenience and value for one’s money and time are other important demand 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 (2017)
Total $245.0bn
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
SOURCE: WWW.IBISWORLD.COM
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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, some 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 Markets continued
consumers of fast food in the United States are lower-middle income households.
Households in the lowest income quintile, or those households with an annual income of less than $21,432 in 2014 (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 permit 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 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 2022.
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 19
Products & Markets
Business Locations 2017
MO 1.9
West
West
West
Rocky Mountains Plains
Southwest
Southeast
New England
VT 0.2
MA 2.2
RI 0.4
NJ 3.0
DE 0.3
NH 0.5
CT 1.0
MD 2.2
DC 0.4
1
5
3
7
2
6
4
8 9
Additional States (as marked on map)
AZ 1.9
CA 12.0
NV 1.0
OR 1.3
WA 2.2
MT 0.3
NE 0.6
MN 1.5
IA 0.9
OH 4.1 VA
2.8
FL 5.3
KS 0.9
CO 1.7
UT 0.9
ID 0.5
TX 7.9
OK 1.2
NC 3.2
AK 0.2
WY 0.2
TN 2.1
KY 1.4
GA 3.2
IL 4.2
ME 0.4
ND 0.2
WI 1.6 MI
3.0 PA4.0
WV 0.6
SD 0.2
NM 0.6
AR 0.9
MS 0.9
AL 1.5
SC 1.6
LA 1.4
HI 0.6
IN 2.0
NY 7.1 5
6 7
8
3 21
4
9
SOURCE: WWW.IBISWORLD.COM
Mid- Atlantic
Establishments (%)
Less than 3% 3% to less than 10% 10% to less than 20% 20% or more
Great Lakes
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 20
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 (24.9% of industry establishments) has the highest concentration of franchised establishments and a higher proportion of employment and revenue. There are also large proportions of establishments in the West (17.3%) and Mid-Atlantic (17.0%) regions, and the smallest proportion in the Rocky Mountains (3.6%) region. California (12.0%), 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.
%
30
0
10
20
So ut
hw es
t
W es
t
G re
at L
ak es
M id
-A tla
nt ic
N ew
E ng
la nd
Pl ai
ns
Ro ck
y M
ou nt
ai ns
So ut
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t
Establishments Population
Distribution of establishments vs. population
SOURCE: WWW.IBISWORLD.COM
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 21
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.
Profit Industry 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 McDonald’s, profit margins at company-operated restaurants can be as high as 15.0% to 20.0% due to the large economies of scale the organization has access to. However, the profit margin of a small enterprise
Key Success Factors Product is sold at high profile outlets Having high-profile locations for stores, with easy access, parking and drive- through services increases convenience for customers.
Business expertise of operators Business expertise is required as this industry has high turnover but low margins; thus, losses are easily made.
Effective cost controls Cost controls are important in this low-margin industry, particularly related to minimizing food waste.
Having a clear market position Clear market positioning gives operators a competitive advantage over competitors.
Ability to franchise operations Franchising both in the United States and overseas is now a significant component of this industry and can provide necessary support to owners.
Access to multiskilled and flexible workforce Industry operators need access to a good supply of skilled, casual workers to meet peak service demand periods.
Market Share Concentration
The top four players in the Fast Food Restaurants industry are expected to account for 31.6% of available market share, giving this industry a low 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 decreased. As many of the older stalwarts lose ground to up-and-coming concepts, such as smaller chains like Chick-fil-A, as well as fast-casual concepts such as Shake Shack, are gaining ground,
as sales have faltered for larger competitors. 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 2012 and 2017, the numbers of establishments and enterprises have grown slowly, causing a marginal increase in industry concentration. Industry concentration is expected to continue increasing over the five years to 2022.
Competitive Landscape Market Share Concentration | Key Success Factors | Cost Structure Benchmarks Basis of Competition | Barriers to Entry | Industry Globalization
Level Concentration in this industry is Low
IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:
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Competitive Landscape
Cost Structure Benchmarks continued
that operates only one restaurant will be much lower. IBISWorld estimates that in 2017, the average fast food restaurant will obtain a profit margin of 5.3% of revenue, representing a slight decrease from 2012. This explains the high turnover 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.
Purchases Food 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 must 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 2017, purchases will account for an estimated 36.4% of an average operator’s revenue. This is up only slightly from 2012 as higher global demand for food has forced prices of some inputs higher, particularly fresh produce, over the early half of the five-year period. Prices have since stabilized amid consistent drops in the agricultural price index.
Wages Operators 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,
Sector vs. Industry Costs
n Profi t n Wages n Purchases n Depreciation n Marketing n Rent & Utilities n Other
Average Costs of all Industries in sector (2017)
Industry Costs (2017)
0
20
40
60
Pe rc
en ta
ge o
f r ev
en ue
80
100
SOURCE: WWW.IBISWORLD.COM
9.3 5.3
13.7
12.9 2.8 2.9
36.4
26.0
15.5
7.5 1.9 4.4
34.7
25.1
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Competitive Landscape
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 competition Fast 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 experience 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.
Cost Structure Benchmarks continued
labor costs have risen slightly as a percentage of total revenue due to wage disputes and higher minimum age benchmarks negating other productivity gains by the industry’s largest employers. These costs include wages and benefits, such as health, workers’ compensation and unemployment insurance. Growing labor intensity, however, typically brings down menu prices and industry profitability. Industry wage costs account for an estimated 26.0% of an average operator’s revenue in 2017.
Rent and utilities Rent 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 costs Operators 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. Franchise agreements typically last for about 20 years, and require potential franchisees to pay an upfront franchise fee (usually around $50,000), possess upward to $1.0 million in liquid capital, on top of investment funding to be approved. Franchisee’s also generally pay an annual royalty fee, which is typically pegged to a fixed percentage of total sales, averaging roughly 10.0% to 12.0%. Franchise royalties are expected to comprise a larger share of revenue moving forward. To mitigate risk from shifting consumer trends and to reduce the every-day administrative and operative responsibilities of managing an industry establishment, many larger players have been moving toward a nearly 100.0% franchise-only model. For example, over the long-term, McDonald’s is working toward becoming 95.0% franchised company; it currently franchises about 80.0% of its stores worldwide. 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
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Competitive Landscape
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 less than 40.0% of the available market share over the year. 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.
Basis of Competition continued
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 competition External 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 less costly food options, putting pressure on fast food restaurants to lower prices.
Barriers to Entry checklist
Competition High Concentration Low Life Cycle Stage Mature Capital Intensity Low Technology Change Medium Regulation & Policy Medium Industry Assistance None
SOURCE: WWW.IBISWORLD.COM
Level & Trend Barriers to Entry in this industry are Low and Increasing
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Competitive Landscape
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 toward 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 McDonald’s 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 United States.
There are also many 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, Wagamama,
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. International chains typically target affluent or middle-class customers in urban markets such as New York, Chicago, Washington, DC 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 United States, 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 the international market, particularly in the regions of Asia and South America.
Level & Trend Globalization in this industry is Low and the trend is Steady
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 26
Player Performance McDonald’s Corporation, 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 of 1954. By 1957, McDonald’s had 14 stores and opened its first international store in Canada just 10 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. McDonald’s currently employs more than 420,000 staff and earned $24.6 billion globally in 2016.
McDonald’s business model is primarily focused on the franchising of restaurants. Of the company’s 36,000 restaurants in more than 119 countries at the end of 2015 (latest available data), more than 82.4% were operated by franchisees (with the remainder being company-operated stores). By 2018, the company plans to have 90.0% of its restaurants operated by franchisees as part of a larger restructuring that the company states will give restaurants more opportunities to experiment and better integrate themselves within their core market. According to reporting from Bloomberg, however, this has resulted in the consolidation of franchises, in which larger operators are expected to control a larger share of the company’s franchised locations to speed up the process of renovations and implementation of new
Major Companies McDonald’s Corp. | Yum! Brands Inc. Subway | Other Companies
71.8% Other
McDonald’s Corp. 15.2%
Yum! Brands Inc. 8.4%
Subway 4.6% SOURCE: WWW.IBISWORLD.COM
Major players (Market share)
McDonald’s Corp. Market share: 15.2%
McDonald’s Corporation (US industry-relevant segment) - fi nancial performance*
Year Sales
($ million) (% change) Revenue
($ million) (% change)
Operating Income
($ million) (% change)
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 35,447.0 -1.1 8,651.0 -2.3 3,522.5 -6.8
2015 35,837.0 1.1 8,559.0 -1.1 3,612.0 2.5
2016 36,389.0 1.5 8,253.0 -3.6 3,769.0 4.3
2017 37,243.0 1.3 8,187.8 -0.8 3,848.0 2.1
SOURCE: ANNUAL REPORT AND IBISWORLD
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 27
Major Companies
Player Performance continued
sales strategies. 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, McDonald’s 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. Additionally, the company announced that it is moving its headquarters and major operations from Oak Brook, IL to Chicago.
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 lower sales, McDonalds has moved to test new menu offerings in an attempt to phase out its “Dollar Menu & More,” which offered items ranging from $1.00 to $5.00. The company recently debuted its “McPick 2” offering, in which consumers can pick two items off a preset menu for $2.00. 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 and offering all-day breakfast. The breakfast segment has become a battleground in the Fast Food Restaurants industry over the past five years, as it is the only time segment that is currently growing. In response, the company has introduced all-day breakfast offerings and has since expanded its all-day breakfast menu over
2016. Lastly, while the company has introduced high-end menu options such as those included in the Signature Crafted sandwich line, the company has also engaged in aggressive price-cutting measures on items such as sodas, as the company’s major rivals furthered the company’s dependency on loss leaders by pressuring prices downward.
Financial performance Over the five years to 2017, McDonald’s US revenue is expected to decrease at an annualized rate of 1.5% to $8.2 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 include revenue earned by company-owned stores and franchised stores. Based on this measure, McDonalds’ market share of the Fast Food Restaurants industry in the United States is estimated to be 15.2% in 2017. US system-wide sales are expected to grow an annualized 0.9% over the five years to 2017 to $37.2 billion.
The addition of all-day breakfast has offered more options to consumers and increased sales and earnings over the latter half of the period, and has been further aided by a menu expansion that increased the amount of breakfast items offered all day and introduced new, higher-end sandwiches showcasing higher quality proteins and products. Sales ticked upward in response to the company’s aggressive push toward all-day breakfast offerings, increasing its market share in a highly coveted segment for operators within this industry. However, the company failed to increase foot traffic over 2015 and 2016, with comparable guest counts in the United States falling 3.0% and 2.1%, respectively, indicating that already-loyal customers are solely responsible for buoying the company’s recent good fortune. While the company has made noteworthy headway over 2017
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Major Companies
Player Performance Yum! Brands Inc. (Yum) is a fast food conglomerate based in Louisville, KY. 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
Player Performance continued
regarding higher guest traffic, it remains to be seen whether this turnaround can sustain growth for the company. Nevertheless, the company’s continued expansion of its all-day breakfast menu to include other sandwiches, as well as the popular McGriddle, as well as major structural changes to its stores and overall customer experience, has mitigated an overall slowdown in demand.
To combat the company’s sluggish growth over the early half of the five-year period, McDonald’s has made aggressive changes to the company’s menu, structure and overall strategy in an effort to remedy these service issues. These changes have bolstered overall sales for the company over the latter half of the five-year period. For example, as an estimated 70.0% of sales are made to individuals ordering within their vehicle, the company has introduced a new method of taking orders to minimize incorrect tickets from the drive-thru. Over the next year, the company also plans to introduce mobile
ordering solutions and delivery, in which consumers will be able to order via a smartphone or other mobile device, according to Bloomberg. Additionally, the company’s refranchising strategy has placed significant emphasis on localized management, coupled with community- based emphasis on demand to better serve customers, as well as major renovations and the implantation of new lead-time reducing technology in the form of increased ordering solutions. Recently, the company announced that it will be offering table service in its restaurants for the first time throughout the United States. To complement this major change, McDonald’s also announced the introduction of self-serve kiosks in an effort to reduce lead time, as well as offer a range of point of sale options for consumers who seek convenience and customization options. These changes have been positively received in overseas markets, where the majority of these service changes were initially implemented.
Yum! Brands Inc. Market share: 8.4%
Yum! Brands Inc. (US industry-relevant segment) - fi nancial performance*
Year Sales
($ million) (% change) Revenue
($ million) (% change)
Operating Income
($ million) (% change)
2012 23,583 5.1 3,352 -11.5 3,847 42.0
2013 21,466 -9.0 2,953 -11.9 3,622 -5.9
2014 21,178 -1.3 3,006 1.8 3,071 -15.2
2015 20,345 -3.9 2,844 -5.4 3,260 6.2
2016 20,569 1.1 2,628 -7.6 3,301 1.3
2017 20,964 1.9 2,608 -0.8 3,271 -0.9
SOURCE: ANNUAL REPORT AND IBISWORLD
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Major Companies
Player Performance continued
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 2016, Yum employed about 523,000 staff and earned $13.1 billion in revenue globally. The company has more than 43,000 company-owned, franchised and licensed restaurants in more than 130 countries making 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 about 80.0% of the company’s stores operating under franchise or license agreements. The company intends to increase the amount of stores operating under franchise or license agreements to 96.0% by 2017. The franchise model contributes to Yum’s revenue through annual royalties and franchise fees. Yum’s strategy involves the opening of collocated, multibranded restaurants in high-traffic areas. It is not uncommon to find a KFC, Pizza Hut or Taco Bell located next to each other within the same building. Over the past decade, Yum has moved aggressively to open new restaurants in 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.
In October 2015, the company announced plans to separate its China- based business into a separate, independent entity, which was completed in 2017. Beleaguered by several missteps in the industry’s largest market, including a string of food safety mishaps, as well as still-increasing competition, the company will turn its China-based business into a licensee of the company, possessing the rights to the company’s concepts within China by paying Yum a portion of sales to retain rights to the company’s concepts.
This move is expected to provide stability for the company’s saturated markets, while enabling the new business to compete more efficiently and grow its market share in a still-growing market.
Financial performance Over the five years to 2017, Yum’s US revenue is expected to decline at an annualized rate of 0.5% 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 2.3% to $21.0 billion over the five years to 2017. Yum has experienced increasing difficulty with increasing sales, as consumers have shifted their preferences toward fast-casual food that offers higher quality at a similar price point. In response, the company has begun experimenting with new menu offerings through its concepts. One such example is Taco Bell’s “Dollar Cravings Menu,” which contains about a dozen items that cost just $1.00. While this new menu contains some previously existing items, new concepts have also been introduced to pique consumer interest. The menu functions similarly to other loss-leader menus, relying on add-on items, such as fountain sodas and other drinks, in which operators may profit by more than 50.0% on these items. The company is anticipated to continue revamping aspects about its concepts over the next five years to meet the demands of shifting consumer
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Major Companies
Player Performance Subway is a privately owned fast food chain that primarily sells sub sandwiches. The chain is owned by the holding company Doctor’s Associates Inc. All stores are franchised and the company only employs a small head office staff. Nonetheless, it has more than 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 16 individual shops on its own. Currently, Subway has more than 40,000 restaurants operating in 102 different countries.
Over the past decade, Subway significantly boosted its marketing campaigns and has been at the forefront
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 that touted Subway sandwiches as a key aspect to consumers’ weight-loss success. These 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 several variations of this theme in different countries), a campaign that coincided with the recession. The promotion has proven to be successful in attracting new
Player Performance continued
preferences. As a primary example, the company is expected to open over 300 new upscale Taco Bell locations over the next five years. Falling under the company’s experimental Taco Bell Cantina brand, the company expects to
build these locations without traditional drive-thru options, and include alcoholic beverages to their menu offerings. The locations of these new establishments are expected to be in high-density areas to maximize foot traffic.
Subway Market share: 4.6%
Subway (US industry-relevant segment) - fi nancial performance*
Year Sales
($ million) (% change) Operating Income
($ million) (% change)
2011 11,400 7.5 1,186 5.5
2012 12,100 6.1 1,271 7.2
2013 12,700 5.0 1,321 4.0
2014 11,900 -6.3 1,250 -5.4
2015 11,486 -3.5 1,218 -2.6
2016 11,301 -1.6 1,187 -2.5
SOURCE: IBISWORLD
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 31
Major Companies
Other Companies The Wendy’s Co. Estimated market share: 3.8% The Wendy’s Co. is a Dublin, OH-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 more than 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 (85.0%) 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 Pasta Connection chains and owns an 18.5% stake in the Arby’s
Player Performance continued
customers and boosting sales; however, the company recently increased prices of its footlong sandwiches by a dollar, amid sluggish sales during the latter half of the five-year period.
However, though the company has suggested that it plans to continue rolling out new locations worldwide, particularly in Russia and the United Arab Emirates, sales in the United States stagnated in 2014, dropping an estimated 6.3% over the year. Facing increasing competition from and lackluster demand for its menu offerings and overall presentation compared with its fast-casual competitors, the company has slowed its expansion somewhat in the United States, while increasing its focus on international markets to spur further growth. Additionally, in an attempt to win back increasingly health-conscious consumers and rearticulate the company’s commitment to fresh, quality ingredients, the company announced that it will remove all artificial colors, flavors and preservatives from its menu offerings by the end of 2017.
Financial performance Subway is a private company that does not publicly disclose its financial results. However, based on sales per store, IBISWorld estimates that Subway’s US system-wide revenue will decrease to $11.2 billion in 2017, down from $12.1 billion in 2012, representing an annualized decline of 1.5% during the
five-year period. The company has traditionally grown through its flexible franchise model and surpassed McDonald’s as the number-one fast food restaurant in the United States in terms of store numbers. However, amid a string of scandals and diminished interest in the company’s offerings when compared with newer, more nimble concepts, such as Jersey Mike’s subs, the company has experienced a decline in sales during the latter half of the five-year period. While the company originally benefited and pioneered marketing to appeal to the societal shift toward healthy eating and increased media coverage about obesity, diabetes and heart disease, this positive influence has waned.
As marketing and competition for the health-conscious consumer intensifies along with the simultaneous rise in fast casual dining, Subway’s reputation as a source of fresh food has become stale in the eyes of many consumers. Sleeker layouts, shrewd marketing touting locally sourced ingredients and fast turnover that precludes ingredients like fresh vegetables from sitting too long has enabled competitors, such as Chipotle and Five Guys, to gain more market share from long-standing stalwarts, such as Subway, in this otherwise saturated industry. To more effectively compete against these up-and-coming chains, Subway’s presentation and approach to consumers is expected to undergo serious changes over the next five years.
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Major Companies
Other Companies continued
fast food roast beef sandwich chain. In 2016, Wendy’s earned $1.4 billion in revenue globally and employed about 12,100 workers, of which 10,900 work on an hourly basis.
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 several salads but has not developed a comprehensive range of healthy options such as competitors like McDonald’s. 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 Co. The chain has also recently undertaken an initiative to sell many its company-owned restaurants to franchises. Since the announcement of this initiative, an aggregate 418 stores have been sold over 2013 and 2014. IBISWorld 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 1.6% to $9.3 billion over the five years to 2017. Sales increased during the latter half of the five-year period, which was primarily driven by consumers spending more per transaction due to higher prices on certain menu items. However, the company has had to contend with slow growth in system-wide sales and a reduction in the number of customers visiting its stores during the early half of the five-year period. Ultimately, strategic price increases on the menu and a change in sales mix toward 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 some franchises out of business. Nevertheless, a recent foray into the value-conscious market, with its “4 for $4.00” menu, to more effectively compete with the likes of Burger King and McDonald’s, which both have similar menu offerings.
Burger King Corp. Estimated market share: 3.4% Burger King Corp. is a Miami-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 15,003 stores operating under franchise agreements. About 48.0% of the company’s restaurants are based in the United States. In 2015, Burger King earned $2.1 billion globally and employed about 2,420 staff in its company restaurants, support centers and field operations (latest available data).
Burger King has been through several 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, with the company renamed Burger King Worldwide.
When it was taken private by 3G Capital in 2010, Burger King’s strategy
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Major Companies
Other Companies continued
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 $8.4 billion in 2016. 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 Whopper Jr., as well as its recently introduced “5 for $4.00” menu. Furthermore, to embrace niche menu offerings, the company also introduced hot dogs to its menu, making it the largest restaurant chain to offer the product.
As of December 2014, Burger King acquired Ontario-based Tim Hortons, Canada’s largest brand of quick service restaurants. Subsequently, both chains were taken off the stock market and combined under Restaurant Brands International, a holding company that is also based in Canada and majority-owned by 3G Capital. While updated company financials are not currently available, the acquisition and subsequent combination of companies under Restaurant Brands International is expected to significantly boost the company’s market share in the coming years. Most recently, the company also agreed to acquire Popeyes Louisiana Kitchen, Inc. According to the new company, the combined companies comprise over 22,500 restaurants in about 100 countries, employing 450,000 individuals worldwide. Moving forward, the company’s business strategy aims to expand internationally, while defending its favorable position in Canada and aggressively competing in the saturated US market. The company plans on doing
this through significant menu overhauls, introducing premium products and extending its brand reach in urban areas through nontraditional formats. Moving forward, the company’s business strategy aims to expand internationally, while defending its favorable position in Canada and aggressively competing in the saturated US market. The company plans on doing this through significant menu overhauls, introducing premium products and extending its brand reach in urban areas through nontraditional formats.
Chick-fil-A Estimated market share: 3.3% Chick-fil-A is a fast food restaurant chain that is best known for its boneless chicken breast sandwich. The company was founded in 1946 and headquartered in College Park, GA. 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, New England and Southern California. The company is privately held and does not disclose financial results; however, sales are expected to equal $8.2 billion in 2017.
Domino’s Pizza Inc. Estimated market share: 1.7% Domino’s Pizza Inc. has its roots in Ypsilanti, MI, where 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 more than 1.5 million pizzas globally each day.
Domino’s sales are primarily generated through its pizza delivery
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Major Companies
Other Companies continued
business and delivering its food in a timely manner. As a result, the company focuses on securing its position within the Fast Food Restaurants 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 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 its menu in 2012.
Domino’s is estimated to earn $4.3 billion in US system-wide sales in 2017. 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. The company accounts for 28.0% of the total market share for pizza deliveries in the United States. Domino’s sophisticated web- based order and delivery system has also helped the company’s bottom line as it now derives more than 50.0% of its sales from digital orders.
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 35
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 2017, it will spend an estimated $0.11 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 Conditions Capital Intensity | Technology & Systems | Revenue Volatility Regulation & Policy | Industry Assistance
Tools of the Trade: Growth Strategies for Success
SOURCE: WWW.IBISWORLD.COM
La bo
r I nt
en si
ve Capital 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.
Specialty Food Stores
Frozen Food Wholesaling
Chain 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.COM Dotted line shows a high level of capital intensity
Capital units per labor unit
Fast Food Restaurants
Accommodation and Food Services
Economy
Level The level of capital intensity is Low
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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 service The 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 driven industry players to reach wholesalers and suppliers online. This has led to 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 systems Most operators now have point-of-sale systems in stores to speed up service,
which leads to more 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 facilitate 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, enabling the ordering of coffees and food items via mobile applications and online.
Labor scheduling It 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 lets managers make adjustments to staffing levels.
Social media Technology has also aided fast food restaurants with marketing. Social media such as Facebook, Twitter and Instagram enables savvy operators to connect directly with customers and tailor their brand’s message to target fragmented consumer segments.
Capital Intensity continued
helping chefs 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 enable 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
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 37
Operating Conditions
Revenue Volatility The Fast Food Restaurants industry has a low-to-moderate level of revenue volatility. Over the five-year period, 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 toward 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.
SOURCE: WWW.IBISWORLD.COM
Volatility vs Growth
Re ve
nu e
vo la
til ity
* ( %
)
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.
Fast Food Restaurants
Level The level of Volatility is Low
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 38
Operating Conditions
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 standards The 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 some 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 relations The 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 United States are entitled to be paid no less than the statutory minimum wage, which as of 2015 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 operators 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 bans Smoking 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 workplaces in many states and some local
Level & Trend The level of Regulation is Medium and the trend is Increasing
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 39
Operating Conditions
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 & Policy continued
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 laws A 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 $500 before opening for business.
Level & Trend The level of Industry Assistance is None and the trend is Steady
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 40
Key Statistics Revenue
($m)
Industry Value Added
($m) Establish-
ments Enterprises Employment Exports Imports Wages ($m)
Domestic Demand
Consumer spending
($b) 2008 194,128.1 62,355.4 256,609 179,945 3,710,452 -- -- 49,116.8 N/A 10,007.2 2009 193,420.5 64,271.2 256,172 179,297 3,615,943 -- -- 49,141.9 N/A 9,847.0 2010 198,320.5 66,402.6 259,363 181,835 3,553,354 -- -- 49,922.6 N/A 10,036.3 2011 203,941.3 66,408.9 262,480 184,316 3,622,440 -- -- 50,650.7 N/A 10,263.5 2012 209,949.6 69,535.9 271,200 188,901 3,750,097 -- -- 51,976.9 N/A 10,413.2 2013 214,917.1 71,306.0 276,380 194,378 3,936,950 -- -- 54,238.4 N/A 10,565.4 2014 221,054.1 74,376.5 280,934 197,704 4,060,455 -- -- 55,980.5 N/A 10,868.9 2015 236,550.2 79,421.2 288,097 201,309 4,215,020 -- -- 60,245.8 N/A 11,214.7 2016 242,216.6 81,526.3 294,240 203,953 4,364,525 -- -- 61,948.9 N/A 11,522.2 2017 244,962.2 83,579.2 294,633 205,519 4,485,229 -- -- 63,568.7 N/A 11,806.4 2018 248,671.3 84,632.9 299,134 209,230 4,558,014 -- -- 64,428.4 N/A 12,097.6 2019 252,854.0 86,116.3 302,289 211,926 4,631,148 -- -- 65,451.7 N/A 12,363.8 2020 256,444.9 86,981.0 305,282 214,542 4,696,611 -- -- 66,143.4 N/A 12,611.1 2021 260,617.1 88,312.8 308,697 217,409 4,772,623 -- -- 67,124.2 N/A 12,825.5 2022 265,715.8 90,093.8 312,306 220,058 4,858,122 -- -- 68,480.2 N/A 13,030.7 Sector Rank 2/37 3/37 2/37 4/37 2/37 N/A N/A 3/37 N/A N/A Economy Rank 39/1918 34/1587 36/1918 49/1918 6/1918 N/A N/A 24/1918 N/A N/A
IVA/Revenue (%)
Imports/ Demand
(%)
Exports/ Revenue
(%)
Revenue per Employee
($’000) Wages/Revenue
(%) Employees
per Est. Average Wage
($)
Share of the Economy
(%) 2008 32.12 N/A N/A 52.32 25.30 14.46 13,237.42 0.42 2009 33.23 N/A N/A 53.49 25.41 14.12 13,590.34 0.45 2010 33.48 N/A N/A 55.81 25.17 13.70 14,049.43 0.45 2011 32.56 N/A N/A 56.30 24.84 13.80 13,982.48 0.44 2012 33.12 N/A N/A 55.99 24.76 13.83 13,860.15 0.45 2013 33.18 N/A N/A 54.59 25.24 14.24 13,776.76 0.46 2014 33.65 N/A N/A 54.44 25.32 14.45 13,786.76 0.47 2015 33.57 N/A N/A 56.12 25.47 14.63 14,293.12 0.48 2016 33.66 N/A N/A 55.50 25.58 14.83 14,193.73 0.49 2017 34.12 N/A N/A 54.62 25.95 15.22 14,172.90 0.49 2018 34.03 N/A N/A 54.56 25.91 15.24 14,135.19 0.49 2019 34.06 N/A N/A 54.60 25.89 15.32 14,132.93 0.48 2020 33.92 N/A N/A 54.60 25.79 15.38 14,083.22 0.48 2021 33.89 N/A N/A 54.61 25.76 15.46 14,064.43 0.48 2022 33.91 N/A N/A 54.70 25.77 15.56 14,096.02 0.48 Sector Rank 27/37 N/A N/A 26/37 19/37 12/37 28/37 3/37 Economy Rank 711/1587 N/A N/A 1799/1918 639/1918 830/1918 1837/1918 34/1587
Figures are in inflation-adjusted 2017 dollars. Rank refers to 2017 data.
Revenue (%)
Industry Value Added
(%)
Establish- ments
(%) Enterprises
(%) Employment
(%) Exports
(%) Imports
(%) Wages
(%)
Domestic Demand
(%)
Consumer spending
(%) 2009 -0.4 3.1 -0.2 -0.4 -2.5 N/A N/A 0.1 N/A -1.6 2010 2.5 3.3 1.2 1.4 -1.7 N/A N/A 1.6 N/A 1.9 2011 2.8 0.0 1.2 1.4 1.9 N/A N/A 1.5 N/A 2.3 2012 2.9 4.7 3.3 2.5 3.5 N/A N/A 2.6 N/A 1.5 2013 2.4 2.5 1.9 2.9 5.0 N/A N/A 4.4 N/A 1.5 2014 2.9 4.3 1.6 1.7 3.1 N/A N/A 3.2 N/A 2.9 2015 7.0 6.8 2.5 1.8 3.8 N/A N/A 7.6 N/A 3.2 2016 2.4 2.7 2.1 1.3 3.5 N/A N/A 2.8 N/A 2.7 2017 1.1 2.5 0.1 0.8 2.8 N/A N/A 2.6 N/A 2.5 2018 1.5 1.3 1.5 1.8 1.6 N/A N/A 1.4 N/A 2.5 2019 1.7 1.8 1.1 1.3 1.6 N/A N/A 1.6 N/A 2.2 2020 1.4 1.0 1.0 1.2 1.4 N/A N/A 1.1 N/A 2.0 2021 1.6 1.5 1.1 1.3 1.6 N/A N/A 1.5 N/A 1.7 2022 2.0 2.0 1.2 1.2 1.8 N/A N/A 2.0 N/A 1.6 Sector Rank 28/37 14/37 35/37 31/37 11/37 N/A N/A 11/37 N/A N/A Economy Rank 1355/1918 709/1587 1371/1918 1113/1918 567/1918 N/A N/A 739/1918 N/A N/A
Annual Change
Key Ratios
Industry Data
SOURCE: WWW.IBISWORLD.COM
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WWW.IBISWORLD.COM Fast Food Restaurants in the US October 2017 41
Apr 2015 - Mar 2016 by company revenue Apr 2012 - Apr 2013 - Apr 2014 - Apr 2015 - Small Medium Large Mar 2013 Mar 2014 Mar 2015 Mar 2016 (<$10m) ($10-50m) (>$50m)
Liquidity Ratios
Current Ratio 0.8 0.8 0.8 0.8 0.9 0.8 0.7 Quick Ratio 0.5 0.5 0.6 0.6 0.6 0.6 0.4 Sales / Receivables (Trade Receivables Turnover) n/c n/c n/c n/c n/c n/c 243.4
Days’ Receivables 0.4 0.4 0.4 n/a n/a n/a 1.5 Cost of Sales / Inventory (Inventory Turnover) 42.9 44.0 43.3 43.2 43.9 42.8 40.6
Days’ Inventory 8.5 8.3 8.4 8.4 8.3 8.5 9.0 Cost of Sales / Payables (Payables Turnover) 27.5 28.1 27.2 28.6 41.6 20.3 13.7
Days’ Payables 13.3 13.0 13.4 12.8 8.8 18.0 26.6 Sales / Working Capital -82.8 -75.5 -86.0 -98.5 -202.5 -62.9 -30.5
Coverage Ratios
Earnings Before Interest & Taxes (EBIT) / Interest 4.5 4.9 5.0 6.0 5.9 7.2 4.7
Net Profit + Dep., Depletion, Amort. / Current Maturities LT Debt 2.4 2.5 2.7 2.9 2.5 2.5 3.0
Leverage Ratios
Fixed Assets / Net Worth 4.4 4.7 4.2 4.2 3.0 6.8 -11.5 Debt / Net Worth 6.7 7.9 6.6 6.7 4.8 11.5 -15.6 Tangible Net Worth -2.0 -1.6 -0.3 1.8 2.4 3.8 -6.9
Operating Ratios
Profit before Taxes / Net Worth, % 47.8 45.9 47.5 57.2 60.6 52.2 40.5 Profit before Taxes / Total Assets, % 11.2 11.5 11.7 14.1 16.5 11.9 8.8 Sales / Net Fixed Assets 7.8 8.0 8.4 8.3 10.1 6.9 4.5 Sales / Total Assets (Asset Turnover) 3.4 3.3 3.4 3.3 3.8 2.9 2.1
Cash Flow & Debt Service Ratios (% of sales)
Cash from Trading 65.4 66.1 66.2 67.2 66.5 68.5 69.2 Cash after Operations 7.6 7.8 7.9 8.5 8.4 8.5 9.8 Net Cash after Operations 7.8 8.0 8.0 8.8 8.6 8.9 9.9 Cash after Debt Amortization 2.4 2.1 2.1 2.5 2.5 2.6 3.1 Debt Service P&I Coverage 2.7 2.6 2.8 3.1 3.4 2.7 2.9 Interest Coverage (Operating Cash) 7.3 8.6 8.9 10.7 9.8 12.9 9.5
Assets, %
Cash & Equivalents 17.2 17.7 18.9 19.2 20.8 16.9 11.1 Trade Receivables (net) 1.7 1.6 1.5 1.6 1.5 1.6 2.6 Inventory 5.5 5.0 5.2 4.8 5.3 3.3 3.3 All Other Current Assets 2.6 2.2 2.2 2.1 2.1 1.9 2.4 Total Current Assets 27.0 26.5 27.8 27.7 29.7 23.7 19.4 Fixed Assets (net) 49.0 47.7 46.7 46.0 45.0 47.8 50.4 Intangibles (net) 13.5 15.7 15.4 16.5 14.4 21.1 23.2 All Other Non-Current Assets 10.5 10.1 10.2 9.9 10.9 7.5 7.0 Total Assets 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Total Assets ($m) 45,996.0 48,475.7 55,786.9 63,571.0 4,761.4 11,746.1 47,063.5
Liabilities, %
Notes Payable-Short Term 4.6 3.9 4.4 4.7 5.8 2.4 1.4 Current Maturities L/T/D 4.8 5.4 4.9 5.1 4.5 7.5 4.7 Trade Payables 8.9 8.5 9.3 8.0 8.2 7.6 7.4 Income Taxes Payable 0.1 0.1 0.1 0.2 0.2 0.1 0.1 All Other Current Liabilities 19.5 19.3 19.9 18.5 20.5 13.1 13.9 Total Current Liabilities 37.9 37.2 38.6 36.5 39.1 30.7 27.5 Long Term Debt 37.2 36.6 34.2 34.2 31.8 38.2 45.8 Deferred Taxes 0.1 0.1 0.2 0.1 n/a 0.1 0.9 All Other Non-Current Liabilities 13.3 12.0 12.0 10.9 12.3 6.1 9.5 Net Worth 11.5 14.1 15.1 18.3 16.8 24.9 16.3 Total Liabilities & Net Worth ($m) 45,996.0 48,475.7 55,786.9 63,571.0 4,761.4 11,746.1 47,063.5
Maximum Number of Statements Used 5,687 6,073 5,949 6,247 4,499 1,191 557
Industry Financial Ratios
Source: RMA Annual Statement Studies, rmahq.org. RMA data for all industries is derived directly from more than 260,000 statements of member financial institutions’ borrowers and prospects. Note: For a full description of the ratios refer to the Key Statistics chapter online.
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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.
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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Jargon & Glossary
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.
IBISWorld Glossary continued
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