According to the National Restaurant Association, 2016 could be
the seventh consecutive year of real sales growth in the restaurant
industry. The industry generates sales that account for 4% of U.S.
GDP. It is expected to counter headwinds on the back of strong
Given past trends and growth prospects of the industry, we have
highlighted some of the positives to help investors decide whether
they should increase their investments in the space.
Improving U.S. Economic Growth:
An improving economy and employment picture, along with growing
consumer confidence, have led to a slow but steady recovery in the
restaurant industry. Despite global concerns, the U.S. economy is
improving. While the decline in
raised concerns of a global deflation and an economic slowdown, it
is actually driving consumer spending, which accounts for more than
two-thirds of U.S. economic growth. Stepped-up economic activities,
improving business conditions, renewed optimism as a result of
housing recovery and rising consumer confidence are expected to
keep investors' confidence high in 2016.
Sales Strategies: Restaurants strive to improve sales by targeting
higher footfall and delivering something unique. Having stabilized
their financial positions, the operators are constantly striving to
add new items to their menu to cater to the ever-changing palates
of customers while making food presentation better. Buffalo Wild
Wings Inc. (
), The Wendy's Company (
), Papa John's International Inc. (
) and Jack in the Box Inc. (
) are some of the restaurateurs playing this card.
Another initiative undertaken by the food chains is re-imaging the
stores, which has received overwhelming response from guests.
Wendy's, Domino's Pizza, Inc. (
), Ruby Tuesday, Inc. (
) and Carrols Restaurant Group, Inc. (
) have been working on these lines. Reimaging stores aims to create
a more appealing but differentiated concept that connects the brand
better to guests, especially millennials.
Meanwhile, restaurant companies like BJ's Restaurants, Inc. (
), Brinker International, Inc. (
), Red Robin Gourmet Burgers Inc. (
) and Panera Bread Company (
) have started offering loyalty programs at their outlets to
enhance value dining. Loyalty programs help retain old diners while
bringing in new ones, which drives traffic.
Some industry players like Brinker, BJ's Restaurants and Red Robin
Gourmet are rolling out prototypes and smaller restaurant chains to
augment value and drive traffic, thereby lowering construction and
occupancy costs but enhancing returns on capital. Smaller
prototypes also accelerate growth in non-traditional locations.
Darden Restaurants, Inc. (
), Panera Bread and BJ's Restaurants are investing in kitchen
equipment to improve capacity and speed.
Modern Technology, Digital Ordering, & Delivery Gaining
The digital wave has hit the U.S. fast casual restaurant sector as
more and more restaurateurs are deploying technology to enhance
guest experience. While smartphone apps attract consumers, video
menu boards in quick-service restaurants and tabletop devices speed
up sales and ensure convenience.
Panera Bread and Buffalo Wild Wings are using tablets to drive
traffic. Meanwhile, Red Robin Gourmet and Brinker International
have partnered with Ziosk, a provider of ordering, entertainment
and pay-at-the table tablet, to install tabletop technology at
Chipotle Mexican Grill, Inc. (
) is also prioritizing its e-Commerce program and looking to extend
its online ordering platform by adding the delivery option. Apart
from re-launching chipotle.com for mobile users, the company has
begun online and mobile order delivery in 67 cities using the
Postmates delivery app. The company has also launched an app for
Apple Watch to allow guests to order before they arrive at the
restaurants. The chain is also testing mobile payment methods like
Apple Pay and the Google Wallet at restaurants.
Also, Chipotle Mexican Grill has entered into a partnership with
Tapingo, a leading mobile commerce app that provides food pickup
and delivery services to students. Students were able to order food
through Tapingo at 40 college campuses nationwide by the end of
2015 and the company intends to make the service available at more
than 100 campuses in the U.S. this year.
Papa John's added Google Wallet into their ordering process and
launched an iOS app. The company continues to set the pace in the
digital arena and ended last year with more than 50% of domestic
system-wide sales coming from the digital channel. Domino's Pizza
has gained significantly from the digital trend too, with around
50% of its U.S. sales coming via digital platforms. The company is
also updating its digital platforms constantly to connect better
Additionally, the world's largest coffee-shop operator, Starbucks
) has secured a leading position by leveraging its mobile and
digital assets, and loyalty and e-Commerce platforms to create more
revenue streams. Nearly 20% of all U.S. transactions of Starbucks
take place through mobile, more than double the figure a couple of
years ago. Starbucks launched the Mobile Order & Pay service
which is now available in all company-operated outlets in the U.S.
This initiative allows customers to order before arriving at a
Starbucks café and pick up the items at their selected Starbucks
store, thus saving time.
Starbucks has started to deploy the facility in select stores in
the UK and in Canada as well, with plans to continue rolling out
the platform in key international markets. Moreover, in order to
expand its loyalty program, Starbucks formed strategic loyalty
partnerships with Lyft, Spotify and The New York Times, under which
these partners will purchase Starbucks stars that will be rewarded
to their customers as loyalty points and subscriptions. A
third-party loyalty program further leverages Starbucks' digital
ecosystem and adds a revenue stream.
In order to capitalize on the increasing demand for their products,
a few players in the industry like Panera Bread, BJ's Restaurants,
Chipotle and Noodles & Company (
) are offering off-premise catering programs. These programs are
especially designed to serve a large number of customers at their
homes, offices or at any other venue.
Starbucks has started a food and beverage delivery service
through its employees at New York's Empire State building in last
October. The company also began testing food and beverage delivery
in collaboration with on-demand delivery service, Postmates, in
select areas of Seattle in December. Customers in these regions can
place orders through the Starbucks mobile app using the 'Mobile
Order & Pay' feature, while those in New York can order online.
Restaurant operators also rely on social media for promotions and
incorporate Facebook, Inc. (
), online review sites, Twitter, Inc. (
) and blogs aggressively into their marketing mix.
Cost-Cutting Efforts Needed:
Given the exponential rise in costs, companies are trying various
ways to keep them in control. Through its Project Q initiatives,
BJ's Restaurants is striving to reduce kitchen hours and enhance
labor efficiencies. The Cheesecake Factory Inc. (
), Darden and Cracker Barrel Old Country Store, Inc. (
) are also working on techniques to aggressively cut costs.
Adapting to Changing Consumer Preference:
The latest trend at the U.S. eateries is a healthy menu as
consumers are increasingly showing preference for fresh, organic,
nutritious and low-calorie food. Rising health concerns and growing
awareness about obesity and related diseases have led to the shift
in consumer preference toward healthy and "good for you" products.
Starbucks and Panera are replacing all artificial flavors and
colors used in their food items with natural alternatives. Burger
giant, McDonald's Corp. (
) has pledged to discontinue the use of chicken raised on
antibiotics meant for humans within the next two years and intends
to use cage-free eggs. Meanwhile, Chipotle is also popular for
using genetically modified organism-free ingredients in its food
Further, companies like McDonald's, Dunkin' Brands, Wendy's and
Panera are shifting to cage-free eggs to appease health conscious
guests. Pizza chain, Papa John does not use trans-fat or partially
hydrogenated oils in its products. Papa John is the first national
pizza brand to remove cellulose as an anti-caking agent from its
mozzarella cheese. Except soft drinks, the company has removed all
sources of artificial flavors and synthetic colors from its menu in
2016, which includes pizza ingredients, pizza toppings, dessert
items and sauces. By the summer of 2016, the company plans to
remove antibiotics from its chicken toppings and poppers.
On the consumer side, it seems that Americans are becoming keener
on having breakfast at restaurants. Breakfast visits were higher in
2016 than last year, while lunch and dinner visits remained flat,
according to research firm, NPD Group. Exclusive breakfast
offerings such as coffee, pancakes and doughnuts have been driving
traffic at most U.S. restaurants, outpacing conventional lunch and
dinner items. In fact, Denny's Corporation (
), Jack in the Box and Sonic Corp. (
), which have been offering all-day breakfast for quite some time
now, highlight how the trend has been successfully driving sales.
Massachusetts-based Dunkin' Brands also sells breakfast sandwiches
all day, which is a major contributor to sales. Fast-food giant,
McDonald's started its own all-day breakfast platform in the U.S.,
which has proven to be a remarkable success.
Other players in the industry like Yum! Brands, Inc.'s (
) Taco Bell are also capitalizing on the rising demand for
breakfast. Meanwhile, this daypart generally has lower food cost
requirements. Therefore, focusing on it somewhat offsets the
adverse impact of rising food costs, thereby boosting margins.
With breakfast foods playing a key role in the daily eating habits
of restaurant-goers, the fast food industry has been able to turn
around and drive growth even as the non-healthy items in their
menus are falling out of favor.
There are plenty of reasons to be optimistic about the restaurant
industry's near- to medium-term outlook. Given the efforts
undertaken by the companies, it is needless to say that investors
can cash in on the existing opportunities in the space.
Check out our latest
Restaurant Industry Outlook here
for more on the current state of affairs from an earnings
perspective and the trend for this important sector.
Want the latest recommendations from Zacks Investment Research?
Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
To read this article on Zacks.com click here.