Only a blackheart would fault restaurants for sending off 2018 with more exuberance than a calendar change usually musters. It wasn’t the worst of years, but even a masochist would balk at calling it one of the industry’s best. Tax cuts failed to deliver the top-line help that operators desperately needed, and alien possession seemed the only plausible explanation at times for consumers’ fickle behavior. Experts hailed the economy as robust, but restaurateurs scanned their empty seats and wondered if customers realized they were supposed to dine out more often.
The only group in tighter supply than guests were employees.
Still, there were some bright spots. Off-premise business boomed, and technology eased the rigors of running restaurants—albeit with a new set of challenges about what to do with the generated data.
All in all, it was a year of transitions. Here are some of the ways the industry changed.
1. Money ain’t for nothing when it comes to labor
Unions and other labor advocates didn’t have to worry in 2018 about driving up wages through legislative mandates (though they pursued that route anyway). The marketplace did it for them.
Galloping demand and a continued shrinking of the labor supply pushed pay rates to heights seldom encountered outside a NASA flight plan. Chain operators warned shareholders that wages were climbing in the mid-single-digit range, offsetting any benefits of moderating commodity costs. Lip service about cultivating a culture of retention gave way in restaurant headquarters to a fire drill mindset that something had to really be done, and pronto.
A realization took hold that drawing enough employees was as essential to an operation’s success as attracting customers. “Moving forward, the biggest challenge for the industry is going to be the war on talent. That’s where we’re focused,” Gene Lee, CEO of Olive Garden parent Darden Restaurants, told investors. “That’s where I think the winners will be focused.”
Fortunately for operations that had the wherewithal to sweeten pay rates, employees showed a newfound appreciation of money. Whereas pay had traditionally been third or fourth on employees’ list of the reasons why they left a restaurant job, it jumped toward the top in 2018, according to researcher TDn2K.
In short: Pay soared, but at least employees noticed.
2. Off-premise as sales salvation
The restaurant industry’s biggest sales gainers of 2018 weren’t restaurants. Third-party delivery services easily laid claim to that distinction by collecting some $5 billion in sales during just the first six months of the year, a 55% increase over their intake for the same period in 2017, according to Technomic. At an annualized rate, the Grubhubs and Uber Eats of the business would have collectively finished as the industry’s third-largest operation ranked by sales, behind McDonald’s and Starbucks, the researcher noted.
Restaurants also reported impressive sales gains from delivery, takeout and catering—increases in the 20% to 30% range weren’t unusual for chains of significant size. Most characterized that business as virtually all incremental, making the off-premise boom by far the most positive development for restaurants in 2018.
3. The micro-LTO
Limited-time offers have been losing popularity among restaurant chains for several years, a reflection of the high cost and daunting logistical requirements that can go into a promotion lasting a few weeks. But 2018 added topspin to a new variant: The really limited limited-time offer. Arby’s was a particularly avid proponent, offering a duck breast sandwich in just 16 units during duck-hunting season for as long as extremely limited supplies lasted. The chain also promoted free tattoos at a single parlor in California for the course of one day.
It was hardly alone in narrowing a come-on to a few locations for a matter of hours. In October, Popeyes Louisiana Chicken offered wings dipped in Champagne and battered with edible 24-karat gold flakes—at only four stores nationwide, and for less than 24 hours. The wings sold for $5 per order of six.
Burger King sold a doughnut Whopper—a traditional version of the sandwich in all respects except the doughnut shape of the bun top—just for National Doughnut Day on June 1.
But the master of the micro-LTO remained Olive Garden, which once again sold a pass for unlimited pasta servings over a long stretch (a full 365 days this time, as opposed to seven weeks in previous versions) at a bargain price ($300 this year, up from $100). The Darden Restaurants chain declined to reveal when it had depleted all 1,000 of the passes that were offered.
4. Restaurateurs as tech entrepreneurs
Restaurants continued to embrace technology to an extensive degree in 2018, but a few operators went beyond buying merely a system or device. They bought the whole supplier, or at least enough of a stake to lay claim to the innovation.
The buyers included Danny Meyer’s Enlightened Hospitality Investments private-equity group, which invested $20 million in Goldbelly, an online seller of such signature restaurant dishes as Central Grocery Market’s muffaletta, or sandwiches made according to Carnegie Deli’s specs. Meyer already owned a piece of the Resy restaurant reservations system.
Yum Brands, the parent of Taco Bell and KFC, spent $200 million for an undisclosed stake in Grubhub, the third-party delivery service that services the two chains. Yum’s third quick-service chain, Pizza Hut, agreed to buy the QuikOrder online ordering system for an advantage in using that technology.
Yum has said that it will likely make additional investments in tech to turn capabilities into proprietary assets.
Lettuce Entertain You Enterprises, the Chicago multiconcept operator, and chef Thomas Keller were part of the backing group that invested $9.5 million in the Tock ticket-style reservation system owned by another restaurant operator, The Alinea Group’s Nick Kokonas.
5. A year of big-name exits
The year was marked by the departure of an all-star team of veteran chain leaders, some likely to be more missed than others. Among the big brains who exited their CEO posts amid fanfare and regrets, their reputations intact: Patrick Doyle of Domino’s Pizza, Ron Shaich of Panera Bread, Nigel Travis of Dunkin’ Donuts parent Dunkin’ Brands, Cliff Hudson of Sonic Drive-In and Mike O’Donnell of Ruth’s Chris Steak House. Kelli Valade resigned as president of Chili’s Grill & Bar, and Howard Schultz turned in his gavel as chairman of Starbucks, the coffee titan he built over a 36-year period.
Taken more in stride, if not met with relief, were the departures of two other empire builders: Steve Ells, founder and CEO of Chipotle Mexican Grill, and John Schnatter, founder, chairman and the Papa John of Papa John’s.
6. So long, brick-and-mortar mall neighbors
Restaurants have maintained a symbiotic relationship with shopping malls for at least 40 years. But relations were frayed this year by the continuing meltdown of brick-and-mortar retailing, a result of shoppers increasingly hunting for bargains online. It’s more difficult for Starbucks to sell coffee to shoppers or Orange Julius to find buyers for its signature drink when the usual targets are at home in their bathrobes, checking eBay prices against Amazon’s.
The closings of onetime mall draws have continued at a rapid clip. Toys R Us announced plans to close all 735 of its stores. Lowe’s said it would shut 52. Sears is snapping the lights off at nearly 200 branches. The list goes on and on.
But out of those ashes have come new opportunities for restaurants, or at least that’s what some operators are figuring. Starbucks, for instance, informed its executive team that the downturn in retailing will likely pressure landlords to reconsider the rents they’re demanding of tenants like coffee cafes.
Simon Property Group, one of the nation’s largest mall operators, disclosed plans to turn the plots of shuttered Sears and Kmart stores into a new generation of mixed-use centers abounding in restaurant options, particularly destination-style restaurants such as The Cheesecake Factory.
7. Franchisees fight back
Relations between franchisees and franchisors took a dramatic change for the worse in 2018, a result in the eyes of many observers of the asset-light mindset that has taken hold in the chain sector. The old formula of a franchisor owning and operating about a third of a system’s restaurants has gone the way of video rental stores. The home offices of brands ranging from Applebee’s to Jack in the Box have recast themselves as pure franchisors, with virtually no restaurants under their management.
Whatever the cause, relations have undeniably worsened. Tim Hortons and its American parent, Restaurant Brands International, have turned 2018 into a boomtime for franchise attorneys. Jack in the Box’s franchisees are demanding that once-popular CEO Lenny Comma be fired because of a deafness to their demands. They’re also requesting a seat on the publicly owned franchisor’s board of directors, and are adding momentum to a call for the chain’s sale.
Even McDonald’s has found itself at odds with the owner-operators of all but 700 of the chain’s 14,000 units. They’re outraged by demands that stores be updated with a new look and operations package that will cost them hundreds of thousands, even with the franchisor picking up more than half of the outlay.
Strife has also been reported within Papa John’s, Subway, Dickey’s Barbecue Pit, Steak ‘n Shake and Sonic Drive-In.
8. Bankruptcies abounded
The industry suffered a flashback of sorts to the years immediately following the Great Recession: One after another, well-known operators decided (or had creditors decide for them) that it was time to throw in the napkin and file for bankruptcy protection. The operations unable to maintain business as usual ranged from the multiconcept empire of celebrated Philadelphia chef-operator Jose Garces to one of Applebee’s largest franchisees, 163-restaurant RMH Franchise Holdings, to the fast-casual upstart Noon Mediterranean, formerly known as Verts.
By our count, about a dozen chains operated by six companies were among the casualties. In addition to the Garces Group, the multiconcept operators that called it quits included Mike Isabella’s collection of highly rated restaurants in Washington, D.C.
9. Wheeling and dealing restaurant-style
Shopping may have declined within the nation’s malls, but not in the restaurant marketplace. Participants in that Swap-A-Rama say the level of acquisitions and mergers was unprecedented, a result of capital being readily available and opportunities abounding.
At the high end were the purchases of Buffalo Wild Wings ($2.9 billion) and Sonic Drive-In ($2.3 billion) by a holding company newly formed by private-equity firm Roark Capital. Inspire Brands hasn’t hidden its intentions to continue adding restaurant brands to its portfolio, which already included Arby’s and Rusty Taco.
Inspire Brands was one of several new holding companies that emerged during 2018. Former Olive Garden chief Brad Blum engineered an acquisition of the Brio Tuscan Grille and Bravo Cucina Italiana casual chains from shareholders for $100 million, declaring the twin brands a foundation for further purchases by his FoodFirst Global Restaurants.
Ron Shaich re-emerged after relinquishing the reins of Panera Bread on Jan. 1, backing Cava’s $300 million acquisition of Zoes Kitchen through his Act III investment company. More deals involving Act III are expected.
At the other end of the spectrum was the purchase of the 34-unit Tilted Kilt breastaurant chain for $10 (and, no, that’s not a typo). It’s believed the payment was in cash.
The buyer, Arc Group, was one of a fast-growing group of restaurant investors that scooped up ailing brands at bargain prices. The scavengers included Canada-based MTY Foods Group, now the owner of the sweetFrog frozen yogurt chain, and Fat Brands, now the parent of Ponderosa Steakhouse, Bonanza Steakhouse, Fatburger and Yalla Mediterranean.