Top trends to watch in restaurants in 2017
The restaurant industry limped into 2017 with disappointing same-store sales results and declining traffic counts causing many analysts and certain media outlets to question whether the industry is headed into a recession. Nonetheless, the National Restaurant Association reports daily restaurant industry sales approaching $1.8 billion across one million restaurant locations nationwide and a recent Bureau of Labor Statistics survey indicated a 2.8 percent increase in demand last year in food-away-from-home venues. These trends exemplify just how dynamic the restaurant industry is. The industry is not entering a recession, it is simply continuing to evolve. As lifestyles change and new generations become consumers, how we purchase and consume food away from home will continue to change. How we define and measure the restaurant industry will also need to change.
Successful restaurant operators in these tumultuous times will be those who focus on the changing purchasing habits of today’s consumers and fully understand where their concepts fit into the equation. They will also focus on other significant headwinds facing the industry.
Listen to John Nicolopoulos, RSM’s restaurant and retail practice leader, as he provides his insights and explores the challenges and opportunities restaurants will face in 2017 in this brief video.
Note the following categories to monitor this year and the related trends and issues that will continue to shape the restaurant industry:
Despite a stable economy and ongoing job growth, the economy is expected to grow at a modest 3 to 4 percent rate. Slow economic growth coupled with changing consumer preferences and buying habits will require restaurant operators to compete mightily with other industries for their share of the additional disposable income in 2017. In this environment, growth will only be achieved at the expense of the competition. Restaurant operators will need to develop creative ways to connect with customers and drive traffic. Effective execution at the unit level will be critical in sustaining and gaining wallet share and building guest loyalty.
Preferences continue to evolve with a changing society impacted by fluctuating demographics, lifestyle choices, spending patterns and more. While changes to fast casual have been highlighted in the media, the evolution of the restaurant industry is not limited to this space. Changing consumer preferences have affected every segment of the industry.
Fast casual concepts will benefit from increasingly demanding lifestyles and a growing number of younger consumers who tend to dine out more than the generations before them. These newer consumers view dining out as a necessity rather than a luxury. Although they tend to spend less than older generations, they dine out with greater frequency. Successful fast casual operators need to pay close attention to this demographic, addressing demands for healthier and more creative menu options prepared with locally sourced and organically grown or raised products. They will also understand convenience is critical to their customers. Efficient flow through, facilitated by technology, will continue to be important. Mobile ordering and mobile payment options will become the norm and creative loyalty programs and effective social media programs aimed at driving the brand and creating community across the customer base will win the day in this space and with these consumers.
Previously defined by white tablecloths, ornate dining rooms and formal service, fine dining is now defined by the food. Top chefs are developing creative menus to attract guests who want to experience complex flavors in a hip and vibrant atmosphere. Small plate menus enabling diners to sample the menu and share their food experience are driving the shift in this space. That’s not to say the traditional fine dining establishment is dead, but it has further evolved into a special occasion destination. Now forced to share fewer dining dollars, the number of these special occasion establishments will be limited in geographic areas as regions can only support so many of these types of restaurants.
The casual segment is perhaps the most affected by the changes. This segment continues to be the hardest hit by declining traffic counts. Shifting demographics, changing lifestyles and an overbuilt segment make competition fierce among operators in this space, particularly national brands that continue to struggle to differentiate themselves. Many have similar menus and create similar experiences for their guests, which forces them to compete on price. They are also being affected by consumers’ focus on local products, which extends beyond locally sourced products to locally owned and operated establishments. There has been a surge of locally owned, small to midsized multi-unit operators in this space who are more nimble and more creative in their menu options, catering to local tastes and preferences, who are taking market share from national brands. For national brands to compete in this environment they need to find ways to differentiate themselves. Value will always be important in this space, but food quality and attentive service are part of the value proposition; it’s not just price point.
Competition will likely intensify in 2017 as growing brands enter new markets and attack established operators for market share. Overall, the majority of winners will emerge from the fast casual space. These restaurant concepts are able to connect better with their customers and attract younger consumers who are drawn to fresh foods and healthy options. Conversely, casual dining establishments will continue to struggle to differentiate themselves. Many share the same menu items, and to compete in that environment it will be more about location and convenience for their customers, as well as low prices. Profitability for many casual dining restaurants will be problematic as average unit volumes fall faster than their cost structure. There are simply too many restaurant seats in most major markets and insufficient foot traffic and demand to support the volume of choices. Brand differentiation will be key this year.
Branding is more than creating a catchy jingle, a cool name or hip service marks. It’s the essence of an individual restaurant or concept. It starts with creative menu options, the quality of the product served, the manner in which it is served, the vibe created and an ability to connect with customers or guests, all delivered on a consistent basis. This is true regardless of the segment. The priority of these items and the tactics to deliver them may vary by segment, but operators who are successful in these areas will capitalize on the opportunities created by the shifting trends across the industry.
Cost containment will become increasingly important as the industry evolves. Industry expansion, coupled with declining overall traffic means more seats with fewer people to fill them. Add increasing labor and real estate costs and operating margins are negatively affected from multiple directions. Managing margins will be critical in 2017 and beyond. Operators who invest in technology to effectively manage full-time equivalents (FTEs) and control food costs will be best positioned to compete effectively. Disciplined site selection will also be important. Operators under pressure to grow will need to develop realistic sales goals for prospective locations to ensure the unit economics work before signing new leases. Expansion into new markets may require less traditional real estate programs. A hub-and-spoke approach, utilizing a more expensive prime location as the hub with less expensive locations around it, may be a prudent way to manage overall occupancy costs in new markets, particularly in larger metropolitan areas where rents have traditionally challenged unit economics.
Labor represents a significant expense to all restaurant operators, second only to food and beverage costs. Pending regulatory legislative changes relating to minimum wage and paid overtime will have a significant impact on the industry. Despite a new administration in Washington that may try to delay these initiatives, labor cost is likely to continue to have an impact as unemployment continues to decrease and labor becomes increasingly scarce. Proposed immigration policies, policies promoting new manufacturing jobs and plans to modernize the country’s infrastructure will create competition for labor and may drive up costs even further.
Listen to what our industry insider says about the importance of a strong workforce, one that’s trained and well-versed in food safety, brand and product, and how things might be changing for many middle market restaurants in terms of labor.
Data security will continue to be an issue for the industry in 2017. Hackers will target restaurant companies to obtain credit card information and other personal confidential information on their guests.
As new technologies provide greater opportunities to collect additional guest data to better understand preferences and to build greater loyalty, the risk will intensify. Many operators have purchased insurance to manage their cyber risk. However, insurance carriers have made it clear that companies need to take appropriate precautions and be in compliance with regulatory requirements to maintain the standing of their policies.
Credit card fraud is also likely to continue to affect operators who have delayed the implementation of chip technology into their credit card processing. Rules shifting responsibility from card issuers to merchants not using chip technology went into effect in late 2015. Many operators who delayed implementation of the new technology realized a significant increase in credit card fraud, particularly for the purchase of gift cards which would later be sold on the internet. Successful operators will implement the appropriate technology and other mitigating controls to manage the risk in this area.
Despite discussion around a pending restaurant recession, interest in the industry remains constant. High quality deals will continue to generate significant interest and yield high multiples. However, the number of deals is likely to decrease as fewer high quality opportunities are available. Consequently, we expect the level of investment in restaurant businesses to be modest in 2017.
What’s hot and what’s to come in restaurant dealmaking? Private equity firms and strategic buyers will compete to invest in proven restaurant concepts and brands that resonate with millennials.
The trend toward locally sourced products, often from smaller producers, coupled with increasing turnover rates create a challenging situation for restaurant operators—particularly in those segments that rely on large numbers of part-time employees, many of who are working at their first job.
Restaurant operators need to have clear food safety policies and procedures in place and robust training programs to ensure 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. However, ongoing training efforts may be a challenge given frequent workforce turnovers and the lack of experienced restaurant employees. Restaurant 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 so if an issue occurs it is addressed immediately and appropriately, minimizing impact to the brand.