Question

How A&W will win, where it faces risks, and how competitor, Tim Hortons might win against A&W.

Answer 1

TORONTO -- Bolstered by an ongoing strategy to beef up its food quality and customer experience, A&W is now expanding rapidly in Canada despite the challenging environment fast-food giants face.

While some market leaders appear to have stumbled navigating changing consumer demands for healthier foods made up of more high-quality ingredients in recent years, A&W has continued to post record strong growth, according to food analysts.

For its 2015 financial year, the fast-food operator reported same-store sales growth -- a key metric that measures sales at restaurants open for more than a year -- of nearly eight per cent, said Elizabeth Johnston, equity research associate for Laurentian Bank Securities.

That's higher than most of A&W's quick-service competition in the country, Johnston noted, which has recently ranged anywhere from negative one per cent to five per cent.

McDonald's Canada, by way of comparison, recorded several years of sliding sales figures and operating profits before marginally beginning to post improvements in 2016, according to estimates by industry research firm IBISWorld's April report on the Canadian fast-food restaurant industry.

A&W, however, has been ahead of the curve by incorporating higher quality ingredients in its food, said IBISWorld industry analyst Andrew Alvarez, "which has helped them significantly."

In 2012, the chain started serving up beef from cows raised without the use of hormones or steroids.

"We saw a real uptick," in quarterly sales figures after introducing the more natural beef, said Don Leslie, A&W's chief financial officer.

The company followed that up with chicken and pork raised without the use of antibiotics, and eggs from hens fed a diet free of animal byproducts.

"These items speak to a changing demographic, a younger demographic for whom this quality is a focus," said Johnston. "Maybe they don't eat quick service or fast food all the time, but when they do they're making a choice to eat at A&W."

The chain's strong sales have also been boosted by significant expansion, added Alvarez.

Since A&W opened its first restaurant in Winnipeg in 1956, it's grown to 858 Canadian locations as of June 19, according to its first quarter report for the 2016 financial year. A&W plans to expand by an additional 300 joints over the next five to seven years.

This puts the chain in the position where they would be or could be the most convenient choice for consumers in a given area, Alvarez said, resulting in more new customers.

A&W president Susan Senecal said the company has been focused on expanding in markets where it lacked a sufficient footprint, like Ontario and Quebec where it's made great progress and attracted new customers.

Johnston suggests its focus on guest experience helps their returns as well. Each store hosts a kiosk where patrons can rate their satisfaction, she said.

While shifting to additive-free ingredients and opening more stores may seem like simple changes any chain could undertake, it's not that easy, said Alvarez.

"It wouldn't necessarily translate into higher sales, without the demand already there. A&W has managed to capture consumer loyalty and its expansion is now satisfying demand."

The question, Alvarez added, becomes whether or not it can keep that momentum going.

"Usually these things slow down once they reach saturation ... It doesn't seem like A&W has hit that point yet".

While some market leaders appear to have stumbled navigating changing consumer demands for healthier foods made up of more high-quality ingredients in recent years, A&W has continued to post record strong growth.

A&W Food Services of Canada could add more plant-based protein foods to its menus after the success its seen with the Beyond Meat burger, said CEO Susan Senecal Wednesday.

"We're looking all the time," the chief executive said during a conference call with analysts after the A&W Revenue Royalties Income Fund released its second-quarter financial results.

The company is continuing to watch market trends, said Senecal, to see what kinds of products are available for them to invest in, adding the primary consideration is taste.

The company added Beyond Meat burgers to its menu in July 2018. The plant-based patty is made by a California company and uses ingredients to mimic beef's colouring, juiciness and chew. The product temporarily sold out due to demand shortly after it launched.

Senecal assured analysts that the company's strong partnership with Beyond Meat gives her confidence in their supply chain.

"I'm not that concerned about any kind of product shortages," she said, despite the California-based company now seeing increased demand for its product in Canada.

A&W has since expanded the partnership to include a Beyond Meat sausage and egger breakfast sandwich. Competitor Tim Hortons now serves Beyond Meat burgers, as well as breakfast sandwiches and wraps. B.C. restaurant chain White Spot also added the patties to its burger menu.

A&W has attributed its ongoing innovation, including being the first national burger chain to serve the Beyond Meat burger, to helping drive strong sales.

That continued in the most recent quarter with same-store sales growing 10.3 per cent for the period ending June 16, compared with 6.6 per cent in the same time last year.

Some of that came from visits as new customers enter the market wanting to try the plant-based patty, said Senecal, and some of that growth may be coming from competitors' market share.

The Vancouver-based fund boosted its monthly cash distribution from 15.4 cents to 15.9 cents starting with the July distribution as it made $7.55 million in the quarter, up from $7.08 million in the same time last year.

Analysts had expected earnings of $7.93 million according to the financial markets data firm Refinitiv.

Gross sales came in at $351.85 million from 934 stores, compared with $305.13 million from its 896 stores last year.