Paul Brown probably didn’t envision a global pandemic threatening the future of the restaurant industry in 2017 when he agreed to buy Buffalo Wild Wings as the CEO of Arby’s. But the coronavirus has proven many of the predictions that drove the acquisition.
Specifically, Brown foresaw many of the same issues in restaurants that drove considerable change in the hotel industry, where he had worked before taking the Arby’s job in 2013. Technology was taking an interest in restaurants, as it had with hotels and car rental services and other businesses.
Restaurants would need to grow larger to be able to make the investments necessary to survive in an environment like that.
“Those companies that are able to make those investments will ultimately benefit from this, and it will be a very good thing,” Brown said at the Restaurant Finance and Development Conference this week. “For those that aren’t, it will be less positive. You need scale. Having that scale, and the right kind of scale, was really the genesis of Inspire.”
The pandemic would prove Brown prescient. Not because of the devastation it caused, but because of the industry’s reaction.
Restaurants have jumped five or more years into the future since March 2020. Chains have pumped as much money into technology as they probably had in the decade before then. They’re doing things like robot fry makers and waiters and implementing artificial intelligence, all to make their businesses more efficient.
In-app ordering became a must-have and customers flocked to it. Companies started flocking to ghost kitchens and created virtual brands and began hosting them inside their restaurants to use labor more efficiently.
The result has been predictable. The biggest chain restaurants performed best in 2020 and have improved further in 2021. Franchisees of many of these brands are reporting strong cash flow and record valuations. This is giving them breathing room in the face of labor and commodity inflation.
On the other side, independent restaurants bore the brunt of the pandemic, closing by the thousands. They remain less likely to offset these rising costs.
While there are certainly exceptions, it all pretty much proves Brown right. At the time of the initial merger—Inspire Brands since has acquired Sonic, Jimmy John’s and Dunkin’ Brands—the industry was in need of change.
“The restaurant industry is the last really large industry in the United States that has seen virtually no improvements in productivity,” Brown said.
Restaurants had relied largely on low input costs, he said. This was especially true with labor. The industry’s labor costs were traditionally higher than competitors like grocers or other retailers, though it relied heavily on a plentiful supply of low-wage workers.
Technology had made few inroads into the business before 2015.
But technology had made significant changes to other industries, like the aforementioned hotel business.
To take one example, the digitally enabled loyalty programs that chains like Del Taco and McDonald’s are deploying with gusto this year have long been in place at hotels such as Marriott. And that industry was hit early with a push by third-party aggregators like Orbitz and Priceline selling their reservations online to customers. Delivery companies like DoorDash and Uber Eats have drawn comparisons to that era.
Perhaps unsurprisingly, Inspire Brands is organized “a lot more like how hotel companies organize themselves than restaurants,” Brown said.
The company combines media purchasing across all brands, which also share best practices with one another. For instance, when Buffalo Wild Wings added curbside service during the pandemic, it was able to get an assist from Sonic.
The company is building an infrastructure to benefit all its brands. It is not extending its loyalty program across all of them yet, but it is able to share things learned from Dunkin’s DD Perks program across all its concepts.
And then it’s able to experiment, as it is doing now with Alliance Kitchen, a ghost kitchen comprised of five brands—everything but Dunkin’ and Baskin-Robbins—that has proven to cut the cost of energy, labor and equipment.
That is the sort of thing you can do when you’re one of the biggest restaurant companies in the country, and many of its contemporaries are doing similar things. It gives big chains a massive advantage.
Independents and smaller chains are not exactly going away, of course. But they may have a tougher time succeeding in the post-pandemic environment.