QSR Report – July 2019

QSR Industry Overview

The Quick Service Restaurant (QSR) industry has had large revenue gains in the U.S. with generated revenues reaching $256B in 2018, a 3.8% growth. In correlation, the number of new restaurants increased by 2%. The industry has predominately focused on food innovation to maintain and expand market share. McDonald’s took the lead in increasing market share with its burger sales, a first time increase in five years. Starbucks continues to provide limited and new product offerings to keep traffic at stores while focusing on increasing per transaction sales. Subway lost 1,100 locations last year but continues to innovate and modernize its menu to appeal to consumers.

Consumers continue to be conscientious to healthy food options and QSR menus have changed over time to provide healthier options. QSR industry growth also is sensitive to changes in consumer spending. Consumer spending increased by 1.2% in Q1 2019. When personal consumption expenditure is high, consumers are more apt to spend money to eat at restaurants. With QSRs continuing to offer low price point options in an effort to keep attracting customers, steady consumer spending has offset losses.

Top 10 QSRs in the U.S. by Revenue

TOP 5 QSR – CORPORATE ACTIVITY

Fresh Ingredients and Ongoing Focus on Technology
In consumer appeal towards ingredient transparency, McDonald’s introduced fresh beef last year. This has led to substantial market growth in burger sales. McDonald’s has experienced a 30% increase in quarter pound sales (40 million more quarter pounders) in the past 12 months. Franchisees have felt the monetary pressure with capital put towards new refrigeration & storage equipment, remodeling and modernizations. Part of these modernizations include technology to enhance consumer experience including the global mobile app and the adaptation of self-order kiosks. The company is also focusing on transforming the employee experience in eliminating repetitive tasks, improving service speed and enhancing employee to customer interaction.

Accelerating Growth in U.S and China Segments
Starbucks sales in Q2 2019 had an increase in comparable store sales by 4% driven by an increase in average ticket sales. In the same quarter, the company had a total of 319 new net stores added to its roster with only 6% of those being in the United States. Net revenues for the Americas grew 8% over Q2 2018 to $4.3 Billion in 2019. Driven by 686 net new store openings over the past 12 months. The company is looked to accelerate its targeted markets include the U.S and China with an expansion of its brand through Global Coffee Alliance with Nestle to increase shareholder returns. Starbucks continues to innovate its menu offering and recently added four new colorful drinks to its lineup included limited time food offerings.

Menu & Leadership Promotion in Innovation
Traffic and sales has been challenging in the past for Subway. In 2018, the company closed 1,100 stores and rolled out a Fresh Forward design across 465 locations. The 2019 focus has shifted on improving product offerings. Earlier this year, the company introduced new additions to its signature wrap collection. In April, Subway launched its expansion of global food innovation partnership with Tastemade, a digital food network. Since the inception of the partnership, hundreds of menu items have been developed including unique data insights derived from the Tastemade audience for possible inclusion on the Subway menu. Other food innovations have included the club sandwich menu and the introduction of a new bread offering as the result of a King Hawaiian partnership. At the end of May, Subway announced the promotion of Len Van Popering to Chief Brand and Innovation Officer. He has been at the company since 2017 and has been actively involved in the brand’s global transformation and helping expand its innovation pipeline.

Incremental Sales Growth and Refinancing Transactions
In Q1 2019 earnings, Wendy’s reported incremental sales growth in North America up .2% over year prior. Total revenues were up 7.4% to $408.6M. Revenue increases were primarily driven by higher sales at company-operated restaurants and an increase in franchise royalty revenue and fees. Higher sales at company-operated stores was the result of an increase in the number of restaurants in operation and positive same-restaurant sales. Wendy’s also announced its plans to refinance a portion of its outstanding securitization debt with a new series of securitize notes under an existing securitized financing facility. The company intends to issue at least $850M of new fixed rate senior secured notes to close by the end of Q2 2019.

Breakfast Daypart Impact
Burger King reported Q1 2019 system-wide sales growth at more than 8%, attributed by solid same store sales over Q1 2018. Comparable sales for the quarter were .4% positive, slightly below performance in Q4 2018. The reintroduction of the spicy nugget was effective in the value menu and the Big King KL performed well in the premium offerings. Decreases have been experienced in Burger King’s breakfast daypart offering and the company began to address it at the end of the quarter with the launch of the BK Café platform in March in an effort to help drive guest count and sales growth. The BK Café platform includes an expansion of specialty coffee menu including 10 new beverages.

QSR TOP TEN MEDIAN ASKING PRICE & CAP RATES

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