The growth rate of Top 500 chains dropped in 2016 following a strong 2015 performance. Total sales growth slowed from 5.2% to 3.6%, while total units remained mostly static. This is according to Technomic’s Top 500 Chain Restaurant Report, a comprehensive ranking, analysis and overview of the 2016 U.S. chain restaurant industry.
The presidential election, higher labor costs and greater competition from on-trend independents and emerging chains are among the factors contributing to the Top 500’s weakened performance.
Emerging Chains Gain Momentum
The Top 100 ranked chains continue to drive industry sales, accounting for more than $240 billion in 2016. In comparison, those in the second-tier ranking (chains 101-200) brought in just more than $25 billion.
Interestingly, the strongest annual growth came from the bottom Top 500 tiers, a signal that consumers are gravitating toward emerging restaurant brands. Chains ranked 301-400 grew sales 4.7%, and those in the 401-500 ranking grew by 6.4%. That compares to the Top 100’s growth of 3.6% for the year.
Limited Service Leads Growth
Unsurprisingly, limited service continues to dominate the Top 500. Total limited-service sales grew at a cumulative rate of 4.4%, and unit totals increased 1.9%. Fast casual remains a significant growth vehicle for the segment and for the Top 500 overall.
However, 2016 is the first year that sales for fast casuals within the Top 500 slipped to a single-digit growth rate. This decline indicates a maturing fast-casual marketplace as some menu categories become increasingly saturated. Waning fast-casual sales can also be partially attributed to Chipotle’s foodborne-illness troubles, which negatively affected the segment as a whole.
Comparatively, sales for quick-service restaurants (QSRs) jumped 3.7%. Although fast casual is gradually owning a larger share of limited-service sales, QSRs still make up more than 60% of the Top 500’s total sales volume. Solid growth from key players such as Starbucks and Domino’s continue to demonstrate the influence and size of this segment within limited service.
The Highs and Lows of Full Service
Full service, on the other hand, had annual sales growth dip to 1.4% and unit growth remain flat. Traditional casual-dining chains most heavily contributed to this segment’s troubles. The top five largest full-service brands, four of which are casual dining, all either had negative or slow sales in 2016.
Bright spots within full service are polished/upscale and contemporary casual-dining chains, which increased sales by 4% and 4.5%, respectively. Even fine dining saw sales rise by 4.9% due to the affluence of the sector’s customer base, the quality of offerings found at these brands and the appeal this segment has with today’s consumer.
Outlook and Opportunities
Technomic forecasts continued nominal restaurant growth in 2017. Much of that growth will still come from fast casual, particularly niche segments such as healthy, Mediterranean and barbecue. The changing landscape of delivery will also result in off-premise occasions serving as a top growth strategy for most segments. While casual dining is not expected to regain its footing anytime within the next year, expect to see brands still fight to recapture business.
Leading initiatives will center on remodeling stores and refining operations, as well as emphasizing value and convenience.
Darren Tristano is the former president and chief insights officer of Technomic.
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