Consumer Foodservice in Australia

Consumer Foodservice in Australia

EXECUTIVE SUMMARY

Sales growth sustained despite worsening financial conditions

Despite further worsening of economic conditions in 2009, consumer foodservice sustained value growth of 4% in current terms, similar that achieved in the preceding year. Cheaper food choices in 100% home delivery/takeaway and fast food continued to be key contributors to market performance in 2009, while full-service restaurants posted slight gains in value growth facilitated by the government financial stimulus package at the start of the review year. Transactions saw an improvement of 3% in current value growth as many consumers resumed their levels of dining out as financial pressures eased towards the latter part of 2009. Outlet growth was slight at less than 1% due to difficulties accessing credit and wariness towards expansion among companies and potential franchisees.

New menu developments intensify competition in consumer foodservice

The review year saw many key menu developments by leading chained operators particularly in fast food and 100% home delivery/takeaway. Premium food items were especially successful in chained burger fast food such as the Angus beef burgers by McDonald’s and Hungry Jack’s as consumers sought out affordable indulgences in fast food. In pizza 100% home delivery/takeaway, Yum! Restaurants Australia Pty Ltd heavily marketed its new pasta additions while Domino’s Pizza revamped its menu that is developed to suit local preferences.

Franchising remains the key expansionary strategy for chained operators

With most chained consumer foodservice companies operating via the franchising model, the system is the preferred mode for multinationals and domestic players to drive outlet growth. As a result, various franchisees lead in consumer foodservice holding almost 10% of value sales and just over 2% of total outlets during the review year. McDonald's Australia Ltd is the second leading company in value sales, recording a slight gain from the introduction of premium menu items in 2009, while Subway Systems Australia Pty Ltd follows various franchisees closely in outlet share as the company continues to expand at a rate of approximately 6% annually.

Independents find it hard to compete in 100% home delivery/take home and fast food

The intense competition for transactions presented by chained players through aggressive promotions and frequent advertising continued to impact independent operators during the review year. Outlet growth was static for independents with the categories 100% home delivery/take home and fast food recording declines, which furthered impacted transaction levels. The only exception remained full-service restaurants in which independents are preferred by consumers for their individuality in terms of flavour and ambience compared to chained outlets.

Australians expected to continue to dine out

The early years of the forecast period are likely to be characterised by consumers shifting towards less expensive food choices as a result of interest rate increases impacting mortgage repayments. Nonetheless, with the economic conditions expected to improve over the forecast period, Australians are expected to be less value-conscious in their meal choices. The experiential aspect of dining out will resume its importance with consumers. Consequently, consumer foodservice is expected to record a CAGR of almost 2% in constant value terms over the forecast period, with only street stalls/kiosks likely to suffer slight decline.

KEY TRENDS AND DEVELOPMENTS

Consumers seek out cost-saving deals

With the global economic crisis worsening in 2009 leading to more unemployment and investment losses, Australians were not only faced with the present financial pressures as well as the uncertainty of a lengthy economic downturn. Consumers became more value-conscious in their discretionary spending, which included dining out. As observed in the preceding year which saw the unfolding of the economic downturn, consumers have been trading down to cheaper meal options as they still desired to eat out on occasions due to a need for convenience or as a form of treat/indulgence.

Foodservice companies have responded to the value-conscious consumers by engaging in promotions in the form of combination meals or free items. While such promotional activities are not new in fast food or pizza 100% home delivery, other foodservice sectors including full-service restaurants and cafés/bars are increasingly resorting to value-added deals to attract consumer transactions.

Current Impact

With many consumers already trading down to fast food in order to cut back their discretionary spending, chained fast food operators such as Hungry Jack’s Whopper sandwich and Whopper Jr. sandwich value meals drove stronger sales growth for the company. During the review year, McDonald's Australia Ltd continued to aggressively advertise ‘Value Picks’, launched nationally in August 2008, which featured seven snacks and drinks under A$3. Souvlakihut, a Middle Eastern fast food chain, introduced tongue-in-cheek combination meals named ‘Stimulus Packages’ that offered meal items for a family of four under A$20.

In full-service restaurants, Wagamama (Australia) Pty Ltd offered free items for children 12 years and younger with the purchase of an accompanying adult meal. Parents or guardians could choose from a range of mini meals or desserts for their children, which are priced at approximately A$8. Fasta Pasta, a European full-service restaurant chain, offered a meal and movie ticket combination to attract consumers looking for recreational activities outside the home.

Outlook

The persistence of consumer thriftiness as well as the continuing of promotions by consumer foodservice operators will be dependent on the economic conditions. While the economy is expected to improve during the initial part of the forecast period, the Reserve Bank of Australia has been raising federal interest rates which saw 0.75% increase in the last quarter of 2009. The interest rate hike will impact Australian home-owners whose mortgage repayments are usually aligned to the prevailing rates, rather than being fixed.

While consumers will look to cost-saving measures by eating at home, they are likely to still want to dine out as a result of being time-poor or for recreational purposes. As a result, consumers are likely to continue to seek out deals and promotions to balance their budgetary constraints with their dining out habits.

Future Impact

As observed in the retail environment, continual discounting and promotion have led to a degree of expectancy as a normal form of trading with consumers. Similarly in consumer foodservice, the promotion of value meals and offer of free items could be regarded as standard fare by consumers. This will become costly for consumer foodservice companies which may see declining profitability despite sustaining transaction levels and value sales.

It is critical therefore for companies to also innovate on menu items, including a mix of premium food and drinks items that provide them with the margins otherwise lost in offering promotional deals. Consumers have been observed to be willing to spend occasionally on premium items as a form of personal indulgence. Operators could also looked to reinvigorate the physical setting and ambience to enhance the experiential aspects of eating at their outlets which is also critically appraised as part of the value that consumers derive from their dining out.

Premiumisation in fast food

With the tight financial conditions driving consumers to trade down to lower cost consumer foodservice options, fast food players stepped up in their efforts to grow value sales in the intensely competitive sector by innovating their menu offerings with premium items. McDonald's Australia Ltd introduced new burgers, Grand Angus and Mighty Angus, using Certified Angus Australian Beef in August 2009. This was followed on by Competitive Foods Australia Ltd which launched the Angry Angus burger at the end of the review year.

Chained convenience fast food operator 7-Eleven Stores Pty Ltd also looked to differentiate itself from the competition by piloting concept stores with a dedicated foodservice area offering delicatessen-style food items and barista-made coffees.

The premiumisation trend is also evident in the growing popularity of fast casual chains which feature using high-quality, fresh ingredients and speedy service. For example, Nando's Australia Pty Ltd uses free-range and hormone-free chickens in its menu which are pre-grilled to cut back on preparation time needed and only basted with the choice of sauce when the consumer order comes through. Such fast food brands also provide a similar experience of dining at a casual dining full-service restaurant at lower prices which appeals to many consumers looking for affordable treats.

Current Impact

During the review year, consumers have responded well to the premium developments in fast food as they satisfied the indulgence aspect while remaining relatively affordable. The launch of the premium Angus beef burgers by the leading chained burger fast food operators lifted sub-category value growth to 12% in 2009 as compared to 9% in current value terms in 2008. McDonald's Australia Ltd reported up to 20% increase in sales in the months following the launch of the McAngus range. The company also saw an overall increase of over 4% in average spend per transaction to reach A$9.84 in 2009.

The growing popularity of fast casual chains was evident in the robust outlet growth by Nando’s Australia Pty Ltd despite the tight economic conditions presenting challenges in terms of available credit and consumer confidence. The chained chicken fast food operator increased by 22% in outlet numbers with a total of 38 stores opened during the review year. The rate of growth exceeded the already strong outlet increase of 13% in 2008.

Outlook

The success of the new premium burger for the leading chained burger fast food operators is likely to lead to other fast food companies innovating in a similar direction. While the economic conditions are likely to recover in the initial half of the forecast period, rising interest rates impacting on mortgage repayments are expected to curtail consumers’ discretionary spending. Consequently, consumers will be keen to continue to look for affordable indulgences during tight financial conditions.

As the economic environment improves, premiumisation in menu offerings is still likely to remain an attractive development for fast food operators, in order to attract the consumers who would be resuming more expensive consumer foodservice channels such as full-service restaurants.

Future Impact

As fast food operators increasingly look to premium products to attract consumer interest, the challenge remains for companies to control the costs of using high-quality ingredients in the midst of rising commodity and food prices. There has been criticism of Hungry Jack’s Angus beef burger for being less than authentic due to the meat not being Certified Angus Australia Beef by the local authority. Competitive Foods Australia Ltd defended the product by asserting the burger patties to contain at least 75% Angus beef.

The popularity of fast casual is expected to remain strong during the forecast period with a CAGR of 12% in constant value terms. Fast casual is a segment which domestic companies could look to gain value share or establish a foothold in the highly competitive fast food environment which is otherwise dominated by multinational chains. Grill’d Pty Ltd, a fast casual brand in chained burger fast food established in Melbourne in 2004, has seen outlet numbers grow to 30 outlets nationally in the review year.

Consumer foodservice companies respond to call for healthier eating

Faced with findings that one quarter of the country’s adults are obese and an additional 37% of the adult population are overweight, as reported in the National Health Survey, government agencies and lobby groups have focused on consumer foodservice and packaged food as potential contributors to the high prevalence of obesity and overweight in the country. In a strategic roadmap released by the newly-formed National Preventative Healthy Taskforce, one of the recommendations in combating obesity included limiting advertising of unhealthy foods to young children. The national branch of a global lobby group with a goal to reduce salt intake, Australian Division of World Action on Salt and Health, conducted a study which found menu items of six leading chained fast food operators including KFC, Hungry Jack’s and Subway, to contain excessive levels of salt.

In a highly competitive trading environment, consumer foodservice companies are keenly aware of the effects of negative media coverage and the need to protect their public reputations which could otherwise impact negatively on transaction growth. Consequently, companies have responded positively in menu development and industry initiatives to address community needs.

Current Impact

During the review year, Food Standards Australia New Zealand conducted a survey as a follow-up to the initiative on reducing levels of trans fatty acids in consumer foodservice and packaged food launched in 2007. The companies which participated in this initiative included leading chained players from fast food and pizza 100% home delivery/takeaway. The survey found that some companies have reduced the levels of trans fats in their food menus by eliminating the use of hydrogenated oils or using healthier vegetable oil blends.

Another collaborative response to the need for healthier eating, seven chained players from pizza 100% home delivery/takeaway and fast food signed up to Australian Quick Service Restaurant Industry Initiative for Responsible Advertising and Marketing to Children. The pledge included companies only directing their advertising to consumer groups aged 14 years and younger with regards to healthier eating choices. These companies which included Yum! Restaurants Australia Pty Ltd and McDonald's Australia Ltd also signed up to provide nutritional content on front-of-pack labelling and company websites.

Outlook

The focus by federal government agencies on reducing obesity levels in the country is expected to heighten over the forecast period, with the National Preventative Health Taskforce aiming to halt and reverse the trend of rising obesity and overweight levels by the year 2020. The taskforce will be implementing initiatives drawn up in the 2009 strategic roadmap which includes driving changes within the supply environment to promote the availability and demand for healthier food and beverages.

In addition to the regulatory environment proactively facilitating the changes in the dietary habits of many Australians, consumers are also being bombarded with the chronic diseases associated with being overweight by the media and public education campaigns. As such, consumer foodservice companies are likely to respond with healthier menu options so as to meet the growing interest among consumers in better for you (BFY) food and drinks.

Future Impact

Government initiatives in promoting healthier eating habits could involve more regulations that involve food preparation methods or advertising activities. For example, the current industry initiative that pledges responsible advertising to children could be legislated across the consumer foodservice industry and front-of-pack labelling. Local governments could also expedite the changes towards healthier food choices such as a pilot programme using traffic light labelling showcasing the nutritional value of food in a popular foodservice area in Melbourne comprising fast food outlets and cafés/bars. Such initiatives could be extended to other foodservice locations over the forecast period, providing more impetus for companies to be proactive in reviewing their menu offerings.

Companies which have not proactively reformulated their menu offerings to align them to recognised guidelines on healthy nutritional levels will not be able to avoid the negative publicity and the potential damage to their public reputations and branding. On the other hand, companies which proactively leverage the trend towards healthy eating could see better value sales growth as a result of growing consumer demand and positive media coverage benefiting their brand positioning.

Internet increasingly deployed by consumer foodservice

With the growing usage of social networking sites on the Internet, the Internet is increasingly used by consumer foodservice companies to drive brand awareness and update consumers about promotions and new menu items. Chains across the foodservice categories with the likes of Domino’s Pizza, Hog’s Breath Cafe, and Gloria Jean’s have deployed Facebook and Twitter to connect with their consumers. The medium of Internet social networking sites is not only cheaper than traditional broadcast or print advertising, it also has the advantage of being perceived as more personalised.

With more Australians having access to the Internet and seeking out convenient meal solutions, companies are also looking to the online ordering channel to grow their transaction levels and value sales. In November 2009, Domino's Pizza Pty Ltd launched an iPhone application which facilitates online ordering for iPhone users. Towards the end of the year, Wagamama, a chained Asian full-service restaurant operator, introduced an online ordering portal for take-away, so as to facilitate shorter waiting times for time-pressed consumers.

Current Impact

Several companies which have adopted social networking tools have seen strong subscription to their sites. For example, Hungry Jack’s and Gloria Jean’s each boast of over 30,000 Facebook friends to their brands. Domino’s Pizza boasts over 13,000 friends on Facebook and more than 2,500 followers on Twitter. The social networking sites not only provide quick and personalised access to consumers, allowing companies to communicate on promotions, company news and menu developments, the tool also provides the companies with feedback from the users. As a result, companies are able to gauge quickly the receptiveness of consumers towards new developments.

With first-mover advantage among pizza 100% home delivery/takeaway operators in terms of innovation through the medium of iPhone technology, Domino’s Pizza Pty Ltd reported 150,000 application downloads in the first month in late 2009 and A$2 million in value sales in the three months since its launch of the iPhone application for online ordering in November 2009. The platform has also facilitated overall growth in online order-taking which accounts for more than 25% of the company’s value sales.

Outlook

Internet penetration in Australia is expected to continue to grow over the forecast period, particularly as the federal government implements the National Broadband Network that will enable quicker access and potentially cheaper rates. With Australians becoming more wired-up and technology savvy, the use of the Internet medium will continue to be an attractive tool for communication and as a channel to grow transaction levels and value sales.

During the review year, Yum! Restaurants Australia Pty Ltd also indicated the likely introduction of an iPhone application to facilitate online ordering for Pizza Hut. The implementation is expected to take place in 2010 and the move will see two leading chains in pizza 100% home delivery/takeaway targeting iPhone users, which is likely to grow in popularity particularly among the Generation Y demographic.

Future Impact

With Australians becoming more net-savvy and the shifting focus to Generation X and Y consumer groups for value and transaction growth, social networking tools will become more critical to the branding activities for consumer foodservice operators. The traditional broadcast media of television and radio will not be sufficient to engage younger consumer groups who also expect immediacy in communication. Smaller chain operators will find such sites critical in driving their brand awareness as the Internet medium provides the form of viral transmission of promotions and news with none of the expense of traditional advertising.

Nonetheless, the immediacy of such tools can work against consumer foodservice companies in the event of any negative publicity or mishandling which will disseminated just as quickly by users of the networking sites. Companies need to be vigilant and constantly monitor the responses and sentiments of the consumers on such sites, addressing promptly any concerns or issues which are raised by users.

As consumers become more time-poor, online ordering through websites or mobile phone technology will also be an important avenue for companies to expand. Consumer foodservice categories other than 100% home delivery/takeaway, as seen in Wagamama (Australia) Pty Ltd can look to this channel to potentially grow transaction levels and value sales per outlet.

Collaboration between chained players to grow transaction and value sales

In the highly competitive environment of consumer foodservice, collaboration among players seems to be an unlikely route to facilitate growth in transaction levels and value sales. However, the challenging trading environment during the review year as a result of the economic downturn saw the slowing down of shopping centre developments and difficulty in access to credit facilities. With many companies adopting the franchising model to drive outlet growth, the investment appetite of prospective franchisees was also dampened by the low levels of consumer confidence in 2009.

Consumer foodservice players recognised the potential in partnering with other chained companies as a means to grow transaction levels and value sales without investing in outlet expansion. While collaborative synergies are more likely to be found across different categories of consumer foodservice, the diverse offerings in fast food have also provided opportunities for cross-selling of products

Current Impact

At the end of 2008, Eagle Boys Dial-A-Pizza Australia Pty Ltd and Landmara Pty Ltd piloted the first Eagle Boys Pizza Express Store within a Nightowl convenience store. The unique foodservice concept occupied approximately six square metres and had most of the ingredients prepared off-site to speed up the process of food preparation. The collaborative concept between the pizza 100% home delivery/takeaway and convenience fast food met with overwhelming consumer interest, with the pilot store reportedly selling up to 800 pizzas in a week.

In a similar move by Retail Food Group Ltd, the company expanded the presence of Donut King within forecourt retailers in New South Wales in 2009 since its pilot of the first store launched at the end of the preceding year. The company is also extending the collaboration to South Australia.

The franchise operator of Baskin-Robbins and Cookie Man, Allied Brands Ltd reported stronger sales performance during the review year in combination stores servicing the two brands of ice cream fast food and bakery products fast food compared to standalone outlets. Such combination stores were seen to outperform single branded sites by 30% more in value sales terms.

Outlook

Collaboration between consumer foodservice companies is likely to continue over the forecast period as companies compete for a limited number of suitable sites due to the slowdown in shopping centre developments. Smaller collaborative sites will also require less investment to run company-owned stores as well as being more palatable to potential franchisees.

The successful alliances formed between consumer foodservice brands from different categories observed during the review year is also likely to interest other chained players to expand through this avenue. Franchise operators such as Retail Food Group Ltd and Allied Brands Ltd have indicated their intentions to leverage such collaborations to drive growth in transaction levels and value sales.

Future Impact

While these collaborative efforts have been seen to improve outlet performance, there remains the possibility that overall levels of transactions and value sales will be cannabilised. Pizza 100% home delivery/takeaway operators need to be particularly cautious in expanding in this avenue as the partnership with convenience stores does not encroach into other outlets’ assigned locations.

In addition to the potential alliances between foodservice companies, there is also the opportunity to collaborate with store-based retailing channels such as supermarkets and mass merchandisers. Consumers who are increasingly time-poor are likely to appreciate the convenience of grabbing a quick meal while carrying out their grocery shopping. Following the success of its in-store café/bar within a supermarket during the review year, SPAR Australia Ltd has extended the in-store foodservice offering to new stores planned for 2010.