The restaurant industry is at an odd spot. Sales remain strong. Profitability not so much. Labor is difficult to come by and expensive when you do. The supply chain problem is even worse. But the industry’s valuations and its activity have rarely, if ever, been stronger.
It made for a notable Restaurant Leadership Conference, which concluded on Wednesday in Scottsdale, Ariz., with some 1,500 attendees.
Session after session highlighted many of the challenges operators are facing right now. Yet in some respects there seems to be considerable opportunity, both from an innovation and a growth standpoint. Here’s a few of our takeaways from the four-day event.
Consumers have a “recessionary mindset”
On Tuesday, in the middle of RLC, the federal government reported that its consumer price index is up 8.5% year over year, a 40-year high. Menu price inflation rose 6.9%, also a 40-year high.
Prices are increasing because the economy is going well. But consumers see things like sudden spikes in the price of a gallon of gas or the cost of hamburger in the grocery store and think otherwise. That could well play a role in industry sales, leading to more deal-seeking consumers or cuts in visits.
“We’re probably in an existential recession,” Rich Shank, senior principal with Technomic, said at RLC. “There is a recessionary mindset. It is having an impact on [consumers’] outlook.”
Sales may be hitting a wall
Maybe that mindset is already having an impact.
Shortly before RLC, Technomic released data from its Top 500 Chain Restaurant Report showing 8% growth in chain sales since 2019—meaning the biggest concepts largely recovered from the downturn. (Both the RLC and Technomic are owned by Winsight, which also owns Restaurant Business.)
Sales have remained strong despite historically high levels. But those sales may be slowing. “There seems to be a little bit of a slowdown,” Technomic Managing Principal Joe Pawlak said. He noted that the rate of growth in the industry has slowed in recent months, according to the firm’s “Tindex” index. Many segments, meanwhile, have yet to ramp up.
The supply chain is a problem
More than a third of restaurants dropped at least one supplier due to performance issues over the past two years, according to Technomic.
While operators did say that some of the acute issues with the supply chain are getting better, their cost of goods continues to increase.
While many brands have cut their menus, sometimes products are too important. “Operators do face that challenge a lot,” James O’Reilly, CEO of the casual chain Smokey Bones, said on a panel discussion on the supply chain. “You take a profit hit to keep an item on the menu.”
The labor problem isn’t going away
Labor challenges were an ever-present theme at the conference—and any other industry event these days, for that matter. At least some of the blame for the problem is the pandemic, which kept a lot of people from working, while government stimulus checks and higher wages kept demand flowing.
But don’t expect this problem to go away with the coronavirus, either. “Eventually, we will be done with this pandemic,” Ken Abosch, a partner with the human resources consulting firm Aon, said during one session. “Unfortunately, that will not resolve these labor challenges we’re expecting today.”
But pay is what keeps employees around
Operators have been searching for answers for keeping workers. But one of the easiest has been staring them in the face: Paychecks.
While culture and other matters are clearly important in a restaurant, pay is what will keep turnover at a minimum. Non-management turnover at quick-service restaurants, by the way, is 170%, according to Aon. The cost of replacing a worker is about $5,900. Pay remains the top priority for employees.
“Research actually shows that as you’re willing to pay more, the probability of turnover decreases,” he said. “There is a strong correlation between the two.”
Takeout sales require focus
One such opportunity restaurants have had since the pandemic is takeout. And the ones that have put energy behind takeout have the most chance of keeping those sales afterward.
IHOP, for instance, looks at items differently. “Now we look at things in two ways—off-premise and dine-in,” the chain’s chief marketing officer, Kieran Donahue, said on Wednesday. She noted that the company recently developed burritos and bowls because they did well for takeout. “You have to consider portability.”
At P.F. Chang’s, the company has seen takeout take off, a particular opportunity for an Asian chain. The company has even added self-delivery in 90 of its locations, though it is not giving up on third-party delivery and is not doing ghost kitchens.
Ghost kitchens are here to stay, but not everybody is enthused
David Chang, the celebrity chef and founder of Momofuku, believes ghost kitchens have a potentially huge future. “Whoever cracks this code is going to create the largest companies in the world,” he said.
Ghost kitchens have clearly been top-of-mind for a lot of brands and continue to present an intriguing expansion option for many companies. Their ability to host multiple concepts for delivery-only has the eyes of a lot of restaurant chains.
Not everyone is necessarily on board. “We get a lot of walk-in business,” P.F. Chang’s CEO Damola Adamolekun said. “When you don’t have that front of house, you lose maybe half your sales of people just walking in.”
Virtual brands and quick money
During one session on virtual brands, Alex Canter, the young founder of Nextbite, praised Robert Earl, the experienced restaurateur and founder of Virtual Dining Concepts. Both companies operate big virtual brands. Canter was impressed by the growth of MrBeast Burger.
Earl showed his appreciation, apparently, by holding up a wad of cash.
Virtual brands are intriguing, certainly from an investment standpoint, as concepts like MrBeast can be started quickly with little up-front capital to be in hundreds of locations making … huge wads of cash. So it’s only fitting.
Speaking of virtual brands
Their biggest potential could be late at night.
That’s according to Jessica Jackson, director of strategy and innovation at Dine Brands, who said during the same innovation forum as the cash-flashing session that IHOP’s two virtual brands have been busiest between 9 p.m. and 5 a.m.
We hear that repeatedly, that late-night business remains a big opportunity for virtual brands focused on delivery. That makes sense, because people get hungry late and don’t necessarily want to go out. So maybe the future of 24-hour concepts is that their overnight hours will be mostly spent doing delivery orders.
Technology is huge
At one point during the conference, an attendee approached me and said hello, and then wished me off by saying, “You’ll hear a lot more about me in a couple of years!” Unsurprisingly he was head of a burgeoning technology company.
Tech was huge at the conference—in the sessions, throughout the marketplace, in discussion after discussion, and of course out in the hallways. Everyone thinks about it, from employees to marketers. “Technology has been a friend to our employees overall,” Adamolekun said.
Recent years have brought more technology into this business than ever before, and operators want to talk about what works. That’s because technology can be an answer to many of the challenges operators are facing. That may be the biggest opportunity of the post-pandemic era—the opportunity to bring restaurants to the same technological level as other industries such as hotels or retail.
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