9 trends in the restaurant industry to watch in 2016
The National Restaurant Association (NRA) has estimated that 47 percent of current U.S. domestic food spending is in the restaurant industry. Furthermore, a recent NRA survey reveals for many, restaurants are an essential component of their lifestyles. Others see the dining experience as social—an opportunity to meet with family and friends in a relaxed atmosphere without the fuss of entertaining at home—and still others seek the experience of exotic cuisines that they can’t duplicate themselves. Many U.S. diners likely fall into more than one of these categories. Busier lifestyles, shifting demographics and changing consumer preferences and buying habits all have contributed to the growth and direction of the industry and will continue to push restaurant operators for more choices to add to their dining experiences.
Growth-minded restaurant operators are listening to their customers more than ever before, but they also face greater challenges than ever before.
Watch this short video as our insiders explore challenges and critical success factors for the restaurant industry this year.
Trends and issues
Note the following categories to monitor this year and the related trends and issues that will continue to shape the restaurant industry.
The U.S. economy is expected to continue to grow in 2016, with household consumption growing at roughly 3 percent. Changing consumer spending habits, particularly among millennials, has resulted in a shift away from traditional retail spending toward experiential spending, which should positively impact the restaurant industry.
Despite the improving economy, many businesses and industries will compete for their share of the additional disposable income. In 2015, U.S. consumers allocated more of their disposable income to automobiles, and spending on travel and leisure also posted fairly significant gains. To better compete in 2016, restaurant operators will need to develop creative ways to drive traffic. Effective execution at the unit level will be critical in gaining and sustaining wallet share and building guest loyalty.
Changing demographics and consumer preferences will fuel growth across the industry. Growing demand for healthier, organically produced menu options has spawned significant growth, particularly in the fast casual space. Increased demand for ethnic and international cuisines will also continue as the U.S. population continues to shift and younger, more adventurous diners seek new experiences.
The ability to attract younger diners will be critical, particularly in the casual restaurant segment, which has forfeited guest count to both fast casual and polished casual segments in recent years. Millennials will have a significant impact in the coming years. Studies suggest that they dine out more than any other segment of the population and they view dining out as a necessity, rather than a luxury.
The restaurant business has never been more competitive. Changing demographics and related consumer preferences has given rise to new concepts hoping to capitalize on changing tastes and more active lifestyles. Many of these concepts have attracted the attention of the investment community who are well-funded and have significant growth strategies.
This creates a more competitive environment for all operators. Guest counts are showing only marginal improvement and that trend is expected to continue, meaning growth will largely come at the expense of other operators. Established brands need to understand the changing demographics and react. Guest engagement is changing. It begins well before the guest enters the restaurant and it extends beyond their departure. Younger diners are highly adept with technology, including mobile apps and social media. Those interactive tools help millennials research their options and make informed decisions. Operators who successfully tap into these mediums will have the greatest success reaching them.
Millennials also use technology to share their experiences with family, friends and work colleagues. They are highly likely to use social media to tell others about their recent purchases or their visits to restaurants and entertainment venues. Operators must use these technologies to connect with this generation of decision-makers and maintain relationships with them.
There will be winners and losers in 2016. Operators who can maximize the guest experience will drive same-store sales and drive guest loyalty in 2016, and will be in the best position to win.
Managing unit-level costs will be a major challenge across the industry. Labor costs will continue to rise as costs associated with the Affordable Care Act and additional increases to the minimum wage continue to impact margin. While most believe that increases in these costs will be passed on through menu increases, significant increases will likely impact traffic. Operators who can manage the cost line and minimize the increases will be favored by a value-focused consumer.
Advances in technology will assist tech-savvy operators to control the labor line across all sectors of the industry. New and developing scheduling software will provide better insight to required FTEs across all day parts. The use of tablets will gain greater popularity and expedite ordering, driving covers during the peak lunch periods and increasing the average check when guests have more time. Mobile apps will drive traffic, expedite service and drive throughput in peak periods at fast casual concepts.
An improving employment market, coupled with the rapid expansion plans of well-financed emerging brands will intensify competition for labor at all levels of the business. Turnover within the industry continued to rise across the entire industry in 2015, including casual and fine dining segments that had previously benefited from lower turnover rates than some other segments of the industry. This trend is expected to continue.
Driving the guest experience, while managing unit-level costs, will be critical to success. Well-trained, engaged management teams are essential, both in the kitchen and in the front of the house. Attracting and retaining top talent will require creativity and commitment, particularly for multiunit operators planning to grow. Those with deep benches will manage growth most effectively. Companies that can create best-in-class work environments, develop creative compensation packages and demonstrate growth opportunities within the organization will be in the best position to win.
Prime locations will continue to be in high demand. Accelerated growth will drive up prices for the best locations and make it more difficult for marginal operators to compete. Even the best operators will be forced to the high end of their budgets to make the unit economics work or settle for less desirable locations. Operators under pressure to achieve aggressive new unit growth will need to strike an appropriate balance as they enter new markets. A hub and spoke approach, utilizing a more expensive prime location as the hub with less expensive locations around it, may be most prudent to manage overall occupancy costs in new markets, particularly in larger metropolitan areas where rents have traditionally challenged unit economics.
Cybersecurity continues to be a major risk to restaurant operators. New technologies provide opportunities to collect additional guest data to better understand their preferences and to build loyalty. However, as companies collect more information about their customers, they must be mindful of protecting that data, or risk financial and reputational loss.
The nature of data breaches has evolved into a full-blown underground industry. Employee security lapses have been surpassed by organized hacker groups that are technically sophisticated in their ability to invade and disrupt computer networks. Middle-market companies are not immune to these risks, and in some cases may even be more vulnerable to them, as smaller organizations may be perceived by hackers to be more easily penetrated.
Restaurants across all segments of the industry are adopting farm-to-table concepts to meet growing consumer demand for fresh, locally sourced products. Highly publicized food safety issues have sparked significant debate related to the food safety standards at smaller producers, suggesting restaurant operators need to take on more responsibility to ensure their food safety programs can support this new trend.
Restaurant operators need to have clear food safety policies and procedures in place and robust training programs to ensure those procedures are understood and executed consistently across all units. Food safety awareness and training should be built into the onboarding process for all new employees. This is particularly important in segments of the industry that employ a more transient workforce and continue to experience growing turnover rates.
Operators also need to have clear remediation and communication plans in place. Those plans need to be well-documented and understood at the unit level. Multistate operators may need multiple plans to ensure they are complying with state and local reporting requirements in the event of an incident.
M&A activity is likely to remain strong. Despite a slowdown in the IPO market and the overall volatility of the public markets, private equity firms will continue to compete for new and developing restaurant concepts. Local and regional concepts will seek growth capital to enter new geographic markets and those that are able to attract younger guests will be the most attractive targets for investment. Buyers are expected to continue to favor fast casual and polished casual concepts, which will likely keep multiples high and maintain a sellers’ market in these sectors. Established multi-branded groups will look to acquisition to meet their growth objectives. These strategic buyers are expected to continue to drive multiples upward, as projected synergistic savings justify a higher purchase price.