Big burger shops have a growth problem

The largest players in the burger arena have reached the point at which any growth they manage  may be less about demand than about raising prices and selling costlier menu items, as the amount of sales at the likes of McDonald's (MCD), Burger King (BKW) and Wendy's (WEN) has stagnated.

With that said, they're still sending a lot of orders out the door -- fast-food hamburger chains, including the big three, recorded $69.7 billion in U.S. sales in 2013. But even at that impressive number, sales volume increased only 0.9% for the segment, widely cited food-industry research group Technomic says. For American burger joints overall, sales exceeded $72 billion, and while that was up 1.2% from the previous year, if not for higher prices the number in fact would have declined.

It isn't entirely unknown that growth has been difficult to come by in recent years for a number of restaurants, but the commentary from Technomic helps illustrate the considerable forces acting upon this industry and why its members can't bank on old successes automatically translating to a bright future.

Size is a factor in growth rates: It's certainly much easier for a company with $5 million in sales to see 25% growth than it is for one with $50 billion. However, it's also a reflection of other causes, such as health considerations, competition for dining dollars — there are now about 1 million restaurants nationwide, along with the option to simply eat at home — and dietary changes in the United States. Department of Agriculture data show beef consumption for the average American dropped 44% from 1976 to the present, from 94.4 lbs. that year to an estimated 53 lbs. in 2014. Meanwhile, the amount of chicken eaten has climbed to 85 lbs. per person from 42.1 lbs. in that time, a 100% increase. That's something all major participants in the burger sphere have attempted to address through menu additions featuring more poultry.

For McDonald's, last year's U.S. sales totaled $35.9 billion, a minuscule improvement from the prior year's $35.6 billion, and that number was bolstered by the addition of 121 restaurants to its domestic system. At the individual store level, the lack of growth was evidenced by flat-year-over revenue, which was right at $2.51 million in each of the past two years. Guest counts in U.S. stores were down 1.6% last year, something that's been virtually unheard of for McDonald's. Again though, it's not entirely alone, as many restaurants have struggled to keep foot traffic positive.

Wendy's system sales ticked up 1% to $8.8 billion in the U.S., whereas at Burger King, revenue slipped 1% to $8.5 billion, Technomic says. Wendy's itself doesn't provide a breakout in its full-year financial statement, and Burger King reports annual combined sales for the U.S. and Canada, which together declined to $8.8 billion last year from $8.9 billion in 2012.

But important to remember is that, even if growth has peaked, these three venues aren't likely to disappear or even shrink noticeably anytime soon, even without expanding demand at existing shops, considering they had more than 27,000 locations across the country at the end of last year. In terms of the entire burger group's restaurant count, it was up 1% to 42,853 locations.

Better burgers winning

Outside of these most extensive names, some of the smaller chains did record higher sales. According to Technomic, sales were up 8% at Culver's, a chain heavily concentrated in the Midwest. At In-N-Out Burgers, an operator located mostly in California, as well as parts of the Southwest, sales rose 6%. Freddy's Frozen Custard & Steakburgers, found in about half the U.S. states, had a 42% sales gain.

"Growth for Culver's and Freddy's has been supported by the consumer appeal of their frozen custard, while In-N-Out Burger continues to provide a simple menu, good quality and a strong value price point," Technomic says.

The fast casual "better burger" chains had a good year, with sales growth of 10.4%, though they account for only $2.4 billion in sales for the burger shops. Five Guys had $1.1 billion of those sales, while Smashburger had $214.9 million.

"Consumer demand for health and wellness will drive success for brands that differentiate by quality, and innovation efforts will continue to drive impulse visits for trial," Darren Tristano, Technomic executive vice president, said in a press release.

And recalling what his firm said last summer, we're still going to eat burgers, perhaps just not in the same way.