In Canada, new breed of fast-food chains are eating McDonald’s lunch

WATCH ABOVE: There is a big shift going on right now in the fast food industry. John Hadden explains Part 1 of “Fast Food Shift”.

You may not have heard the term, but chances are high you’ve eaten the food.

McDonald’s was back in the news Thursday for doing something it hasn’t done in at least 40 years — maybe ever. It’s shrinking.

The biggest player in the fast food business said it’s closing more restaurants in the United States this year than it’s opening, as it addresses falling traffic and burger sales.

There’s been quite a bit of debate about the root of the problem plaguing McDonald’s, the industry’s bellwether, but most experts cite a new breed of restaurants eating McDonald’s lunch as a major culprit.

They’re called “fast-casuals,” and they’ve been sprouting up everywhere in the United States in recent years, and now with increasing speed in Canada, too. Chains like Five Guys, Hero Certified Burgers and Mucho Burrito have found a sweet spot with consumers by marketing themselves as serving better food and ingredients than traditional fast food for just a bit more money.

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“The fast-casual segment is really starting to get some traction in the Canadian market,” says Robert Carter, executive director at research firm NPD Group and an expert on how Canadians spend their money when dining out.

The fast-food subset had about $400 million in sales in 2014, according to NPD estimates, a double-digit rise in what’s considered a mature market (read: low growth). This new wave has collectively opened hundreds of locations across Canada in recent years, many of them pouring over the border to do so.

Five Guys, a burger joint established in Virginia in the 1980s, has opened 63 Canadian locations in just the past few years. Mucho Burrito, owned by Montreal’s MTY Food Group (owners of Thai Express, Mr. Sub among others) is another fast-casual who’s seemingly burst onto the scene, with dozens of locations from Vancouver to Montreal. It now boasts more than 24 shops in the Toronto area alone.

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Led by Tim Hortons and McDonald’s, Canada’s established fast-food or “quick service” giants still rule the $23 billion industry. But an army of smaller, fast-growing fast-casuals is adding up to a big problem for established players like McDonald’s, which has about 1,400 restaurants here.

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For its part, Tim Hortons hasn’t been immune to the shift, but the coffee chain has seemingly pulled out of sales funk and is again posting respectable same-store sales growth.

McDonald’s Canada isn’t experiencing a slide in sales to the same degree the 14,300 or so U.S. locations are, but the Canadian network is taking heat, and it’s U.S. parent is putting everything on the table in a revamp aimed at spurring change at the 60-year-old global chain.

McDonald’s Canada re-jigged its menu earlier this year, a spokesperson said, “to cater to evolving Canadian consumer preferences.” But deeper changes could be afoot.

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In April, McDonald’s said it would close about 700 underperforming locations around the world this year. Steve Easterbrook, the chain’s new CEO who stepped into the role on March 1, also laid out plans to remove layers of bureaucracy to allow the company to move more nimbly.

That will be important in Canada, a fast-food market place that’s expected to post just one per cent annual growth through 2020, according to NPD Group.

“Big bellwether players like McDonald’s are feeling the pressure,” Carter said. “In a market place that’s not really growing, it’s about stealing share.”

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