Product and Service

Companies included in restaurant –quick service sector in food service industry primarily franchise and operate quick service restaurants.


Demand for Product and Service

As our sales data indicates, the demand for quick service food has generally been getting weak since 2016/17 after strong performance before 2016 as indicated by declining transactions.  While supposed to be benefiting from favourable factors from economy &income, consumers’ spending, and demographics, the growth slows down as traffic decreases. Pizza, Mexican, and sandwich sectors seem to get hurt much worse than chicken and burger sectors where demand has been strong presented by less decrease in traffic and higher increase in price. There is a signal that decline in traffic may be slowing down.

The Sector

Sector’s current, trend, causes behind trend, and future

Current and Trend

  1. Generally, demand from loyal customers for quick service restaurant seems to be solid as indicated by the increase in average check size of companies in this sector, which means that customers don’t mind to pay more for the same or adjusted menu.
  2. There is an apparent downward trend in traffic since 2015, which has caused huge pressure on comparable sales of those companies while the declining pace seems to be slowing down in 2018.
  3. All sub-sectors of QSR present a consistency in terms of this downward trend probably under the common influencing factors except for the Mexican food- style restaurants, which have experienced continuing increase between 2015 and 2017 but down in 2018.
  4. Companies in this sector have tended to re-franchise their company-operated restaurants and the trend is more obvious among restaurants of chicken-QSR and Hamburger QSR. Relatively, there is a lower franchise rate among restaurants in Mexican and Pizza QSRs.
  5. Increasing franchise rate has helped improve the gross margins of companies, which have also benefited from rising menu price and decreasing commodity costs.

Causes behind the trend

We think the trend happening among restaurants in this sector has reflected changes in economy that influence consumers’ spending. Generally, benefiting from the recovery of economy the trend in consumers’ spending has been going up. However, this may have been negatively impacted by the recent change in monetary policies.

Food style and restaurant concept are the factors determining how easy to find franchisee in some certain areas. Chicken and hamburger have been the preference of consumers in a bigger population market and thus presented faster increase in terms of franchise rate and gross margin.

We think the increase in Mexican style restaurant has been independent from those factors determining performance of other style of food service but, to a larger extent, determined by the demographic factors such as increase in population.

Competition has not been focused on price as indicated by general ability to raise menu price/products mix to offset the impacts of decreasing traffic. Therefore, there are two explanations for the slowing down traffic: 1. Traffic stay home as a result of economy or changes in eating habit 2. Traffic goes to somewhere else. We will continue to analyze other categories of foodservice industry.

Industry Future

We think the accelerating recovery of economy will eventually help bring traffic back to restaurants after the temporary impacts from cease of quantitative easing policies.

Future competition will focus more on brand and advertising &marketing spending.



General Financial Performance of Companies In the Sector

It seems that the slowing down traffic was the major reason contributing to slowing down increase in comparable sales of fast-service restaurants between 2015 and 2017. Data indicates that the average increase in comparable sales all across this sector went down from around 5% of 2015 to around 1% of 2017 except the Mexican restaurants, which presents consistent 5-6% increase in comparable sales during this period. (Hamburger-QSR went down from 5% to 1%; chicken-QSR down from 4% to 2%; sandwich-QSR down from 4% to -2%; pizza-QSR down from 4% to 0%). Correspondingly, accompanied with declining sales, the traffic has been down for most of companies in this sector since 2015. For example, our data indicates that the average decrease in traffic of hamburger restaurants was 2% and 1% in 2016 and 2017.

Since 2017, it seems that traffic all across this industry has continued to decline but present signals of slowing down. Traffic in Mexican restaurant started to decrease in 2018 following the trend seen frequently in other types of QSR before 2017.  Comps turned into negative range and were down largely in Pizza sector in 2018, which, with sandwich companies present the worst decline among QSR sector in the past two years. Comps in chicken related QSR restaurants seem least impacted by generally slowing down in traffic all across industry probably due to relatively stronger demand and thus the ability to raise price. Decreasing Hamburgers’ comps seem to be hitting the bottoms as traffic rebounds and price rises.

It seems that the impacts from decrease in traffic have been offset partially by raising menu price/products mix. This is probably why we are seeing positive growth in their comparable sales from many restaurants while decrease in traffic.

For under-performed companies in this industry, franchising their company-operated restaurants obviously has been a better business strategy in dealing with decreasing sales and cash flow. However, all industry has been suffering from general decline in sales. Data indicates that the average cash flow/share of companies in this sector has been declining since 2017.

Our data indicate that, while slowing down comparable sales, there are general improvements in companies’ gross margins in the past several years benefiting from shifting of revenue to re-franchising, rising menu price, and decreasing commodity costs.

Different types of food styles present different gross margins depending on how easy/difficult they can find franchisees for their restaurant concepts. It seems that chicken-QSR demonstrates the best abilities to franchise their concept and thus present the highest average sector gross margin (average 47%). Hamburger QSR then follows, which presents average 36% gross margin. The typical gross margin for Mexican and pizza QSR is around 17% with a low proportion of franchised revenue. Sandwich sector presents the lowest gross margin of about 13%.

Correspondingly, chicken-QSR presents, according our data, the highest operating margin of average 30% with a SG&A as percentage of sales of 16%. Hamburger-QSR has an average 22% operating margin with a SG&A as percentage of sales of 13%. Mexican and Pizza -QSR has an average 8-9% operating margin with a SG&A as percentage of sales of 8-9%.

According to our analysis, the current companies’ enterprise price/EBI ratios are:

 (QSR): average 28 with an interest/EBITDA ratio of 19%.      

 (Hamburger-QSR): average 29 with an interest/EBITDA ratio of 24%

(Chicken-QSR): average 34 with an interest/EBITDA ratio of 23%.    

 (Sandwich-QSR): average 91 with an interest/EBITDA ratio of 0% (abnormal)

 (Mexican-QSR): average 23 with an interest/EBITDA ratio of 12%.

 (Pizza-QSR): average 25 with an interest/EBITDA ratio of 10%.

The average cash flow of companies in this sector presents increase of 19-25% in 2016 and 2015 but decreased in 2017 when the traffic slowed down quickly. Cash flow continued its downward trend in 2018 presenting a decrease of about 9%.

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