Fast Food Industry Analysis 2014 - Cost & Trends

Fast Food Industry in 2014 at a Glance

It is no secret: Americans love fast food. And its not just us! The Golden Arches have spread across the globe, and emerging markets are one of the fastest growing areas in the industry. But the fast food industry is not without its challenges, especially in the United States. From rising food costs, economic recession and changing perceptions about health, many fast food franchises have been feeling some heat.

But rather than flee from this challenge, the fast food industry has been adopting new practices and offering new products. Modern society is on the go, and there is plenty of demand for a quick bite at all times of the day. Fast food franchising opportunities exist in the “traditional” spaces like burgers and pizza, but are also sprouting up in healthy and unique ways as well.

The Industry

The fast food industry, also known as Quick Service Restaurants (QSR), has been serving up tasty morsels for as long as people have lived in cities. The modern system of fast food franchising is believed to have started in the mid 1930’s when Howard Johnson franchised his second location to a friend as a means to expand operations during the Great Depression. And oh how it has grown! As cars became commonplace, the drive-thru concept brought explosive growth to the idea of food-on-the go. “Fast Food” was added to the Merrion-Webster dictionary in 1951 and U.S. fast food companies are now franchised in over 100 countries. In the U.S. alone there are over 200,000 restaurant locations! Revenue has grown from $6 billion in 1970 to $160 billion last year, an 8.6% annualized rate.

Fast food franchises focus on high volume, low cost and high speed product. Frequently food is preheated or precooked and served to-go, though many locations also offer seating for on-site consumption. For stands, kiosks or sit-down locations, food is standardized and shipped from central locations. Consumers enjoy being able to get a familiar meal in each location, and menus and marketing are the same in every location.

What’s Been Going Wrong?

There have been challenges for the fast food industry in recent years that have been pressuring profit margins. The industry as a whole has proven robust enough to withstand these challenges, though some players have done better than others.

Over the last decade there has been increased focus on the quality of food served in fast food restaurants. Typically highly processed and industrial in preparation, much of the food is high in fat and has been shown to increase body mass index (BMI) and cause weight gain. Popular books such as Fast Food Nation and documentaries like Super Size Me have increased public awareness of the negative health consequences of fast food. Fast food companies have responded by adopting healthier choices and have had some measure of success, but the shadow of bad press still hangs over the industry.

Rising commodity prices have also significantly crunched many fast food franchises. With food and beverage inputs making up approximately 33% of costs, higher prices for livestock, corn, wheat and more have seriously shrunk margins over the past decade. In such a fiercely competitive space it is impossible to force a price increase on customers, so profit margins are often south of 10%. The recent economic recession did lower commodity prices, but the recession brought on its own complications, and now prices for commodity inputs are on the rise again.

Fast food had been thought to be largely recession proof, and indeed the industry did not suffer nearly as much as other discretionary spending sectors. In fact, there was some increase in consumer visits as people choose cheaper fast food options over fast casual or traditional restaurant choices. But overall, the recession hurt spending, and consumers overall purchased less with each trip. Fast food franchises fared reasonably well but still felt some pain.

Market saturation is also a relevant issue in the fast food industry today, at least in the U.S. There is a McDonald franchise is in almost every town, and it usually sits in a row with several competitors. With so many competitors which offer similar products there are fewer customers per location. Increasingly fast food restaurants are also losing market share to fast casual, a relative newcomer in the restaurant space.

Where do we Go from Here?
Busy citizens still need quick meal options, and fast food restaurants are fighting these challenges with gusto. Now offering healthy choices to battle the stigma of unhealthy food, some quick service restaurants now focus on fresh or organic products. From franchises focused solely on salads or healthy wraps to the lower calorie options offered at traditional burger franchises such as Wendy’s or McDonald’s, consumers are able to make better choices...if they want!

Fast food franchises are also focusing on expanding into new product lines, such as the coffee initiative in the McCafe. Intended to offer competition to Startbucks, McDonalds is luring customers back into their stores, hoping they will purchase food as well. Many franchises have been exploring other meal times such as breakfast and the mid-afternoon snack for growth opportunities and to increase real estate utilization.

The industry is most effectively battling saturation within the United States by creating a much more diverse range of offerings. Sure, there is a McDonalds in every town, but there are very few crepe franchises...yet! From new cultural cuisines to fresh takes on a traditional story, there are many moretypes of quick service restaurants than ever before.

Lots of Variety! Some of the Types of Fast Food Franchise Opportunities Available:

Burgers 24-Hour Breakfast Fish & Chips Pizza
Italian Sandwich/Subs Chinese Japanese
Mexican Deli’s Crepes BBQ
Steaks Salads Buffalo Wings Hot Dogs
Fried Chicken Wraps Grilled Cheese Gyros
Healthy Pitas Fresh Food Sausage Bagels
Indian Noodles Natural/Organic Grilled

The fast food industry is still a large and diverse industry with plenty of opportunity. As one would hope, challenge is being answered with innovation, and fast food franchises are responding with new offerings, pricing and strategies to lure consumers back in. Non-traditional fast food franchises are springing up and gaining traction, and more creativity will always be welcome! Consumers are now on the look-out for new ways to eat fast and healthy. And as the industry continues to evolve and the economy strengthens, fast food franchise profitability will continue to grow.

Matt Sena is a co-founder of FieldLens, a former portfolio manager, research analyst and trader. He holds the Chartered Financial Analyst designation and earned his MBA in Finance from Kellstadt Graduate School of Business while working at Goldman, Sachs & Co.

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