Dive Brief:

• New research conducted by TD Bank finds that 71% of restaurant franchisees feel pressure to expand their business in 2019. They plan to turn to delivery, value meals, store reimaging and mobile technology for growth. 
• Seventy-eight percent of respondents said their restaurant has a delivery strategy, and 60% of those rely on third-party services like Postmates, Grubhub and Uber Eats, while 18% offer delivery in-house. 
• The survey also indicates that 60% of franchisees offer some type of value meal program in response to bargain-hunting customers. However, 22% of them said these value meals hurt their margins. 

Dive Insight:

For restaurant operators, there have typically been two major approaches to propositions — value propositions and convenience propositions. TD Bank’s research, coupled with the staggering growth of delivery despite the additional fees it entails for both consumers and operators, indicates that consumer preferences are driving a sharp shift toward convenience over value. 

In fact, recent research from Zion & Zion shows that people with income under $10,000 order via online delivery the most compared to any other income bracket, further demonstrating that consumers are willing to pay more for convenience no matter what. That’s not to say value meals are moot. A number of chains — including McDonald’s, Burger King, Wendy’s and Taco Bell — turned to value menus in 2018 in an attempt to boost traffic in an intensely competitive environment. 

However, as TD Bank’s respondents note, this approach may generate some additional guest counts, but it also tests margin pressures, stifling profitability which ultimately stifles franchisee growth. 

Delivery seems to be the biggest growth solution at this point, but it requires significant investments. Many chains are yielding some type of return, however. In December, Yum CEO Greg Creed said delivery should help Taco Bell reach its 3% same-store sales growth goal, while Fat Brands’ delivery channel now makes up about 16% of sales and raises average checks by about 25%. McDonald’s CEO Steve Easterbrook said delivery provides incrementality in the 70% range and typically doubles the check size of in-store orders. 

Conversely, value meals, while pervasive, have become a bit of a pain point for restaurant operators’ profit margins. Still, as TD Bank’s Mark Wasilefsky points out in a press release, value meals are expected by consumers, which puts operators in quite a predicament.

As Restaurant Business reports, the QSR segment overall remains stagnant. Last year, for example, the top chains added just 400 units out of about 170,000 total in the segment. Growth opportunities are few and far between. If operators are really pressured to expand, it's best they focus on the opportunities that will best allow them to do so. 

"To really increase revenue in a finite market, franchisees should implement delivery if they do not already offer that service. Ignoring this trend will probably hinder those who do not participate from meaningful growth," Wasilefsky said.