Fast Food’s Snacking Trend Now Has Global Reach
Article | 10 Nov 2011
Between value-priced items and full meals, a new product tier emerged over the past few years: Snack-sized meals, desserts and beverages that drive traffic, improve profitability and broaden restaurant appeal to the widest possible consumer base.
Now, this snacking trend has grown into a worldwide phenomenon, driven by growing consumer demand for variety, value, portion control, small luxuries and new dining experiences. The trend is particularly evident in fast food, led by McDonald's and its success with specialty beverages in the US, desserts in developing markets and snack-size items system-wide. The trend offers a variety of benefits for operators that vary by market maturity: In developed markets, snacking items can be used to drive incremental traffic and take share from competitors; in emerging markets, the same can be used to appeal to lower-income consumers who may not be able to afford full meals.
A focus on taking share
In developed markets, the effects of the recession have left restaurant operators fighting for share in stagnating, or even declining, markets. In Japan, consumer foodservice value sales have declined each year since 2004, and in the US value has not grown since 2007. Other major markets, including France, Spain and the UK, have all shown a net decline in value since 2007, and many are expected to see this stagnation continue through 2011. As such, operators in these markets can no longer rely on organic growth to boost sales year after year. Transactions are also declining in many markets (as much as 3% between 2009 and 2010 in France and Spain). Consumers are dining out less frequently, and operators need to take share from each other in order to grow sales.
Snacks, beverages and desserts can be instrumental in achieving this goal, as these items have the ability to drive incremental traffic across multiple dayparts. After McDonald's introduced Real Fruit Smoothies and McCafé Frappes in the US in 2010, the company saw immediate boosts in sales, with a comparable sales increase of 6% in the month following the smoothies launch. Despite an initial goal of capturing just 5% of the smoothie market, the company also reported having gained a 20% share in less than two months. The frappes were also successful in driving traffic throughout the day—according to McDonald's, just 30% of sales of the beverage during its testing phase occurred during the breakfast daypart.
Starbucks has also had success with the snacking trend, evidence that the benefits aren't confined to fast food. The company launched Starbucks Petites, a line of bite-sized desserts priced lower than standard treats, in March, 2011. Menu items include cake pops, miniature cupcakes and other small desserts, and are priced at less than US$2. They're also marketed as having less than 200 calories, adding an additional draw for consumers who want to treat themselves to a small luxury without going overboard. The Petites have been so successful that in Starbucks' most recent earnings call (fourth quarter, 2011), the company reported a 3% increase in average spending per transaction in the US that it attributed, in part, to incremental sales from the dessert line.
Appealing to lower-income consumers
In less developed markets, consumer foodservice value is still growing at a healthy rate, as these markets have not yet reached full penetration. However, many consumers in these countries are priced out of the market as a result of low disposable incomes. Despite the enormous populations in some key emerging markets (China and India, for example, both have well over three times the population of the US), the wealth is often distributed in such a way as to potentially limit any operator's consumer base.
By way of illustration, average annual disposable incomes per capita in BRIC markets are significantly lower than those in the largest developed markets, despite these countries being a major focus of future consumer foodservice growth. Furthermore, the wealth in these countries is spread differently among consumers, creating a situation where a small decrease in cost can make a product affordable for a disproportionately large percentage of the population. In China, as illustrated below, a majority of the country's total households (56%) have annual disposable incomes between US$2,500 and US$10,000 in constant terms. The largest segment of households, at 110 million, falls in between annual disposable incomes of US$2,500 and U$5,000. As a result, an operator that can offer prices that are attainable to people in this tier can gain hypothetical access to almost 30% of the households in China. Brazil, Russia and India also show similar clusters of households at low disposable incomes, whereas households in Japan and the US are more evenly distributed among the various disposable income levels.
2010 Annual Disposable Income Distribution in the US and China To take advantage of this fact, operators are using snacks, desserts and beverages to appeal to consumers who may not be able to afford typical foodservice fare, thus expanding their potential consumer base without resorting to drastic discounting. In one successful example, South African burger fast food chain Steers launched Get Real, a line of smaller burgers sold at half the price of core menu items, in 2010. The line was well-received, leading to an immediate boost in sales. In the company's 2011 annual report, it reported positive year-on-year sales growth for the brand that was partially attributable to the success of the lower-priced line.
Similarly, some brands have begun using specialized kiosks to draw in lower-income crowds. These outlets sell mainly beverages and dessert items and are placed at street-level in high-traffic areas near full-size restaurants, capturing incremental traffic and driving additional business to stores. McDonald's has had particular success with this strategy in China, where many of the company's 1,700 kiosks are located. The company has reported that the kiosks have been so well received that they are now one of the largest ice cream retailers in the country.
In the end, snacks are about traffic
Snacks, desserts and beverages also have universal benefits that apply in all matter of markets. These items typically have very high margins, allowing them to add profitability to balance sheets while appealing to the widest possible segment of their consumer base. This benefit is particularly important in light of recent food inflation; as operators' costs rise, high-margin items can off-set declining margins in core menu items and help prevent price increases. Furthermore, these kinds of smaller snack items are particularly conducive to continuous flavour innovation through rotating flavours and LTOs, which help maintain consumer excitement.
As an example, in June, 2011, a year after McDonald's launched its first two flavours of Real Fruit Smoothies, the company launched a third flavour, Mango Pineapple. The launch reinvigorated excitement in the line, leading to a 4% increase in comparable sales, despite having lapped the considerable increases recorded during the previous year's launch. The reasoning behind this is simple: Consumers are looking for new dining experiences, especially with the growing culture of food appreciation in many key foodservice markets. These items give consumers a reason to come back to stores, driving repeat traffic and more frequent visits. And ultimately, that's what these items are all about: driving traffic across all possible dayparts, and from the largest possible segment of the population.