Cowen Sees ‘Arms Race to the Bottom’

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Cowen Sees ‘Arms Race to the Bottom’

Quick-service restaurants’ continuing focus on aggressive discounting is an “unhealthy industry dynamic” that could bring future problems, according to a late-June report from financial-services firm Cowen and Company.

BK Facebook Whopper DogCowen analyzed Facebook posts from January 2015 through May 2016 for eight top QSRs: McDonald’s, Burger King, Wendy’s, Sonic, Jack in the Box, Subway, Taco Bell and Popeyes. It measured the incidence of both posts that highlighted value offerings and giveaways and posts featuring existing as well as new menu items. “We view innovation as a healthier and less aggressive way to drive traffic relative to discounts and giveaways,” Cowen writes.

It found that he amount of Facebook posts tied to value offerings and giveaways (V+G) among the eight concepts climbed from 19 in November 2015 to 29 in December 2015 and still higher to 35 in January 2016. From January to May 2016, V+G posts remained in the 32-to-35 range, with Wendy’s and Subway using the most V+G post in Q2. “In April and May, the other six concepts collectively pivoted away from aggressive value and increasingly focused on menu innovation. However, it seems the industry has collectively refocused on intensified value so far in June as operators struggle to determine how to drive sales in a soft industry backdrop,” Cowen reports.

Burger King was the most likely of the eight chains studied to use Facebook to tout new menu items: 70% of its January-June posts focused on new products. Both Jack in the Box (57%) and Taco Bell (52%) also devoted majorities of their posts to products rather than V+G themes.Wendys_Facebook1

In 2016’s Q2, 48% of product posts focused on new menu items, the highest share in the past five quarters, Cowen reports. In Q1, by comparison, just 34% of product posts were for new products.

“We believe this reflects operators’ desire to drive traffic through means other than aggressive value or discounts, to drive higher gross margins as labor remains a challenge across the industry,” Cowen reports. “However, we get the sense innovation efforts were not enough to offset industry softness, leading the company to pivot back to value in June.”

McDonald’s promoted All Day Breakfast in 2015’s Q4, contributing a 10% bump to the new-product focus, but has not nationally promoted a truly new product since the Buttermilk Crispy Chicken Sandwich in 2015’s Q3. “The increase in innovation is driven by the need to stay relevant and bring news to the brand but contrasts to the broad 2015 strategy of emphasizing existing menu items to facilitate operations and in-turn speed service times, as MCD has most clearly exemplified,” Cowen concludes.

Cowen points to McDonald’s turnaround as a primary driver of the QSR industry’s aggressive discounting environment. “As McDonald’s shifted from market share donor to gainer in late 2015, other concepts in quick-service were forced to raise the ante in order to maintain the grip on market share gained from 2012-2015. With a benign commodity backdrop and more specifically beef inflation flipping from a headwind to a tailwind for the first time since prior to 2010, the industry has seemingly been forced into an arm’s race to the bottom,” Cowen writes.

That scenario “could lead to turbulence once these promotions end and consumers adjust back to a more normalized promotional environment,” the firm adds. Cowen’s conclusion: “In our view the healthiest way for QSR operators to cope with a difficult top-line in a deflationary beef environment is through balancing menu innovation while remaining nimble with value tactics as the competitive environment dictates.”


Separately, The NPD Group released its report on the global foodservice market in Q1. It finds that Australia, Canada, China, Germany, Great Britain, Japan, and Spain posted foodservice traffic gains in Q1 while customer visits in France, Italy, and the United States were flat. The biggest loser was Russia, which saw restaurant visits drop by 2%.

“Quick service restaurant (QSR) traffic was up or flat in every global market tracked by NPD Group, and was the driving engine behind the broad health of the industry,” the researcher reports. European markets even saw a gain in full-service restaurant visits, hard hit in recent years.

Average Eater Check in Q1 was $7.49 in the U.S. (highest of all markets studied), $5.63 in Canada, $5.96 in the UK, $6.38 in Australia, $7 in France and $7.12 in Germany. Olympic athletes and spectators will be pleased to know that Brazil’s average check of $3.45 was the lowest of the countries studied.

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