1. food and drink
2. food
3. fast food

The New Normal
19 May 2015
Last year, What’s Hot in the USA was headed “Getting Back to Normal”; this year’s is headed “The New Normal”. We
have chosen this title because there have been significant changes in the US foodservice sector over the last twelve
months but things seem to be settling down. Based on an extensive round of discussions, interviews and chance meetings
in Chicago – both at the NRA Show and at supporting events – this report attempts to provide the context for what is
happening in the USA. If you want us to look into detailed aspects of the market – or if you just want to discuss anything
covered in this report – please contact me on 07785 242809 or [email protected]
In a nutshell
Two words were on everybody’s lips – Millennials and Fast Casual. They formed the leitmotiv of this year’s NRA Show.
Later on, we comment on what these words mean but they translate into the confirmation that the world of tomorrow
will be different from today’s because the latest cohort of new consumers – the Millennials – have different perceptions,
aspirations and lifestyles from their predecessors – Gen X, Baby Boomers and the rest.
While Millennials aren’t the only people attracted to Fast Casual outlets, they are hugely influential in their emergence. The
sector is growing significantly faster than any other sector in the restaurant space whether quick service, casual dining,
family dining, or fine dining.
Overall the US foodservice sector is forecast to grow at a shade under 2% in real terms in 2015 (that’s getting on for 4%
in nominal terms) – and the outlook is brightening which means the outturn may be slightly better
This year, the NRA Show got its old swagger back with just on 2,000 booths (a 10% increase on 2014) and the opening of
a large, new hall – The Lakeside Hall which was the original hall at McCormick Place before the North and South Halls
were built. There seemed to be fewer booths featuring food and more equipment and small wares companies this year.
Of course, the Show wasn’t only about Millennials and Fast Casual – far from it - and a standout highlight was 3D printing
of sugar cake decorations. As always, one of the conundrums of the Show is that while the market is focused – almost
obsessed with – burgers, you have to hunt really hard to find any burgers on the booths.
Across many product categories, notably bakery, gluten-free is still a topic of growing importance, but GMO-free is coming
up on the rails.
And one of the big talking points is the long awaited report on the merger between Sysco and US Foods - the Federal
Trade Commission is due to give its verdict any day now.
The overall take away is that the US foodservice market is expanding just a bit, and because one specific sector – Fast
Casual – is a clear winner, it is clear to everyone where they should be focusing their attention.
Contents
In a nutshell ............................................................................................................................................................................................................................................................... 1
Contents ..................................................................................................................................................................................................................................................................... 2
Eating out in the US ............................................................................................................................................................................................................................................ 2
Fast Casual ................................................................................................................................................................................................................................................................. 3
Millennials ................................................................................................................................................................................................................................................................... 4
Clean Label ............................................................................................................................................................................................................................................................... 4
New products ......................................................................................................................................................................................................................................................... 4
Marketing .................................................................................................................................................................................................................................................................... 5
Business evolution ................................................................................................................................................................................................................................................ 5
Suppliers ...................................................................................................................................................................................................................................................................... 6
Costs.............................................................................................................................................................................................................................................................................. 6
Omelettes .................................................................................................................................................................................................................................................................. 6
The UK and other countries ......................................................................................................................................................................................................................... 7
And a final look ...................................................................................................................................................................................................................................................... 7
Eating out in the US
9 Miles a day
1. Now several years into recovery from the Great Recession the
US economy is softening a tad again and there are, as always,
plenty of issues to keep the political classes occupied.
2. Despite all that, the foodservice sector is expanding – but its
growth is patchy and has only recently become obvious.
3. Traditional Quick Service is flat in real terms – but inbflation is
helping this sector to grow
4. A feature of the market is the curious absence of the Casual
Dining segment as a participant in this growth – Casual Dining
was a leading segment twelve months ago – but now it’s static at
best (even declining in real terms). A frequently given reason is
that prices are too high – or there are highly competitive, valuedriven eating out opportunities in other sectors.
The Apple Health app is now
becoming widely available – helped
by being bundled with the iPhone
6. This app can now confirm how
much walking you have to do to see
the NRA Show – on Saturday we
did 9 miles, on Sunday it was 7 and
Monday (with only half a day was 4
miles). A great opportunity to
exceed 10,000 steps a day which is
what doctors want to see us doing
5. But the lie to this may be seen in the expansion of a newly identified sector – Polished Casual – where
check sizes exceed £20 and which is showing some expansion in real terms
6. A possible key to these changes is that industry voices are beginning to claim that the restaurant sector
is maxed out – there is no more growth except for growth driven by expansion of the US Population
which currently stands at about 0.7% a year (not far from the 0.5% in the UK)
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7. This is a new paradigm for the US market which has shown solid year on year growth since the 1940s
(with just the odd year on year decline until the Great Recession)
8. This means that stealing market share is becoming significant as a way of growing – and this applies to
whole segments (for example, Fast Casual stealing from Quick Service) as it does for individual chains
(for example, Five Guys stealing share from McDonald's)
9. It also means that those chains that are pursuing growth (ie all of them) are running out of “white
space” and are increasingly turning their attention to overseas markets. For some chains such as Jimmy
Johns (2,000 stores selling Pepe, Turkey Tom, Club Lulu and many more sub varieties) it means
expansion just over the border in Mexico and Canada. For others it means taking the brand into the
Far East, The Gulf and into Europe – where Smashburger, Potbelly, Fatburger, Wing Zone, Steak ‘n
Shake and many more are following Five Guys
10. Outside the mainstream restaurant sector, the Noncommercial sector is expanding on the back of
growth in health care – and budgets for feeding patients are not as tight as they are in the UK, with a
typical budget in excess of $3 per meal.
11. The view of many restaurant operators, suppliers and observers is that all of this change boils down to
two things: Fast Casual and Millennials – which we will comment on next
Fast Casual
12. Fast Casual is the sector that has an average check price of $7-9, except when it’s $10 (in which case it
may be called Fine Fast Casual) or $11 (in which case it’s Polished Casual!), and customisation is
important as is serving you at your table (once you’ve ordered at the counter) in fact this is the
essence of Fast Casual except when it isn’t. I think you may be getting the picture – there is no tight,
agreed definition that works for everyone
13. But two key elements seem to be average check of $7-9ish, and an ambience that is more upscale
than traditional fast food (think KFC) with customisation being significant
14. And Fast Casual chains are also known for customising the food to each customer’s full preferences
(arguably a return to the old-style cafeteria model but brought up to date by Subway – who aren’t Fast
Casual - many years ago)
15. Fast Casual chains also serve fresh food (which does not always equal healthy) – which is why some
people refer to this sector as Healthy Fast
16. Many claim that Chipotle and Panera Bread are the leading exponents of Fast Casual
17. Fast casual is taking share from below – traditional quick service – and above – Casual Dining (and
including so-called Polished Casual Dining), Upscale Dining and the other niches and sub niches that
operators and commentators claim to have identified.
18. Although the market served by McDonald’s (ie the whole of North America – and more) is fertile
hunting ground for Fast Casual operators, the burger giant still serves 1 in 13 of all meals eaten out in
the USA.
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Millennials
19. The definition of Millennials – unlike the definition of Fast Casual – is not open to debate (or not much
anyway): it’s the generation that started to come of age at the turn of the millennium and since.
Consequently Millennials are aged 18 to 35
Firefighters
I had always assumed that the term
Firefighter – which seems to be so
much more macho than the British
“Fireman” – was used to burnish the
masculine image of the firefighting
job. But it appears that this is not so
– indeed it’s the result of the search
for a gender-neutral term that
became necessary once females
joined the firefighting service and
claimed – quite correctly – that they
weren’t firemen


20. Many people are concerned that lumping everyone of
this age together and claiming that they are a homogeneous
group is misleading – and often gives rise to imprecise thinking.
Steve Easterbook, the new CEO of McDonald’s Inc has said that
there should be “less sweeping talk of millennials as if they’re
one single group”.
21. Millennials are claimed to want many things from the
food that they eat. It should be
 Customised
 Healthy – and that means “Clean label” (more
about this below)
 Fresh
 Indulgent – sometimes
 Possibly vegetarian or vegan – or flexitarian
“saving the planet for a day”. I have to thank my friend Jimmy
Matorin for this quote
 And if you don’t want to call it “vegetarian” call it “plant based”
And then things like sustainability and provenance also kick in
And Millennials use social media in ways that the restaurant sector hasn’t yet fully go to grips
with (despite the many new IT solutions that seem to be launched almost daily)
22. For demographics outside the Millennials (ie the over 35s), it seems that most of these things also
apply but not in the same committed way - and for non-Millennials: fresh possibly trumps healthy
Clean Label
23. Clean Label is the term applied to food that is “free from” – a concept that is only now making inroads
in the US. It speaks to the need to know what’s in the food that people – Millennials in particular apparently, want to eat
24. But Americans do know what gluten free means – and it was a noticeable feature of many products
shown at last year's NRA Show. Gluten-free has not gone away but it has been joined by GMO–free
25. However, GM-free could become an issue because so much produce in the US is
nowadays GMO. Finding adequate supplies of GMO-free can become a serious, if
not impossible, problem to solve if demand goes too far
New products
26. We were intrigued by a 3D printing machine for food. So far, because of
technological restrictions it is restricted to sugar confections – mainly cake
decorations – but starch-based products are on the horizon and then meat (the
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3D Printed cake
decorations
technology can already print 3D models out of fat – an opportunity for chefs to put their thinking caps
on
27. As always flavours occupy Americans – more so than they do over here. And key flavour trends are:
 Hot, spicy generally
 Sweet and hot / Fruity and spicy
28. A whole host of issues are noted by suppliers and operators as being significant and rising in popularity;
they include:
 Locally sourced
 Sustainable
 Healthy
 But strangely, not healthy and sustainable
 Paleo food – grains, such as spelt and lupin, especially
 Vegetarian
 Authentic, artisan
29. And technology is also evident everywhere. Solutions are available for all aspects of the operator’s
business from well-established resource planning, product sourcing and pos systems to customer
attraction, retention and motivations software.
30. There does not as yet appear to be a mould-breaking app or piece of software, but we were attracted
by a neat solution from a start-up called Diner’s Dream which makes it very easy to catch the waiter’s
eye (notwithstanding that this shouldn’t really be necessary)
Marketing
31. We are often asked “What are US operators doing to get their customers coming back?”
32. And the simple answer is they struggle at this because the customer is offered so much choice.
Successful operators are the ones that have structured their offer to meet the changing needs of their
market – and that takes us back to Millennial and the Fast Casual market.
33. Millennials want all the things we’ve noted above – and Fast Casual chains give them those things – or
more to the point they give more of them than competitors in other segments
34. But while big picture solutions are difficult – not to say costly – to implement, small scale changes
continue apace. Typically new flavours emerge, fresh food is served, gluten-free and GMO-free options
are offered.
Business evolution
35. Business models are being evolved more quickly nowadays than in the past in light of the changes in
consumers’ perceptions and lifestyles. That means the cookie cutter
The US evolves - slowly
approach no longer works how it used to because the shape needs to
be allowed to evolve.
Chip and pin – providing added
security for credit card transactions
36. For new players it is arguably easier to do this because of their
– sis slowly being introduced into
size and, the process of evolution can be built into their DNA from day
one. For established players this is more difficult – for example
the US economy. What took them
McDonald’s launched a customisation initiative at the end of 2014. This
so long?
requires changes to working processes and new kit. Franchisees found
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these additional costs difficult to stomach and the roll out has been slowed down.
37. Despite that McDonald’s is reducing its number of company managed stores – and following in the
direction of Subway and Wendy’s who don’t have any
38. There has been plenty of activity in the investment community including PE firms. Golden Gate bought
Red Lobster from publicly-quoted Darden last year, Redrock Partners buying Romano’s Macaroni Grill
in April from Ignite Restaurant Group (who had bought the business from Golden Gate capital two
years ago)
39. Quite a few PE firms (Roark Capital and Sun Capital for example) have owned a number of restaurant
brands for several years and will be seeking to realise their investments
40. And a possible fly in the ointment of the franchised model is a ruling last autumn from the National
Labor Relations Board that treated franchisors as joint employers with franchisees. There are many
implications arising from this ruling that could significantly affect the franchise model
Suppliers
41. Sysco made an offer to acquire US Foods in late 2013. Between them they have 28% of food sales to
US foodservice outlets and they control about half of the chain business.
42. Not surprisingly there have been competition issues raised by suppliers (who fear being further
squeezed on price), chain operators (who see their room for choice of supplier being severely
reduced) and independent operators (who are fearful of rising prices).
43. The Federal Trade Commission will rule on this shortly and until then there is uncertainty in the
market
Costs
44. Food prices have stayed low for quite a long time and apart from special cases (see Omelettes below)
they haven’t impacted on operator’s too much
45. But their major cost component is labour, and there are plans to introduce high levels of minimum
wages across the US – the headline level is $15 an hour albeit with different rates in different cities to
allow for varying regional costs of living.
46. If introduced as planned, there are fears that this will reduce already low margins.
47. There are other issues too that will impact labour costs, notably the possibly introduction of tip credits
to compensate back of house people as well as serving staff
Omelettes
48. This section is headed “Omelettes” not because it’s about omelettes (which it isn’t) but because it’s
about eggs which are going to be a looming problem in the US. Avian flu has run through poultry
farms in the US Midwest and over 30 million birds have been slaughtered. Just like Mad Cow Disease,
exclusion zones have been created in efforts to stop the spread of the epidemic.
49. But the real story is about the knock-on effects on the market for eggs and the products that use them
– mayonnaise, bakery, ice cream – everything that the US eating-out consumer holds dear.
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50. Forward looking companies are developing contingency plans but many companies will be left behind.
And the view is that it’s likely to be 18 months to two years before things return to normal
The UK and other countries
51. In the words of a supplier of kitchen equipment around the world “the USA market is good but the
UK is on fire!” However, and as always, the majority of US companies are not interested in the UK (or
indeed any country other than the US)
Don’t you just love Americans
“Hi. Have some fish and chips”
52. But one category of company that is very interested in the
UK is the restaurant operator because opportunities in the US are
becoming more difficult to find
53. It’s not so much that the UK is the solution rather it’s
becoming international which is the solution. Operators need an
expansion story based on growing overseas. Given that the growth
model used by most US chains is based on franchising, this
expansion should be easy. In fact, generally it’s difficult because effective and successful franchise
partners that US chains want to find are too few outside the US
And I’m handed a plate of breaded
shrimps and crisps
54. To be sure they are available – and owners of shopping malls in the Gulf are a useful example but their
footprint is too small, and the shape of the market in their area is too restricted, to create the
opportunities for a noticeable number of outlets
55. Given the difficulties of finding suitable franchise partners, the UK at least appears to present an
opportunity by virtue of its current growth and similar (but certainly not identical) eating out culture as
well as similarities in language, law and ways of working.
56. But the UK is only one of other countries that fit into this mould which is why US chains are willing to
consider growth opportunities in Russia (despite the current economic difficulties), Germany, and the
Far East as a region.
57. The reverse of US chains seeking opportunities overseas is, obviously, overseas companies seeking
opportunities in the US. Pret has been in the UK for quite a number of years and Chicagoans are
becoming aware of the brand with its 3 stores in their city – “There should be more” I was told by
two people at the Show “because it’s fresh and quick”
58. Yo! Sushi is another UK brand making a foray into the US with company-owned stores in Paramus,
new Jersey, and Sarasota, Florida(after separating from their former franchise partner with whom they
had opened one store). But the name and the kaiten offer was as yet unknown to the good people of
Chicago
And a final look
59. The US foodservice sector is large, in parts very dynamic, but right now considers itself approaching
middle age. I doubt that it is but, despite the high growth spots, there is a sense of weariness around.
60. Fast Casual belies that last point and is carving a healthy, customised, clean label market which is good
for eating out, good for diners and good for chain operators
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61. From the British perspective there are many similarities – the advance of groups, of healthy food, of
customisation / personalisation, and more
62. The UK appears to offer great opportunities for US chains (although whether the hopes will materialise
for all new entrants is still not certain)
63. The US market is dynamic within a confined range of cuisines – burgers seem to form a whole
economy on their own.
64. It might help if US operators could break out of these confines – and where better to seek ideas than
in the UK!
To discuss what any of this means to your company and how we can help you - or if you have any other
questions – about the UK, US or European foodservice markets - please contact Peter Backman at:
Horizons
M +44 7785 242809
T +44 (0)844 800 0456
[email protected]
www.hrzns.com
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