A plunge into the dynamics shaping upstart restaurant brands yielded bits of good news for the chain builders attending this week’s Restaurant Trends & Directions conference, including predictions of better macro conditions for 2017’s second half. But speakers also warned of potential dangers for the industry, noting that it’s not benefitted proportionately from general improvements in the economy.
“Fundamentals are as solid as they’ve been since I’ve been talking to this crowd,” said Arjun Chakravarti, the IIT Stuart School of Business marketing professor who’s addressed the annual RT&D event for 10 years. “The macro trends are on track. You have to ask yourself, why are things so depressed right now [for restaurants]?”
He and others cited an upswing in competition for restaurants as a key reason, with rivals coming in a variety of forms. Chakravarti revealed how he now eats a prepared steak lunch during the week from Mariano’s, a Midwestern supermarket chain, because it costs only $7. How, he suggested, can a restaurant compete with a deal like that?
And that’s in addition to stepped-up competition within the restaurant business itself. “The growth in chain restaurants, what you see is about 2% over [the] last year,” said Victor Fernandez, executive director of insights and knowledge for the research firm TDn2K. “That’s a net gain of 2,400 establishments.”
In addition to that dilution of traffic, he and other speakers noted, several other risks are potentially looming for emerging chains. Here are six of them.
1. Summer jobs aren’t drawing
Young people no longer regard a summer job as being worth the distraction, said Chakravarti. “They’re sitting it out in droves,” he said, noting that the pay of seasonal restaurant jobs has minimal effect on a student’s financial plight. But it’s not as if they’re heading to the beach. “They’re saying, it’s really much better for us to get out of school a year earlier and earn money, real money.”
2. Too much space for dine-in business?
Scott Wise, founder of the Scotty’s Brewhouse casual-dining chain, revealed that his brainchild is cutting its footprint almost in half because of the delivery boom. “We’ve already scaled down our restaurants because we’re doing so much business through DoorDash,” he explained. Instead of building 9,500-square-foot restaurants, Scotty’s is shrinking the standard size to 5,000 square feet.
3. Brace for a payroll wallop
The job of recruiting and retaining hourly employees is likely to get tougher, speakers agreed, noting that prospects are no longer struggling to find even low-wage work. With the nation at virtually full employment, workers are likely to leave their restaurant jobs today because another employer is offering higher pay, noted TDn2K’s Fernandez.
Traditionally, factors like job satisfaction or a poor work-life balance were what drove restaurant staff members and managers elsewhere, he explained. “They were not leaving for money,” Fernandez said. “Now they are.”
4. What turnover costs today
The financial impact of that turnover can be powerful, Fernandez showed. TDn2K has pegged the cost of replacing a front-of-house worker at $2,171 and the price of a back-of-house crewmember at $2,809. Each departing manager costs a restaurant about $15,271, Fernandez said.
5. Don’t stint on staff
Fernandez aired two tips for avoiding the high cost of replacing hourly employees.
“Those brands that do better in turnover have higher staffing levels,” he said, citing TDn2K research. “If you have enough people to cover shifts, that definitely helps.”
He noted that a slowdown in management turnover also brings down the churn rate for hourlies and yields a host of other benefits. Guest satisfaction scores tend to climb in correlation with manager retention, as do same-store sales results.
6. Beware bankers’ key economic barometer
The current economic situation is a head scratcher because the fundamental dynamics aren’t unfolding as usual, Chakravarti asserted. Despite appreciable economic growth, inflation hasn’t been kick-started, leaving regulators in a quandary.
“If I had to tell you one thing to really keep track of, it’s what the Federal Reserve is going to do,” he told the roomful of restaurateurs. “If they raise the interest rate too fast, it could really tip us downward.”