If you look around, most of the fast-food and casual-dining sector has been a veritable wasteland in recent months. A perfect storm has battered the sector, including rising food inflation, decreased customer traffic due to uncontrollable factors like hurricanes, and now a decrease in consumer spending thanks to the payroll tax hike included in the American Taxpayer Relief Act and the uncertainty associated with the U.S. debt ceiling debates.
Growth in this sector is getting downright hard to come by, and simply possessing an easily recognizable brand name or representing a clean image isn't going far enough. McDonald's (NYSE:MCD), easily one of the most recognizable brands in the world, suffered its first same-store sales decline in nine years last year as competition has heated up and many of its competitors, like Burger King Worldwide, have practically mirrored its menu. Chipotle Mexican Grill, on the other hand, offers its customers premium meat selections from antibiotic-free animals, but has been leery of pushing higher prices on already strained consumers, which has resulted in shrinking margins.
The good news is that there is a two-step solution to this mess, and it's relatively independent of consumer spending or food inflation.
Step 1: Offer healthier food options.
This isn't rocket science, but it's taken years for some restaurants and even grocers to catch on to the fact that consumers will step up and pay more for the perception of more nutritious products, or even the perception of more food options. Grocer Whole Foods Market is a perfect example of this (even if it's not exactly a restaurant company, I'm still going to use it as an example). Whole Foods has thrived on selling organic and natural foods at premium prices, which has allowed it to maintain margins that are often double or triple the average of those of traditional grocers like Safeway or Kroger.
Many casual dining and fast-food restaurants are finally catching on to this trend, although some have been quicker than others.
In the fast-food arena, McDonald's and Chipotle were two of the first to pioneer healthier food options -- McDonald's with snack wraps and Chipotle championing its antibiotic-free meats. Others, like Burger King and Wendy's, have followed suit, but only more recently, leaving them to catch up to their peers.
Casual dining restaurants like Applebees, owned by DineEquity, and Panera Bread (NASDAQ:PNRA) have placed increased emphasis on delivering smaller (i.e., more reasonable) portions and healthier food options to customers.
But the holy grail of all advice I can give to the restaurant industry is...
Step 2: Offer your own coffee blend.
I'm not kidding: Introducing unique blends of coffee has been a lifesaving tool for a number of restaurants in both the fast-food and casual-dining sector.
The pioneer of branded coffee, Starbucks (NASDAQ:SBUX), has made its living off addicting people like me to its premium flavors. In terms of price and uniqueness you can find considerably higher-priced and rarer coffee offerings than what you can get at Starbucks; but considering its size, no coffee-based business can even hold a candle to Starbucks' faithful following that will spend regardless of whether their discretionary income is up or down.
Because of Starbucks' success, we've seen additional coffee houses and premium blended coffee roasters popping out of the woodwork in the past few years, attempting to mimic its success. Green Mountain Coffee Roasters became an overnight sensation with its Keurig brewing system and its single-serve K-Cups, allowing for blend individualization without the need for instant coffee.
More so, we've seen restaurants and chains welcoming the trend toward branded coffee with open arms. Just to name a few...
- Panera Bread: One of the reasons Panera remains so successful in driving traffic to its stores is its specialty coffee produced by Gavina coffee roasters in California.
- McDonald's: Aside from Starbucks, McDonald's McCafe brand may have the strongest brand loyalty of any restaurant chain. Since 2004, coffee sales have risen from just 2% of McDonald's U.S. sales to 6% by 2010.
- Krispy Kreme (NYSE:KKD): Krispy Kreme introduced its Signature coffee line in 2011 as well as healthier food options like yogurt, and, not coincidentally, has seen its share price gain traction and its bottom line stabilize ever since.
- Dunkin' Brands (NASDAQ:DNKN): Dunkin has been an interesting hybrid that's found success by allying itself with Green Mountain and also thriving off its in-store, and now purchasable, Dunkin' brand coffee.
And just yesterday, restaurant chain Denny's announced that it'd be completely revamping its coffee offerings (I think I speak for the majority when I say, "Thank goodness!").
This trend shows some key aspects of coffee drinkers. One, we don't care what the price of coffee is as long as we like it. Two, unique and branded coffee drives traffic into a restaurant and tends to keep customers coming back. Three, despite popular belief, the market for coffee drinkers is actually expanding, meaning further market share gains can be expected from the companies named above.
A recipe that Julia Child would be jealous of
These two factors may seem like child's play when you think about it -- offer healthier food options and branded coffee that you can't get just anywhere -- but the chances of succeeding with this formula are very, very high! Starbucks, Panera, McDonald's, Krispy Kreme, and Dunkin' Brands have all taken an approach of offering more nutritious food options and their own branded coffee blends, and all five have produced stellar results. So restaurateurs, if your business is struggling, listen up... Give us healthy food options and your own brand of coffee, sit back, and watch the magic happen!
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, Green Mountain Coffee Roasters, McDonald's, Panera Bread, Starbucks, and Whole Foods Market. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, Panera Bread, Starbucks, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.