2007 - Another tough year for Quick Service?
Horizons forecast a year of mixed fortunes within the Quick Service sector. Based on our just released QSR Report, we predict there will be no overall growth, but some sub segments – such as coffee shops and sandwich chains – will see some significant expansion. Looking to the longer term, the success of the sector is to a large degree in the hands of the operators themselves. If you would like to have a copy of this report - and its companion reports on Restaurants, Pubs etc - contact Horizons on +44 (0)20 8349 0162 or email .(JavaScript must be enabled to view this email address).
The QSR sector covers a range of different types of outlet. What unites them is: their comparatively low cost offer to the consumer, the usual (but not universal) presence of self-service, the absence of alcohol and, generally, the fact that payment is made before or at the time that the food is provided.
Cost of entry can be low. This encourages many start-ups that are unlikely to be viable because the business plan is wrong; the management/owners lack the requisite skills, knowledge and experience, or a combination of these dangerous elements.
The range of food styles is large but innovation is low. For example, key sectors are fish and chips, burgers, sandwiches, pizza, Indian and Chinese food. In each case the business model is simple, specialist suppliers of the necessary food are easily sourced, equipment – especially second-hand – is readily available. As a result of these various issues, the supply to each segment of the Quick Service sector tends to have its own supply chain.
While this description is valid of most outlets within the Quick Service sector, it leaves out the dynamic elements of the market. These concepts – usually based on US experience and benefiting from US brands and often US finance (or franchised financing models) – have grown up over the last 30 years. The large Quick Service chains have often created their own market where none existed before.
Perhaps the key factor of this sector – whether considering independent operators or large players – is its low margins. Thus the only way to build significant profits is to build volumes – and successful quick service operators are those able to do this. The outcome is that throughput per outlet in the quick service sector (at almost 1,300 meals per week on average and much higher in the major chains) is far higher than throughput in the restaurant and pub sectors.
The need for volume is related to the numbers of outlets that a business can operate. This helps to explain that while chain operators only account for 26% of sales in the quick service sector, they account for 54% of sales.
So the outlook for the UK is good (given the lower percentages in the UK and the untapped potential that they represent)? Well, no. Given the ground to be made up, the UK would be expected to be showing rapid growth in this area. But this isn’t happening – and it’s not just a short-term issue, slow growth has been a feature of the UK QSR segment for the last four years.
The question therefore is: has QSR which was an engine for foodservice growth in the UK and the 1980s and 90s now slowed down or shut off altogether? The answer is that it looks likely unless operators in this segment – and the chain operators in particular – can restart the stuttering engine.
For 2007, our preliminary estimates – which we will firm up over the next two months - show that the sector as a whole will serve 2.05 Bn meals - that's 19 million more than in 2006 and will be worth £9.0 Bn.
Growth in the different sectors will vary from Coffee shops (6.2%) and Chicken (3.1%) to declining sectors most notably Fish and Chips (-1.3%).
Looking to the longer term, is this sector going to return to growth? Probably - but not the high growth rates that imply the (re)adoption of the US QSR model. And the reason why is all to do with property.
QSR operators are caught in a triple whammy: high land costs; complex business roll out plans; high finance costs. And they will have to work very hard to generate the long term sales growth that will lead to ongoing profitability.
But there will always be new offers and concepts to take up the challenge.
What will replace sandwiches and coffee? That is a multi £ million question without a clear answer.
