Hunger Games: Strategies for Growing in the Hourglass Economy

Hourglass Economy Discussion

Jon Weber, L.E.K. Consulting

Hunger Games

Strategies for Growing

in the Hourglass Economy

Jon WeberVice President

1© 2013 L.E.K. Consulting LLC. All rights reserved.

Note: *Real median U.S. household income is in 2009 dollarsSource: U.S. Census, Bureau of Labor Statistics, L.E.K. research and analysis

Purchasing power shifting to the top and bottom is creating an hourglass economy, which will persist

1.2

-1.7

0.6

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Change in percent of households in income brackets (2007-2011)PPT change

≥$70,000$30,000-$69,000

<$30,000

2

Key drivers of the hourglass economy

• Globalization

• Middle-class job opportunities declining

• Technological change requiring specialized, high paying skills

Successfully adapting to this long-term

phenomenon can help deliver growth

© 2013 L.E.K. Consulting LLC. All rights reserved.

Effects of the hourglass can be seen all around us …

Note: * Calculated September 2012 and forecast through rest of year; ** Sales as of the end of FY2012 for Whole Foods and as of 3Q:2012 for Dollar General and Safeway; ^ As of Q3:2012Source: IBISWorld, Responsys, BIGinsight, Nielsen, Euromonitor International, Value Retail News, Boston Business Journal, Dallas News,

Company websites and annual reports

Premium / discount grocery revenue growth

In 2012**, Whole Foods and Dollar General experienced comp store sales growth of 8.7% and 5.3%, respectively, while Safeway experienced growth of 1.3%

Promotion Proliferation

84% of shoppers indicate they “usually” or “only” buy clothing on sale

“Deal” Channels

Daily deal site revenue has grown 304% from ’07-’12, reaching ~$1.7B in the U.S.Factory Outlet Growth

U.S.-based outlet stores generated sales of $24.3B in 2012*, up from $16.5B in 2007

Department Store Squeeze

Apparel sales in department stores fell 1.5% from 2006-2011

Premium Price Increases

Price of Starbucks’ premium “Clover” coffee raised by 23% from $1.75 to $2.15 in 2012

Significant evidence of consumers

spending more for premium and

value

3

Luxury Retailer Comp Store Increases

Lululemon and Neiman Marcus reported comp store sales growth of 18% and 5.4%, respectively, from 2011 to 2012^


Source: U.S. Bureau of Labor Statistics

… and the food industry is no exception

Aggregate food at-home spend by household income (2007-2011) CAGR

Aggregate food away-from-home spend by household income (2007-2011) CAGR

Top 20%

Middle Class

Bottom 40%

3.0%

2.2%

4.1%

0.3%

-1.4%

1.9%


As a consequence, restaurants at the top and bottom are outperforming those in the middle

Low-end High-end

Source: GE Capital Franchise Finance, QSR Magazine, Nation’s Restaurant News, L.E.K. analysis

5

3

1

6

44

1

-1-2

33

1

66

3

-4

-2

0

2

4

6

20112010 Q1:2012

Comp store sales growth by restaurant type (2010-Q1:2012)Percent

Family FineQSR CasualFast Casual


Chains across the spectrum can benefit

from strategies that embrace the hourglass

A number of strategies can help you drive growth in this environment

• Add items that appeal to the top & bottom of the hourglass

• Be the best at what you do - Get more “signature items”

• Co-brand to elevate products to star status

• Everyone is snacking; “grab-and-go” get this business

• Adapt to the evolving consumer

• Grow internationally – wealth is growing faster outside the U.S. than in it

1

2

3

4

6

5

Product appeal

Environment

Geography


Items that appeal to consumers’ value and premium needs are critical to winning in the hourglass economy

Source: Company websites, Grub Grade

1

7

McDonald’s Panera Bread

Price Points

Menu Breadth

$1.00 $3.99

McChicken Angus Deluxe Smoked Turkey Breast

$5.99

Roasted Turkey Artichoke

$8.59Enable

consumers to trade-up /

down and add-on / take-off


Doing this will help drive traffic, and avoid the “veto vote” (of which there are many)

1

Note: *Includes peers / friends / family >10 years oldSource: L.E.K. Restaurant Consumer Survey

11

20

0

20

40

60

80

100

Last dining experience at restaurantincluded children under 10% of respondents

High income (>$75K annually)

Low income (<$25K annually)

8

47 47

0

20

40

60

80

100

Last dining experience at restaurant was with a group*% of respondents

Frequency of eating lunch or dinner at a restaurant**% of respondents

0

20

40

60

80

35-5418-34

100100 100

55+

100

Alone

With peers

With children


Among affluent consumers specifically, innovation with new and different flavors are important traffic drivers

1

Source: Technomics9© 2013 L.E.K. Consulting LLC. All rights reserved.

43% of affluent consumers prefer restaurants that offer innovative

flavors and ingredients vs. 27% of working

class consumers

All affluent consumers

Continuous innovation is critical

Examples

• New and different flavors that are on-trend

• Menu items that signal quality

• Ongoing “renewal” that drives interest / traffic

Fresh avocado Korean BBQ Tacos ‘Shroom Burger

These items often garner a premium price

Signature items (those that are truly different and craved by consumers) are a key driver of traffic

Source: L.E.K. Restaurant Consumer Survey

25262627

313132

0

5

10

15

20

25

30

35

Importance of a Signature Menu Item in Driving Traffic% of respondents that cited signature item as a top three reason for visiting a restaurant

2


Signature items are needed across the menu

Source: L.E.K. analysis, Technomics

2

11

Appetizers

Salads

Entrees Desserts

Sandwiches Beverages

ü

û û

û û

ü Do you really have

enough signature items on

your menu?

Consumers are very discerning, with 63% of low income and 49% of affluent diners viewing eating out as a special treat, which makes

signature items more important than ever © 2013 L.E.K. Consulting LLC. All rights reserved.

Source: Company websites, Nation’s Restaurant News, Loudon County KFC, The Impulsive Buy, L.E.K. analysis

Use others’ brand power to create star products that stand out to each end of the hourglass

3

Taco Bell & Doritos

Dunkin Donuts & Oreo

Applebee’s & Weight Watchers

12

McDonald’s & Newman’s Own Coffee

Co-Branding

On average, these items are priced at a ~35% premium


U.S. consumers are snacking a lot …4

13

69%

49%

24%

43%

6%100

90

80

70

60

50

40

30

20

10

0

2012

~3 snacks per day

0%

2%

2009

~2 snacks per day

3%

3% 0%

None

1-2

3-4

5-6

7+

Source: Symphony U.S. Consumer Snacking Survey

U.S. daily snacking frequency, 2009 vs. 2012Percentage of consumers

Of the time spent eating, the percent which is spenteating and performing other tasksPercentage

60

40

20

0

Time eatingand performingother tasks

Time eating only

100

80

100


Note: * Calories from snacking includes food consumed outside of traditional meal times of breakfast, lunch and dinner as indicated by respondentsSource: Bureau of Labor Statistics, U.S. Department of Agriculture, Just-Food.com, All One, L.E.K. Analysis

… across demographics and throughout the day4

20

0

≥$75,000

23

Estimated Caloric Intake from Snacking*Percentage

$25,000-$74,999

24

<$25,000

2640

60

80

100

14

Ways to attract snacking consumers: offer compelling snack items; extended hours; portable packaging; fast in-and-out service

16%

22%

26%

11%

4%

21%

34%

39%

21%

7%

0

5

10

15

20

25

30

35

40

Late Evening

EveningAfternoonMorningEarly Morning

2012

2009

U.S. snacking habits by time of day, 2009 vs. 2012Percentage of consumers


Taste, convenience, and value are most important to consumers, regardless of income …

Source: L.E.K. Restaurant Consumer Survey

5

27

35

41 4038

46

0

5

10

15

20

25

30

35

40

45

50

Conveniently located

Top three reasons cited for visiting a restaurant% of respondents

Low prices / good value

Great tasting food

High income ($75K+)

Low income (<$25K)


…but high income consumers have a longer tail of other factors affecting their preferences

Note: *Respondents asked to pick top three important factors out of a total 21 factors when choosing a restaurant Source: L.E.K. Restaurant Consumer Survey

5

Importance of criteria when selecting a restaurant*

16

66

59

34

41

0 10 20 30 40 50 60 70

High income

Low income

High income

Low income

% of respondents

Taste, quality, and price

All other factors

High income: other factors

• Signature item they love

• Healthy options

• Clean and comfortable environment

• Menu is large enough for a group

Continuously innovate…It is imperative to stay current in all that you do – taste

trends, menu innovation, customer experience and values, etc.


Note: Latest presentation of data given in 2011; * Defined by Brookings Institution as households with daily expenditures between US$10-US$100 / person in purchasing power parity terms; North America includes U.S. and Canada only; Europe includes the EU5, Russia, Scandinavian countries as well as Eastern European countries; Asia Pacific includes China, India, other Asian countries as well as Oceania Source: Brookings Institution, Company websites, The Seattle Times, World Bank

Increasing wealth around the world is creating significant opportunities for international growth

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

North America

Europe

Middle East & N. Africa

Sub-Saharan Africa

Asia Pacific

Central & S. America

30F

4,884

20F

3,249

2009

1,845

Size of worldwide middle class and above* population (2009-30F) Millions CAGR%

(2009-30F)

Europe & North America’s combined share falls from 54% to 20% of the total

middle class and above population

6

EXTRA! EXTRA!

In April of 2012, Johnny Rockets opened their second restaurant in South America

In 2011, Smashburger announced its first international expansion, with locations to open in Kuwait, Bahrain and Saudi Arabia

17

Yum! Brands is the world’s largest restaurant company, with nearly 38,000 restaurants in over 120 countries

In 2012, Starbucks announced plans to open ~500 new stores in Asia in the next fiscal year, among other international store openings

McDonald’s currently operates over 33,000 restaurants in more than 119 countries

Applebee’s is the largest casual dining chain in the world, with almost 2,000 restaurants in 15 countries

31.5

148.0

82.9

49.3

1.2(2.4)


So …

• Embrace the hourglass … it is real and will persist

• Challenge yourself – are you really doing enough?

• Continually innovate

• Don’t get caught in the middle


Documents

Hunger Games: Strategies for Growing in the Hourglass Economy