Full access to Entrepreneur for $5

Trends And Outlook For Sandwich Franchises Released


Opinions expressed by Entrepreneur contributors are their own.

Scottsdale, Arizona-The $56.1 billion sandwich segment, which began as a U.S. trend and revolutionized the way the world eats, continues to be fiercely competitive. Chain restaurant operators, fast-food operators in particular, have taken extensive steps to enhance company sales and earnings. These steps include continued domestic and international expansion, expansion into nontraditional locations (i.e., McDonald's opening units in Wal-Mart), co-branding, promotions and new product instructions. NPD ReCount states the sandwich segment increased by 2.2 percent to 114,284 units in 2000, vs. 111,796 in 1999. Five out of the top 11 sandwich chains (Burger King, McDonald's, Sonic, Subway, Wendy's) had increases in more than 150 units, while three in that top 11 (Dairy Queen, Hardee's, Taco Bell) closed units.

Foremost among ways to deal with domestic competition is to expand internationally. The near saturation of the U.S. fast-food market has led larger franchise chains to devote greater resources to international expansion. Over the past few years, Europe has been in fast-food turmoil: The UK is experiencing an American invasion and France is retaliating. However, in 2000, even more turmoil occurred as Mad Cow disease was identified in various European countries. McDonald's leads the pack in the race to become the dominant overseas chain, with unit growth of 11.2 percent versus 1.4 percent unit growth domestically in 2000. Plans for next year include adding about 1,700 restaurants systemwide, with about 90 percent outside the United States. In January 2001, McDonald's bought a 33 percent stake in Britain's Pret a Manger, which serves sandwiches, snacks and sushi at lunchtime. McDonald's investment will fund Pret a Manger's international expansion into the United States. Meanwhile, Burger King and Arby's recently signed its largest international agreement for 102 new units in England over the next 10 years. Outside Britain, Burger King is targeting many other countries, while Dairy Queen remains large in Thailand and Canada and is deciding whether to go into China. Sonic is expected to open its first international location in Mexico in 2001. Burger King completely exited France in 1998.

Co-branding allows brands to cash in on different concepts' daypart strengths and continues to gain in popularity among fast-food operators. Allied Domecq, parent company of Dunkin' Donuts, Baskin-Robbins and Togo's, profits on each concept's daypart strength by combining them all under one roof in a trombo unit. While Allied does not expect to sell sandwiches, ice cream and donuts to the same people, it does intend to exploit each concept's daypart strength to the point of a continuous 12-hour offering. The company not only wishes to attract customers-it also wishes to attract franchisees. Trombos allow franchisees to increase sales and leverage real estate space, employees, management costs and other resources by creating a brand cluster that draws customer traffic throughout the day, instead of single dayparts. On a smaller scale, Wall Street Deli is engaging in co-branding with Taco Bell express.

Another device used in the fast-food segment in 2000 was image revamping. Burger King continued its image conversion, which includes a new logo, a new cooking platform, renovated exteriors and interiors, new uniforms and improved drive-thru service. However, in the second half of 2000, Burger King had double-digit sales declines, which may have encouraged other major chains to renew focus on sales growth and image upgrades. Burger King faced many challenges, including new management, changing ad agencies, Pokemon ball recalls, trouble with Chick-fil-A and potential boycotts.

Fazoli's introduced its new prototype, "Fazoli's Backstreet Café," which derived its name from Italy's quaint restaurants tucked away on small streets. The renovation includes a muted tone décor and new menu items, such as calzones and frozen yogurt. Because Fazoli's added 26 units to total 376 while reporting a unit-level sales decline of 3.3 percent to $1.03 million, systemwide sales increased 6.4 percent to $378.4 million.

There was no shortage of new product development in the sandwich segment in 2000. The biggest player in this segment, McDonald's, unveiled several new items, made easier since the $180 million rollout of its "Made for You" kitchens. The customized system makes preparing products much faster. The quest for hot new products is part of a $400 million "brand reinvention program" kicked off by its new advertising slogan: "We love to see you smile." Besides new products introduced at select locations, including the Grilled McVeggie sandwich, three new chicken sandwiches, Fruit 'n Yogurt Parfait, McFlurry dessert, breakfast bagel sandwiches and the McShaker Salads, about 40-odd ideas are in various testing stages. Throughout the 1990s, McDonald's had little in the way of successful new products; the last new blockbuster product was Chicken McNuggets in 1982. One product that did not fair well was the Big Xtra, which McDonald's planned to phase out in early 2001 in favor of the Big 'N Tasty sandwich, which has been very successful in its test markets. In addition, McDonald's is presently testing a new vertical grill, which permits faster cook times for burgers, and a fryer that cuts the time it takes to cook french fries in half.

In fall 2000, Burger King, the second largest burger chain, rolled out its eight-item BK Cravers line that includes mozzarella sticks, jalapeno poppers and snack size sandwiches as a permanent menu addition. Burger King is using the new finger-food line to reposition its Great Tastes value menu launched in 1998. Burger King recommends that each Craver item be sold for 99 cents. To further fuel its competition with McDonald's, Burger King plans to roll out yet another new french fry. After the failure of its co-called "Perfect Fry," launched in 1998, due to inevitable mistakes in the 19-page recipe, the chain has redesigned its fries and its salt applicators.

In May 2000, Arby's launched a similar appetizer menu with its introduction of mozzarella sticks, onion petals and fried jalapeno bites. Referred to as Sidekickers, the line is promoted as the same quality offered at casual dining chains, rather than playing up its value price like Burger King. In October 2000, in an attempt to entice adults, Arby's rolled out its "Market Fresh" sandwiches-upscale sandwiches featuring a choice of roasted beef, chicken, ham or turkey on thick-cut honey-wheat bread. By focusing on the adult market, the chain is trying to position itself above the traditional fast-food battle, where chains fight for the same youth dollars.

Meanwhile, Subway announced the rollout of its reformulated Italian wheat bread, promoting "the better the bread, the better the sandwich." In keeping with Subway's commitment to offer a healthful alternative to fattening fast food, there has been no significant change in the nutrients in the bread. In fact, the total carbohydrate content went down by one gram in the six-inch Italian bread and by three grams in the six-inch wheat bread. The chain is promoting its health aspect, heavily relying on Jared, the man who lost 235 pounds, to successfully draw customers. In 2000, Subway increased sales per unit by 17.9 percent to $314,900, thus increasing systemwide sales by 18.8 percent to $3.8 billion.

Other techniques to raise earnings by fast-food operators in 2000 include stock repurchases (Arby's, Wendy's) and domestic expansion (Arby's, Burger King, Del Taco). Other operators used value means to entice money-strapped customers (Burger King, Jack in the Box, Taco Bell, Wendy's), and still others improved drive-thru times and menu-order screens to confirm orders to entice time-strapped customers (Burger King, Wendy's). Finally, Wendy's expanded its late-night business, which began in 1998, into more units with increased national advertising. Late-night success is responsible for one-third of Wendy's same-store sales growth. -Franchise Finance Corporation of America