Diners are always looking for a deal, a discount, a special offer. Nobody knows this better than quick-service restaurants (QSRs) — what we often think of as “fast food” joints: McDonald’s, Taco Bell, Wendy’s, et al. For years, QSRs have struggled to balance slim profit margins, operational challenges and rising food costs in order to deliver a satisfying food experience to customers at the right price point.
Like many other businesses, innovation for QSRs — which are often reinventing themselves — comes from necessity. During the recession of 2008 in the U.S., with budgets tightened and wallets harder to crack, the public’s general perception of a casual restaurant meal underwent an overhaul. Diners were looking for more value for less money and restaurants were hard-pressed to deliver. QSRs were able to capitalize on these changing attitudes and pull off a shift in strategy that has resulted in new product offerings and steady revenue growth in the years that have followed.
Even before the recession, consumer behavior had already started to shift away from the standard three-meal-a-day paradigm. A study by the Department of Health and Human Services’ Agriculture Department found that the percentage of Americans eating three or more snacks a day jumped from 11 to 42 percent between 1977 and 2002. While restaurants had traditionally dictated when diners ate, younger millennial consumers were now demanding to truly “have it their way” and eat when they wanted.
This presented an opportunity for restaurants to fill the gap in traditional slow sales periods during the day — particularly mid-morning and late afternoon — by offering on-the-go convenience foods and snacks at a lower price. These discounted food options helped fill gaps in traditional “off peak” sales slumps for the restaurants while allowing consumers to order a la carte at a discounted price — for example, the 99 cent menu that most major fast food chains offer. While diners perceived they were saving money, restaurants were capitalizing on these off-hour sales and making up the difference in price through more repeat visits (given that these snacks left customers less than satiated).
Some restaurants were even cleverly able to reposition some of their existing menu items — saving them time and money in development of new products — as great new snack options. Eric Giandelone, director of foodservice research at Mintel Group, a food service consultancy, cited french fries as one of the existing items on many QSR menus that have made the shift to a viable snack option in the minds of customers.
While snacking was already a growing trend, the recession really solidified this consumer behavior as diners who ordered less at lunch to save pennies were hungry by late afternoon and prone to snack cravings. In 2008 Mintel Group released a report titled “Snack Attack!” Their study showed that snack items on restaurant menus had grown 300 percent from the beginning of 2005 to the end of 2007 (with 196 percent growth in 2006 alone). They also found that the average price of a QSR snack item in 2008 was $1.98, according to the report.
But snacks weren’t only a cost-saving measure for consumers; they were a win for restaurants as well, which operate on exceptionally tight profit margins usually far less than 30 percent. As the recession took hold, restaurants needed to cut costs and streamline operating budgets as volume decreased and the cost of ingredients skyrocketed. QSR Web reported on the cost-saving benefits of snack menus for restaurants in 2008. In that article, Sara Monnette of Technomic Information Services, a food services consultancy, points out that “unlike value menus, which are squeezing margins as ingredient costs rise, snack offerings are more profitable and tend to have higher price points."
In the years that have followed, snacks have emerged as not just a cost saver but a big growth area and snack sales for QSRs alone are projected to hit $22.9 billion by 2016, according to QSR magazine.
Breakfast is another area that proved fruitful in the post-recession QSR discount option playbook, sustaining steady growth over the past several years. Consumers already perceive a grab-and-go breakfast as a savings compared to full-service restaurants, and there is even more value seen in cheaper egg-based breakfast items versus later-in-the-day burger and chicken sandwiches at QSRs.
Taco Bell, which launched breakfast in 2014, was “one of the few companies in the history of the QSR industry to launch breakfast successfully and profitability in Year 1,” CEO David Novak said during the company’s earnings call in 2015. With more and more QSRs getting into the breakfast game, restaurants have had to work harder and offer more value to grab consumer attention and dollars in the morning.
You’d have to have been living under a rock to have not heard about McDonald’s launching all-day breakfast earlier this month. The fast-food behemoth has long held one of the strongest positions among QSRs in the battle for breakfast dollars, but had notoriously had a hard cutoff for their breakfast menu at 10:30 a.m. However, McDonald’s — and all QSRs — have been under increasing pressure from consumers to expand to full day availability. The NRA’s 2015 Restaurant Industry Forecast found 7 in 10 consumers want restaurants to serve breakfast all day. This is especially true in the case of millennials, who are most interested in having breakfast at night according to the report.
While McDonald’s was able to execute the rollout quickly — from a single test a smaller market in May of 2015 to full U.S. franchise launch across 14,000 stores nationwide in October 2015 — a survey of McDonald’s restaurant operators by Nomura analyst Mark Kalinowski, pointed out that some felt it was “disorganized” and “rushed.” In order to pull off the shift, McDonald’s also had to remove seven other items from their menu. The operational challenges entailed in executing these kinds of menu shifts are the reason why some QSRs are hesitant to take the leap, despite the potential upside.