The past year has been a difficult one for the restaurant industry, and the fast-food category has not been exempt.
Continue Reading Below
Fewer people are eating out overall, and in Q3, according to the most recent data available from NPD Group, that trend began to hurt quick serverestaurants (QSRs -- the technical term for fast food). That segment, which represents 80% of all industry visits, saw its first drop in five years. Even though the decline was small (1%), NPD analyst Bonnie Riggs does see signs for concern heading into the new year.
"The term growing your business in a '1% world' has become a popular mantra for the restaurant industry after six consecutive years of annual traffic gains of just 1%," she said, according toFastCasual.com. "However, over the past six months restaurant industry traffic growth has come to a standstill, and quick service restaurants, which have been the traffic growth drivers, are now experiencing a slowdown in visits."
Those sobering numbers suggest both a difficult and interesting 2017 for fast-food restaurants. To keep customers coming through the doors, expect chains to continue to innovate, while also working on clever new ways to offer value without returning to the days where dollar menus impacted profits.
McDonald's has been testing some new in-store technology around the world. Image source: McDonald's.
Expect more innovation
The past year has been one where many chains have pushed the boundaries of their food offerings as a way to get attention. Two Yum! Brands (NYSE: YUM) properties, Taco Bell and Pizza Hut, have led that trend, with many other chains including Restaurant Brands International's (NYSE: QSR) Burger King getting in on the action.
That led to a year where it seemed like the chains were looking to top each other with ridiculous ideas. It was a trend that led to Taco Bell's trying Cheetos burritos, Burger King's using the cheesy snack in multiple products, and Pizza Hut's stuffing everything from bacon to hot dogs in pizza crusts.
These are stunts and gimmicks, but they work to get curious customers through the doors. All of the chains mentioned above, as well as others -- including McDonald's (NYSE: MCD)-- have innovative and/or ridiculous products currently being tested in limited markets. That might mean we get chocolate pumpkin fries from McDonald's or a Taco Bell Caesar salad Crunchwrap (both of those have been offered in limited markets), but it's clear that using wacky combinations to get attention will remain a useful tool for fast-food chains in 2017.
Expect clever discounting to continue
Riggs noted in her report that 75% of the respondents who decreased their visits to restaurants said they watch how they spend their money on most or all purchases. That opens a door for fast-food restaurants, which are generally cheaper than fast-casual or family sit-down eateries with table service. It also creates risk, as QSR chains have pushed discounting too far in the past, increasing traffic but lowering check size and profit margin.
To combat that in 2016, a number of chains went to bundled value meals. Instead of offering lots of inexpensive choices, Burger King, Wendy's (NASDAQ: WEN), and others offered a sandwich, chicken nuggets, fries, and a drink for $4 or $5 (in some cases with a small dessert thrown in). McDonald's did something similar with its McPick 2 Menu, where it offered a limited number of items that could be mixed and matched at the rate of two for $5.
This type of discounting offers a value play for consumers, but by limiting the choice, it also encourages some people to opt for full-priced fare. It's a difficult line to straddle, but in 2017 fast-food chains are likely to continue trying to appeal to the crowd, which wants low prices without going so far in that direction that it compromises margins and profits.
Technology is coming
McDonald's has been testing using ordering kiosks in various parts of the world, and that technology should make its way to part of the United States in 2016. Other chains have not been as aggressive in that area, but 2017 may well be the year fast-food chains start to implement now-common technology through their apps.
This should include Mobile Order & Pay, a technology pioneered by Starbucks that lets the company put fewer people behind the counter working on taking orders and more into production. That increases customer satisfaction while lessening lines for people not using the technology. Consumers are starting to expect this type of convenience, and a number of fast-casual chains have followed the coffee leader in adding it. In 2017, fast-food chains should join in that trend.
It's not going to be an easy year
In 2016 the overall restaurant market was like a close football game played in bad weather. Chains had to fight for every inch they gained, while the conditions and their rivals did everything to push them back. There's every reason to expect that to continue in the coming year, as there's no reason to expectany fundamental changes to the difficult climate that caused the challenging 2016.
10 stocks we like better than McDonald's When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and McDonald's wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of Nov. 7, 2016
Daniel Kline has no position in any stocks mentioned. He deserves a break today. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.