2015 Top 100: Growth patterns shift for major restaurant brands2015 Top 100: Growth patterns shift for major restaurant brands

New-unit development and improved unit-level performance drove the largest brands in foodservice to another year of total sales growth, up 4.6 percent from a year earlier, according to Nations’ Restaurant News Top 100 research.

While top-line trends remained stable, new storylines developed in the 2015 report. A new second-largest restaurant chain was found when Starbucks Coffee overtook Subway by a margin of $754 million in U.S. systemwide sales. Newcomers Raising Cane’s Chicken Fingers and The Capital Grille joined the Top 100 ranks. And another first: McDonald’s posted a decline of 1.1 percent in U.S. systemwide sales — the first dip in at least 30 years.

The 2015 NRN Top 100 chains collected total sales of $232.2 billion in the Latest Year, or fiscal years ended closest to December 2014. That’s a 4.6-percent increase over Preceding-Year sales, which had climbed 3.3 percent to $222.1 billion. Now in its 42nd year, the Top 100 is a benchmarking report that establishes its rankings by reported or estimated U.S. systemwide foodservice sales.

This year’s Top 100 increased its Latest-Year aggregate number of U.S. restaurants by 2.1 percent, to 190,692 locations. That compared with a 2.4-percent increase in total unit tally in the Preceding Year, which had represented the best collective new-store-development figure by a Top 100 group since before the “Great Recession.”

But Top 100 growth patterns have shifted in recent years and continue to do so, noted researchers and analysts, including Malcolm M. Knapp, president of Malcolm M. Knapp Inc., who said new-store expansion is “mostly in specialty areas.”

“None of the major fast-food brands is growing [much], except for Chick-fil-A,” Knapp said. “The highest growth will be in fast casual because they are in the kind of race that fast-food guys had earlier, where you open as fast as you can and hope the other guy dies first.”

Andy Barish, restaurant securities analyst and managing director for Jefferies LLC, said large chains are feeling real estate and sales pressure from a new breed of chef-driven specialty restaurants “that in urban environments starts to add up.”

“I think across the board, everyone is trying to upgrade and, for example, move from QSR to ‘QSR-plus’ to broaden their reach,” Barish said. “Having more modern facilities and ambience I think is really key [particularly] if you want to grow from a QSR perspective.”

The pace of average growth rates dipped in the Latest Year, just as the overall unit growth rate had. Top 100 chains had Latest-Year and Preceding-Year average growth in U.S. units of 3.3 percent and 3.7 percent, respectively. Seventy-five chains added units in the Latest Year with an average increase of 4.9 percent, compared with the Preceding Year when 75 chains added locations at an average rate of 5.6 percent. The 24 chains that lost domestic units in the Latest Year saw their base erode by an average 1.8 percent, while the 23 chains that shrank in the Preceding Year did so at an average rate of 2.0 percent.

A full 75.6 percent of the Top 100’s aggregate Latest-Year unit base was operated by franchisees. The slower overall and average growth in Latest-Year total U.S. units among Top 100 chains is not surprising, then, given that the average rate of growth in franchised locations, among the chains that franchised in the previous two years, was 2.9 percent in the Latest Year, versus 5 percent in the Preceding period.

Growth in aggregate company-operated units among Top 100 chains with such locations was 1.4 percent in the Latest Year, leading to 46,495 year-end company stores, versus Preceding-Year growth of 1.7 percent.

Among the Top 100 segments, the six-chain Beverage-Snack category added the largest number of new locations in the Latest Year, with an addition of 1,042 units. That’s more than seven times the 27-chain Casual-Dining group’s 143-unit aggregate gain. Starbucks Coffee and Dunkin’ Donuts, alone, had Latest-Year gains of 501 and 405 units, respectively.

David H. Stone, managing partner and principal at The New England Consulting Group, said Starbucks is indicative of the operators who are adding units in the long purported “over-stored” U.S. market by ‘being a little more thoughtful and analytical” and considering “consumer behavior” as well as typical penetration issues when it comes to real estate.

Unit-level sales rising more quickly

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New units or not, Top 100 chains were able to increase their estimated sales per unit, or ESPU, by an average 3 percent in the Latest Year, compared with 1.2-percent growth a year earlier. NRN’s ESPU figures are calculated considering full-year systemwide sales and the average number of locations operating in a given year to provide a consistent presentation of approximate unit-level sales output across three years.

In the Latest Year, the 82 chains that each showed increased ESPU had average growth of 4.3 percent. In the Preceding Year, 67 chains from the same roster had average ESPU growth of 3.0 percent.

Much of the Latest-Year improvement stems from the second half of 2014, when domestic same-store sales climbed significantly. Part of that 2014 improvement stemmed from easy comparisons with late 2013, when the federal government was at the edge of the so-called “fiscal cliff,” depressing consumer spending.

Larry Miller, founder of the MillerPulse restaurant sales-tracking survey, said average restaurant same-store sales growth hit about 1.4 percent in the first half of 2014, before doubling to 2.8 percent in the second half. Additional industry data, from TDn2K’s Black Box Intelligence, pegged average first-quarter 2015 same-store sales growth at 2.8 percent, and said that for the 10 months ended in April such growth averaged 2.2 percent.

However, while same-store sales rose in each of the six months ended in April 2015, same-store traffic decreased in four of those months, according to MillerPulse, suggesting a continuation of the traffic challenges that have plagued the industry in recent years. Researcher Knapp has seen the same trends as well.

“The problem is, no one really knows what is going to happen [in 2015’s second half],” Knapp said. “We really have a lot of variables and we’re going up against the strongest part of the year [for comparisons] starting in August.”

The degree of growth “will be a function, in part, of what happens with the economy here and in the rest of the world,” he said. Knapp further noted that, whether it’s avian flu or growing consumer interest in genetically modified organisms in food, “everything that happens in society now shows up in the restaurant business.”

When looking into the rest of 2015, Jefferies’ Barish said he still sees a discretionary income “dividend” from year-over-year lower gasoline prices, though perhaps not as large as in 2014.

“I’m hopeful we’re getting some wage growth finally, which, in one case, is a headwind for restaurant-industry margins [but] maybe also is a [dining out] demand driver,” he said.

Chipotle Mexican Grill led all Top 100 chains in Latest-Year ESPU growth, with its 13.6-percent increase to $2.4 million.

Knapp said much of Chipotle’s ESPU and same-store-sales success was tied to throughput improvements or just, “three more people at lunch and dinner” types of wins.

“What most operators don’t understand is how few additional customers it takes to move [same-store sales] percentages,” he said. “Restaurateurs who get it, say, ‘Hey look, two more bodies per shift and we’re golden.’”

Like Chipotle, strong percentage unit growth and improvement in ESPU were hallmarks of many of the Latest-Year fastest-growing chains, ranked by growth in systemwide domestic sales, including Jersey Mike’s Subs, Firehouse Subs, Raising Cane’s Chicken Fingers and Wingstop. Those five together had average Latest-Year domestic sales growth of 25.6 percent, which was up from the 19.6-percent average growth rate of the Preceding Year’s five fastest-growing chains. Underlying these star performances were average unit and ESPU growth of 16.3 percent and 7.3 percent, respectively.

When it came to dollar sales growth, Starbucks was king in the Latest Year, with incremental estimated domestic sales of $1.2 billion that compared with runner up Chipotle’s $869.6 million addition and No. 3 Chick-fil-A’s $722.1 million add-on. McDonald’s 1.1-percent decline in Latest-Year domestic sales — related mostly to traffic woes — cost it $409.3 million, making it the biggest Top 100 dollar sales loser.

Still, McDonald’s easily retained its perennial No. 1 ranking in total U.S. systemwide sales, with a Latest-Year tally of $35.4 billion. That result is 2.7-times the $13 billion in estimated sales by No. 2, Starbucks. Starbucks’ Latest-Year 9.7-percent growth in U.S. sales moved it past longtime No. 2 Subway, with estimated domestic sales of $12.3 billion that were up just 0.4 percent from the Preceding Year as a result of assumed slower unit growth and lower store-level volumes.

The only other shuffle among the top 10 largest chains involved Chick-fil-A, a brand known for a strong corporate culture and grip on consumers who crave the brand. The chicken chain moved past Pizza Hut, from No. 9 to No. 8, with a 14.5-percent growth in sales, to $5.7 billion. Two years earlier, Chick-fil-A had surpassed KFC as the largest Top 100 Chicken chain.

Such jockeying doesn’t surprise Knapp, who observed: “A market-share fight [has] no single magic bullet. You have to do a whole series of things well [and] you don’t do that without training and a culture that says, ‘we do things right and we don’t take shortcuts.’”

Contact Alan J. Liddle at [email protected].
Follow him on Twitter: @AJ_NRN