In 2020, ongoing economic growth fueled by positive consumer sentiment and growth in jobs and wages will continue to drive sales across the restaurant industry; however, operators will battle significant headwinds. What are the top issues and opportunities trending for restaurant businesses this year? Our national restaurant leader, John Nicolopoulos, shares insights on several emerging topics in the industry below.
Competition will pose the biggest challenge for restaurant operators this year from both traditional restaurant concepts and emerging categories. Customer traffic will continue to be a major challenge across most segments, while competition for labor will drive labor costs up in the near term and continue to attack profitability.
Trends in consumer spending will likely continue, with the gap between food prepared at home and away from home remaining consistent or potentially broadening. However, competition from an overly built out traditional restaurant sector in many markets and other disruptors in the marketplace will increase competition for customer traffic across the ecosystem. Restaurant operators should expect increased competition from grocery, convenience stores and other nontraditional sources as U.S. consumers continue to crave convenience and off-premise dining options.
Consumer tastes and preferences will continue to evolve, creating opportunities for new concepts to enter the market and likely at the expense of less relevant brands. There will continue to be those consumers who focus on the dining experience, whether defined by the cuisine, service, ambiance or the on-premise games or events provided, while other consumers with busy schedules look to outsource meal preparation as they would their laundry. This will give rise to greater competition for on-premise diners and expanded opportunities for off-premise operators to provide meals in a tech-enabled pick-up or delivery model.
Delivery and technology
Off-premise options will continue to evolve as restaurants and third-party delivery platforms struggle to find the path to profitability. Competition for market share and labor will continue to cause delivery providers to exit unprofitable markets with consolidation being the likely longer-term result. Restaurant operators will experiment with ghost kitchens and other similar models to serve off-premise customers in a more efficient and cost-effective manner and to minimize disruption at dine-in locations.
Investment in technology will continue to grow as operators search for ways to streamline operations, minimize friction in the sales process and drive guest loyalty. Mobile ordering and payment will be especially important for off-premise operations. Data security will become increasingly important as operators obtain more and more data about their guests and regulators impose tougher security and privacy standards. Protecting guest information and preventing ransom attacks will require additional focus, while point-to-point encryption will enhance payment card security.
Cost, margin pressure and growth
Cost and scarcity of labor will continue to be a challenge to operations. This has been caused by a healthy economy, competition from gig employers and growth across the industry. Competition for qualified general managers will continue to drive up costs and affect operational effectiveness, while hourly employees at all levels will benefit from increases in minimum wages, particularly in large metropolitan areas. Turnover is expected to remain high in the near term as employees take full advantage of the sellers’ market.
Real estate costs will remain a challenge. Recent retail and restaurant closings have had little impact on the cost of prime real estate locations. Competition for “A” locations continues to drive rates; a shift to smaller-box formats will allow landlords to add multiple smaller restaurant concepts to their projects, creating more options for customers but greater competition for operators. As operators react to off-premise demand, many will look to alternate sites and/or scaled down versions of flagship concepts to serve off-premise guests, while others reconfigure existing locations to accommodate changing purchasing patterns.
Cost of capital will likely increase as traditional lenders assess the risk profile within their portfolios. Tighter leverage ratios from these lenders may push some borrowers to other sources who typically charge higher interest rates. Limitations on the tax deductibility of interest will exacerbate the problem for some, particularly for high-growth concepts that sacrifice EBITDA for revenue as they grow. The overall impact of these factors may be slower growth.
Mergers and acquisitions trends will likely continue along the recent path. High-quality assets will garner most of the attention with strategic buyers searching for growth through acquisition, while financial buyers search for budding brands with significant growth potential. There will be no shortage of reclamation projects available and some investors will bargain hunt for good brands and concepts in need of reorganization and retooling. Reorganizations will make second-generation space available and provide a lower cost of entry into certain markets, but operators need to be wary as many of these locations will be vacated as a result of changing traffic patterns, changing buying behaviors or heavy competition.