Fast food restaurants represent one of the largest segments of the food industry with over 200,000 restaurants and $120B in sales in the U.S. alone. Fast food restaurants, also known as quick service restaurants (QSR) and regional players like Jack In The Box and Sonic.
Since late 2006, the fast food industry's growth has been slowed by soaring food and energy prices. The high prices of commodities, combined with the housing slump and a weakening job market are taking a toll on restaurant spending in the U.S. (the world's largest fast food market, by far). The same food and energy inflation that is corroding consumer spending is also taking a bite out of company margins.
Fast food restaurants have navigated this difficult landscape with varying levels of success. International players such as McDonald's (MCD) and Yum! Brands (YUM) have had the most success as explosive growth in [[Emerging Markets|emergvation to boost growth and profitability.
The U.S. accounts for the lion's share of fast food spending globally. Since the first half of 2007, several forces have put consumer spending in this critical market under intense pressure. The first of these is a plummeting housing market (especially in the overbuilt areas of Southern California, Nevada and Florida) which produces a negative wealth effect among consumers, discouraging spending. Second, rising food and energy prices have raised inflation to multi-decade highs- outpacing wage gains and shrinking spending power. Finally, the U.S. job market has deteriorated; in the first six months of 2008, the economy has shed 485,000 private sector jobs, while many have seen job hours reduced. Although some industry players, such as McDonald's, have seen continued same store sales growth as consumers trade down to less costly food alternatives, overall the sector has struggled. According to the National Association of Restaurants, 55% of restaurant operators reported a same-store sales decline in March 2008 compared to just 28% who reported increases
italic text===Rising Food Prices Pressure Fast Food Margins===
Several factors have contributed to a dramatic rise in food prices in recent years, including higher oil and energy prices; the growing global demand from rapidly developing economies such as China and India; a weak U.S. dollar; and a larger share of the grain market being diverted to ethanol production. These trends have led to the rapidly rising prices of commodities such as corn and wheat (see graphs at right).
After labor, food and beverage inputs are the single largest cost facing fast food restaurant operators, accounting for 33 cents for every dollar of sales. Because operating margins are already relatively low compared to other industries (typically in the single digits) a slight increase in these costs can have an outsized effect on profitability. For over a year now, wholesale food price inflation has been rising at multi-decade highs. In 2007, wholesale food prices rose 7.6%; as of March 2008 that number had increased to 8.5% on a year over year basis. At the same time, intense competition limits the ability of fast food operators to pass along rising costs to customers. Increased costs have had a noticeable effect on fast food company earnings with operators such as Domino's, Wendy's and Jack In The Box have all reported consistent quarterly declines in operating margins since the second half of 2007.
Because franchisers capture a portion of revenue rather than profits, smaller fast food chains that have a lower portion of their restaurants franchised are most vulnerable to cost increases. Jack In The Box, Wendy's, and Sonic have particularly low franchised to owned restaurant rations.
Fast food companies with exposure to international markets have most successfully overcome the twin hurdles of high prices and an anemic North American market. Yum! Brands and McDonald’s, with 50% and 60% of sales overseas respectively, are the best examples of the benefits of an international presence. Both companies have posted consistent same store sales growth driven by double digit gains overseas. Rising overseas sales are underpinned by strong economic growth in emerging markets like China, India, Russia, Latin America and Eastern Europe. As more people across the globe join the middle class many are enjoying the promise of a better diet.
Higher rates of heart disease, increases in the incidence of cancer, record numbers of clinically obese people, and various other health scares have all drawn attention to the need for healthy lifestyle choices. Rising concerns for ‘’health and wellness’’ are bad news for fast food which is generally perceived as fattening and unhealthy. Many QSRs have responded to this negative press by adding new, healthier offerings to their menus. Since the beginning of the decade many companies have also responded by removing trans-fats and other unhealthy ingredients from their offerings. Despite these efforts, fast food restaurants retain an unhealthy stigma
Fast casual restaurants are a growing source of competition for the fast food industry. Fast casual restaurants like Chipotle, Cosi and Panera combine the convenience of fast food restaurants with the quality of casual dining. This new alternative to fast food and sit down restaurants threatens to steal market share from both. Still the fast food restaurant stands to benefit from a U.S. consumer slowdown as strapped consumers trade down from more costly fast casual restaurants. And waste will be channeled to the Septic Tank, Septic Tank, Septic Tank, Septic Tank Biotech, Septic Tank Biotech, Global Inti Fibertech' Septic Tank, Septic Tank, Septic Tank, Septic Tank, Septic Tank, Septic Tank,