Restructuring expert Nishant Machado from Mackinac Partners explains the process—it's more than just a menu revamp.
As stakeholders in casual dining (CD) concepts continue to look at the turnaround potential of their investment, it is important to focus on techniques and strategies that accelerate success where others have failed.
Management teams guiding these CD restaurant chains need to take decisive steps to evolve their brand and aggressively plan for growing costs. Absent deliberate change, some CD concepts could fall to the barrage of headwinds in the form of increasing minimum wage, growing food cost, shift in consumer trends, and ever-increasing competition. With nearly 10 years of steadily declining traffic (22 percent), (1) management and shareholders are looking for answers as restaurant economics continue to shrink.
A number of CD concepts battling difficult turnarounds turn to CAPEX investments and new menu designs to drive top line growth. These initiatives only add sustainable same store sales (SSS) growth if companies are able to effectively address core issues facing the brand. Before sponsors invest considerable capital in challenged concepts, it is essential that their management teams strategically identify and implement specific turnaround initiatives to position themselves for growth and sustainability by focusing on the core issues facing the segment—brand relevance, service, and stretched management.
Through these turnaround efforts, sponsors have to be ready for a controlled yet tumultuous ride that will help concepts break away from ineffective and outdated strategies and steer them toward relevancy, market share growth, and sustainability.
CD concepts were built to serve the Baby Boomer generation, and in many instances have not evolved with changing consumer trends and preferences. With Millennials now more likely to eat at a restaurant than older generations, they are usurping Baby Boomers as the top restaurant spenders in the country. As a result, companies have to focus on capturing more of this demographic by building around key characteristics that resonate with this group.
Studies show that Millennials value expedient service, transparency, authenticity, and customization.(1) CD concepts need to have a thorough understanding of their consumers and brand perception, and have the right team to strategically define cost-effective initiatives to tap into those specific characteristics without ostracizing their current core consumer. This is a fine balance, and management needs to lean on research data and experienced professionals to carefully navigate this change to avoid a costly setback.
Executive teams need to diligently monitor consumer feedback by focusing on key indicators (net promoter scores, consumer sentiment trends, etc.) to help measure the success of turnaround efforts and to drive adjustments to any turnaround plan, with SSS growth being the ultimately measure of success.
So the question becomes not:
“How can we turn around our existing offering?”
“In what ways can we add (or subtract) to evolve our offering to be more relevant and create a more meaningful experience for the new, younger Millennial and 'Gen Z' consumer?”
“Do we have the right resources to do it?”
Service is a key differentiator between CD and fast-casual or quick-serve. CD concepts have an opportunity to connect with guests through best-in-class service and hospitality. CD concepts need to capitalize on longer face time with consumers to build a relationship that will trigger return visits. The current approach at many CD concepts is so mechanical that the whole concept of hospitality is lost.
Given the SSS struggles, it is important that turnaround efforts be developed to focus on in-unit culture and training to maximize FOH sales potential. Managers need to be given the direction and resources to cultivate an environment that gets buy-in from FOH team members so they embody the brand’s commitment to hospitality, incentivize them to promote high-margin items, and to tactfully upsell.
Instituting a culture change and retraining a workforce can be a time-consuming and arduous effort, but is an essential step in building a sustainable brand. It involves tremendous commitment, aggressive recruiting efforts, interactive systems, and capital.
Companies need to customize their recruiting efforts to find talent that fits the concept’s strategic direction. They also need to implement systems that effectively cascade training efforts throughout the organization, measure and grade unit-level employees, and institute programs to retain employees. Retaining employees is a critical piece that is often overlooked and can provide much-needed consistency and stability for concepts that are in a turnaround phase.
It is important that companies provide themselves with sufficient runway by developing additional revenue generators and targeted initiatives to sustain EBITDA and sales, while the longer-term turnaround initiative is fully realized.
Some of the most effective and immediate initiatives that companies can evaluate are online ordering, loyalty programs, banquet and catering services, licensing, and developing dedicated local store marketing programs to better equip managers. Industry benchmarks show that online ordering, banquets, and catering services can increase revenues approximately 10 percent.(1)
Successfully implementing a cultural change toward hospitality and dedication to service requires a combined effort between human resources (recruitment and retainment), training, operations (execution and evaluation), marketing (internal and external messaging), IT (systems to measure), and executive management. Oftentimes, companies don’t have the internal resources with the expertise or bandwidth to orchestrate such an undertaking, but it is critical to have a leader driving the process for it to succeed.
Executive teams in a turnaround situation are not equipped to singlehandedly deal with the various top line and cost headwinds facing the segment. Fighting a decline in market share, growing costs, the perception of legacy brands, changing consumer behaviors, etc. can be a monumental undertaking. Requiring executive teams to run the day-to-day business and to define strategies and cross-departmental plans to evolve the concept can end in failure. Executive teams need dedicated and turnaround-experienced resources to expedite efforts so they can focus on daily execution and operations.
Due to the demand placed on management, turnaround situations typically see a considerably higher amount of turnover at the management level compared to performing companies. This has a domino effect on operations, service, sales, and profitability. The onus is on sponsors and company leaders to set their executive teams up for success by surrounding them with the resources to help turnaround the business.
Equally important is ensuring that a company has the right team in place and that they are creatively incentivized to effectively and expeditiously execute the turnaround plan. Depending on the extent of the turnaround effort, typical bonus structures may not always yield the best results.
In any turnaround effort, visibility into the operations is critical. Chief Restructuring Officers, advisors, sponsors, and the executive teams need to be able to effectively measure and assess every aspect of the business to be able to react quickly and measure progress. Developing the right processes, systems, and tools to do this is the first step to any turnaround.
(1) Source: Wall Street Research.
Casual dining concepts need to evolve to better serve lapsed consumers and to attract an ever-changing consumer set. With growing competition and new entrants, these concepts need to act swiftly to stabilize, regain market share, and build EBITDA. Supporting management with the right resources and executing on the core turnaround initiatives will stem the bleeding, and more importantly, drive enterprise value through a robust and sustainable platform.
The opinions of contributors are their own. Publication of their writing does not imply endorsement by FSR magazine or Journalistic Inc.