We live in a great time to be a consumer. Mass markets, most famously TV and retail, are each undergoing something of a “Golden Age,” driven by disruptive entrants offering compelling new products, often enabled by technology, and competing against sluggish, entrenched legacy incumbents. Think Netflix vs. CBS and NBC, or Amazon or Trunk Club vs any number of brick-and-mortar retailers. The American consumer today is being spoilt for choice, with a proliferating number of companies competing for his and her attention, eyeballs, time and, of course, money.
There’s a similar phenomenon happening in food, which I find remarkably under-reported on. Most of the “food press” is devoted to the typical foodie beat: the organic/locavore stuff popular with the same wealthy elites that obsess over food as a vehicle for self-expression. That stuff is interesting too – more on it later in this post. Yet there’s another food renaissance happening on the other end of the market: in fast food, and the “fast casual”/quick service restaurant (“QSR”) segment broadly. As consumers, particularly younger ones, shift more of their spending towards experiences and consumables rather than tangible goods, new restaurant concepts are breaking the traditional expectations of the fast food biz and growing like crazy.
I think we’re the early days of broad growth in food, which will eventually absorb many of the dollars Americans are not spending in physical retail stores. Up and down the value chain, from your basic fast-food, to upscale “fast-casual,” to the burgeoning category of meal kit delivery, how and what people eat is changing – with interesting knock-on effects on adjacent industries like transportation and local delivery.
There are few things more iconically American as fast food. The Golden Arches alone are something of a modern symbol of empire. Wide swaths of the world know how to say “Kentucky” despite having no real idea of what it means. The “Big Mac Index” of gauging purchasing power parity is both a real thing and actually pretty useful.
Yet even beyond our global brands, the United States has always had our regional fast food favorites. The East Coast/West Coast rivalry of Five Guys vs. In-N-Out, or North/South with Dunkin Donuts vs. Krispy Kreme, respectively. High priests of the foodie politico-spiritual movement like Michael Pollan and Mark Bittman might disapprove, but the numbers don’t lie: Americans like fast food, eat a lot of it, and show no signs of stopping. Indeed, they’re eating more.
The difference between “fast casual,” “fast food” or simply “QSR” is mostly just marketing (and small differences in average check size) – I refer to them interchangeably here.
The variety and quality of QSR dining has expanded steadily over the last ten years at an accelerating rate, beating a lot of the old expectations about crappy growth in the restaurant biz. Just look at the famous recent examples of Chipotle and Panera Bread, which have each been opening around three or four restaurants per week for the last five years, with steadily rising revenues and unit volume. These chains are examples of the “fast casual” concept, exemplified by bigger, nicer eating areas that people don’t mind dining in (as opposed to the cheaper-feeling dining area in your typical burger fast food joint). They also demonstrate that consumers – particularly those with disposable income – are increasingly willing to venture outside of burgers.
There is a popular narrative that younger, hipper consumers are flocking towards healthier, more environmentally conscious food options. I have strong doubts about this, though. Witness the meteoric growth of millennial cult favorite Shake Shack, which went public with only 36 locations (mostly in Manhattan) and whose undeniably unhealthy burgers command an average check value almost 20% higher than their competitors. Chipotle, the other current darling of the modern American palate, has used masterful, even beautiful, marketing to present itself as a more environmentally friendly choice, strongly implying (without ever explicitly claiming) to be healthier too:
But while their burritos may be delicious, Chipotle is definitely not a healthy choice, with over half of meals there totaling well over 1,000 calories. And while McDonald’s mustered their mighty supply chain to begin offering an array of salads almost ten years ago, even after aggressive advertising, they only represent 2-3% of the company’s sales today. It’s the oldest story in the book: consumers say they want one thing, but actually buy another.
Burger path dependence
One of the biggest problems for any big, national food chain today is that its brand is pretty well cemented already. Consumers have very well-defined concepts of what KFC, Taco Bell, Wendy’s, or the Big Kahuna Burger of them all, McDonald’s, stand for, and whether that appeals or not. Not only are the brands well-defined, but each chain is also closely identified with a particular price range, making branching out of its core customer group difficult: a single meal at Chipotle can easily exceed $15, but who’s going to pay that much at a McDonald’s? And finally, each has long, well-established relationships with franchisees, whose cost structures and financial expectations are tied to long-established norms for the restaurant concept.
The story is similar across fast-food incumbents KFC, Taco Bell, Wendy’s, and particularly McDonald’s, whose dominance in fast food is akin to Walmart’s in retail (Micky D’s is the world’s largest buyer of beef, pork, tomatoes, lettuce and potatoes): declines in same-store sales and revenue, franchisee discontent and damaged brands that seem outdated or unappealing. While each still sells at a scale that dwarfs their would-be disruptors, they have hit limits on growth and see a steady loss of business to smaller competitors.
The product novelty offered by up-and-coming QSRs is only part of their advantage. Others are much more durable: shorter supply chains, more limited menus and attractive brands. But particularly important is how their incrementally higher price points enable new distribution models too. For younger consumers (or families!) who are beginning to tap into local delivery services like Postmates, offering cheap delivery options that appeal to customers is obviously easier to swallow for restaurant chains with wider margins. Offering margin-eating delivery options are also far less attractive to franchisees, and guess who owns most of the major fast food chain restaurants? At McDonald’s, KFC and Taco Bell, around 80-90% of all restaurants are franchise-owned, creating difficult split incentives about growth.
The promise of regional chains
I am not a talented food writer. Nevertheless, I sometimes fantasize about taking a roadtrip around the country, writing about the many great regional fast food chains experimenting with different concepts. The differences in business models, particularly what products each focuses on and how at large scale, are operations challenges that should be taught in any business school (rather than yet another Fastenal case).
Many are still private – chains like In-N-Out, Whataburger and Five Guys are firmly controlled by the founding families that likely see little benefit to going public. Yet the last few years have seen a number of other QSR IPOs, suggesting that their management teams see real opportunity in challenging the incumbent fast food chain hegemony. Del Taco, Potbelly’s, El Pollo Loco and Bojangles (which I’m a huge booster for) are great examples of new concepts that are competing on product, brand and high-traffic locations, and growing fast as a result without a strong reliance on franchises.
Personally, I can’t wait for the day when regional chains like Cookout, Firehouse Subs or Freddy’s Steakburgers IPO. Each offers a menu that is familiar enough to be broadly popular, but different enough that their incumbent competitor is not really a compelling alternative. If you get a chance to try any of them, do so, and you’ll know what I mean.
Food as virtue
Eugene Wei has written eloquently on how food is increasingly used as a cultural signifier, and how “foodism has become a totem of class.” (link) What one eats, or doesn’t eat, can now carry a statement of political, and even spiritual, significance. Locavores, organic enthusiasts and “____ diet” (pick one: paleo, Mediterranean, fruitenarian, pescatarian, etc.) believers of many types perform a kind of modern kashrut, honoring rules that lend order and significance to their lives. Some of these rules, like the amazing growth in Americans’ gluten sensitivity, are obviously nonsense invented by aggressive food marketing. Others are nurtured by class-tribal leaders like Michael Pollan and Mark Bittman and corporate marketing from Whole Foods Market and the “natural food” industry, who understood that people can be separated from more of their dollars by making them believe they can make a statement about their identity with kale.
It goes without saying that fast food is not considered sufficiently virtuous by the elite eaters. Rather, it is blamed for widespread obesity and wanton environmental damage, and not without some good reason. Industrial meat production is not a clean business, and fast food is… well, not always healthy.
Yet Americans demonstrably love fast food, as do people pretty much everywhere. If you look across the world, virtually every society and culture has its own version of “fast food” (or “street food”) which is near-universally popular, cheap, and bad for you: highly fatty, salty, sweet, or fried. In Germany, they eat sausages. In France, they eat sugar crepes. In China, you have infinite variety of fried dumplings and noodles. West and Central Africa has sugary beignets and greasy beef brochettes. Many former Commonwealth nations have adopted pastry meat pies. One of my favorite memories from Mumbai is pav bhaji and sugarcane juice from a stand next to the Victoria Terminus. And so on.
American “fast foods” are so deeply woven into our national identity that they’ll never meaningfully disappear, or probably even see decline. Make no mistake: attempts to regulate fast food on health grounds will almost certainly go no where, mostly because Americans simply love burgers, burritos and fried chicken too much. Addressing the obesity crisis from the opposite approach, by embracing processed food and being realistic about what most people like to eat, holds much more promise.
Food choices, and portion sizes, are two parts of very complex changes in lifestyle that have affected Americans over the last few decades, leading to higher obesity rates and, in some ways (though not in others), poorer health. Changes in required daily required activity and movement are another. Yet we also know that income and class are some of the most closely correlated factors with good health. Wealthy people eat fast food too, often at similar rates to poorer ones, but have better health outcomes – and we don’t always know why. Nor does providing poorer neighborhoods with access to healthier food options (solving the “food desert problem”) make much of a difference either.
Wealthy people scolding poorer ones for their food choices is nothing new. George Orwell wrote about it at length, first in Down and Out in Paris and London and later in The Road to Wigan Pier:
“In London… parties of Society dames now have the cheek to walk into East End houses and give shopping-lessons to the wives of the unemployed. He gave this as an instance of the mentality of the English governing class. First you condemn a family to live on thirty shillings a week, and then you have the damned impertinence to tell them how they are to spend their money.”
The amazing growth of QSR is demonstrating that people will, indeed, continue to eat what they want to eat, regardless of what the NYT’s food brahmins say. The challenges for QSR are primarily product-distribution fit, and these newer competitors are quickly figuring that out faster than the incumbents can shift their model. Meanwhile, consumers get better food. Winning!