Here’s Why Innovation Is Likely To Be The Key Growth Driver For Restaurants

by Trefis Team
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As the millennial generation reaches its prime spending years, companies are increasingly adapting themselves to the preferences of this generation. A Goldman Sachs report on millennials states that this generation is focused on “eating right and healthy” and smartly uses online information to track the healthiest food. A Business-Wire report reveals that millennials are demanding “innovative and exotic” food in addition to customization to meet their daily calorie needs. The report states that the global cafes and bars market is likely to grow at a CAGR (compounded annual growth rate) of 7.5% in the next five years and we believe companies which are able to introduce new flavors and innovative menu items will be able to benefit from this growth. Most restaurant companies such as McDonald’s (NYSE:MCD), Restaurant Brands International (which owns Burger King, Tim Hortons, and Popeyes Louisiana Kitchen), Starbucks, Dunkin’ Brands, and Chipotle Mexican Grill are working on new and interesting menu items with customization to meet the demands of millennials. Below is a summary of how various restaurant companies are approaching innovation and our view on how they are faring:

McDonald’s (NYSE:MCD): McDonald’s is undergoing a “makeover” to adapt itself to the healthy eating millennials and the results are visible in terms of higher comparable sales. The company is innovating with “gourmet burgers,” “signature sandwiches,” and menu items with flavors suiting local tastes. Launch of burgers with fresh patties is likely to be its biggest change  next year.  The company is also testing a vegan burger at a select location in Finland currently. McDonald’s is also strong on digital innovation with its “Experience of the Future” stores which have self-ordering kiosks where customers can customize their orders. The burger giant is actively working on a dual strategy to meet the requirements of its “value conscious” customers and millennials who don’t mind paying more for a healthier meal.  We believe McDonald’s has a very strong innovation strategy which should allow the company to take advantage of the growth in the coming years.

Starbucks (NYSE:SBUX) : Starbucks is setting up its Reserve stores and Roastaries to capture the trend of increasing demand of gourmet coffee by millennials. Further, the company is innovating in Iced Coffee with its new cold extraction process to adapt to the preferences of millennials. The company expects to quadruple its cold brew business by 2021. Millennials prefer iced coffee to the bitter hot version and Starbucks is innovating to introduce a “gourmet” version of iced coffee. The company is tailoring its  premium beverages to the tastes of the new generation and we believe it is doing pretty well in the innovation department.

Dunkin’ Brands (NASDAQ:DNKN): Dunkin’ Brands recently hired a new Vice President – Culinary Innovation who will lead the company’s strategic development of new and enhanced menu choices. This indicates that the company is increasing focus on innovation to introduce new beverages which will attract the millennial population.  Reports suggest that the U.S. frozen desserts market is likely to reach $35.2 billion by 2025 and Dunkin’ Brands is well poised to capture this growth through innovative flavors in its products.

Restaurant Brands International  (RBI) (NYSE: QSR): While RBI has not introduced any bold innovative products in the recent past, the company’s balance between premium products, value offering, and limited time offerings have helped drive growth in the Burger King segment. Its premium product the BAKING KING BURGER and related offerings were well received by customers. The company is struggling to resolve  issues with its Tim Hortons’ franchisees and we don’t see any bold menu items being introduced by this chain.

Chipotle Mexican Grill (NYSE: CMG): While Chipotle is trying to recover from a severe reputation loss due to its food being hit by viruses, the company has set up a “Chipotle NEXT Kitchen” which is part of its plan to innovate and introduce new menu items. The company is testing desserts and has introduced the queso dip, however it is not certain whether these innovations will help the company regain its lost customers. For Chipotle it is a battle to win its customers back by restoring their confidence in its products and new innovative menu items might not assure customers of food safety.


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