Changes, investments, transitions, and fixes as the restaurant industry braces for lasting change in the wake of COVID-19.
Change is here. Never in recent history have we experienced forces of disruption like we are seeing today. Savvy operators have adopted a new mindset of evolving with the market and optimizing their business models to take advantage of new opportunities, such as the growth of off-premises. Before, many operators were waiting for the “next normal” to begin, and, by necessity, spending all their time solving the “problems of the day,” such as finding substitutes for products they didn’t receive or figuring out how to run the business shorthanded.
Over the past year, many restaurant brands have seen sales come back to 2019 levels or greater. But are they making money? Price increases have inflated sales numbers, yet even with aggressive cost management, many restaurants are still not as profitable as pre-pandemic.
THE RECOVERY ROADMAP
Kinetic12’s recovery roadmap (below) hypothesizes the industry has moved into the phase of the journey called “Transition 3: Define.” In this phase, we see operators assessing the changes they made through the pandemic and in the transition out of it to determine what should stick and what additional changes are required.
In this article, we look deeper into this “Define” phase and outline nine business issues and opportunities that operators are dealing with in this final transition to the new future.
TODAY’S TOP NINE BUSINESS ISSUES and OPPORTUNITIES
1. SOLVING FOR SUPPLY CHAIN DISRUPTIONS
As shown below, supply chain is the No. 1 business issue being faced by operators today. Despite there still being fill-rate issues, we have seen improvements in how supply is being managed. Communication between operators and their suppliers has improved dramatically, providing greater advance notice and pro-active fixes like approved alternate products to replace spec products in the event of a shortage. Operators must be aggressive in how they manage their supply chain and in what they demand of their suppliers and distributor partners.
Below are six common tactics being used to compensate for supply chain disruptions:
- Approve more substitutions
- Keep more inventory on hand
- Order further ahead
- Eliminate proprietary SKUs and go with branded products
- Reduce number of menu items and SKUs
- Innovate using products that are readily available
2. COMBATING RISING FOOD & LABOR COSTS
As the top 10 business issues survey shows (above), managing inflation is the No. 2 issue after supply chain. Cost inflation continues to have a major impact on operators, and it starts with ingredient costs and menu pricing. Brands have addressed rising costs in many ways in addition to menu pricing, including reformulating to remove high-cost components, cutting additional SKUs, cutting labor hours, and further streamlining operational costs. (See the Emergence: Fighting Inflation survey results below).
Most operators have raised prices, and many have done it multiple times over the past year. Some have received backlash from customers, others have not. The answer falls somewhere in between menu pricing and cost cutting. There must be some price increases, but it’s also smart to remove menu items that have become too costly and add some menu items that can be favorably priced yet provide adequate profitability for the operator.
3. BUILDING THE RIGHT STAFFING STRATEGY
We have heard from some operators the labor issue is improving, but is it really? Are positions being filled with the right people, or just with who’s available?
There is risk to merely filling spots, such as higher turnover, poor execution, higher demands on manager’s time, and unsatisfied customers. Hiring the right people and managing them effectively has always been at the core of running a great restaurant. Here are several labor issues that operators are dealing with today.
- Availability: There are more applicants than there were. The big questions—are they in it for the long haul, and will they be a good fit for the company?
- Quality: People with ethics, a desire to learn, and the ability to take on multiple stations—that’s what a quality person is. Are they interested in more than just picking up a check? Do they want to be engaged and become a dedicated part of the team?
- Training: Quality training is crucial to having and keeping a great team. This training must now also include both technology and skilled trainers.
- Retention: Now that the effort has been put in to hiring and training, it becomes even more important to keep these employees. There should be a certification program in place where staff are rewarded to learn each station. This and more incentives will create stability.
4. MANUFACTURER ENGAGEMENT & SUPPORT
The best suppliers are adjusting their capabilities based upon the needs of their operator customers. When asked what types of manufacturer support have made the greatest impact in their business, operators’ top responses were:
- Better and more frequent communication
- Improved supply chain transparency and communication of alternative products to replace unavailable SKUs
- Information on labor saving solutions and product
In terms of supplier interaction, operators still prefer face-to-face meetings over other forms of engagement. The big difference today is that operators have higher expectations and little time to listen to an irrelevant sales pitch.
MORE FROM THE AUTHORS:
When it comes to being best-in-class the Emergence survey highlighted three characteristics as most important: great communication, transparency, and responsiveness. It is important to note all three of these answers are related to communication. Clearly, operators want better supplier interaction. Manufacturers take note.
5. EXECUTION BARRIERS
Operators may think they are doing everything right and that their sales for any given day could be record breaking, but does that mean customers are happy and will be coming back? Consistent execution has become the benchmark to success in today’s environment—great food, great service, great environment, great experience.
In our Q2 Emergence survey, we asked about the top barriers to great menu execution. Here were the top three answers:
- Lack of qualified labor at restaurants—74 percent of operators chose this as one of their top three execution barriers
- Inconsistent supply & being shorted something—57 percent chose this as a top three
- Managers fighting fires back-of-house and not managing—52 percent chose this as a top three
CASE STUDY: As part of a recent consulting project, I visited multiple locations of a mid-sized operator. This market had been generating above average sales but was starting to see a steady decline except for major sports events. I visited a location during March Madness and the restaurant was not performing well. There was no manager (they were back in the kitchen), tables were dirty, customers were waiting for food and beverages and there was a long wait for tables despite there being empty, dirty tables. A 17-year-old host was basically running the restaurant. I checked in with corporate the next day and was told that they did record breaking sales for the day. But what they didn’t know was that many of those customers would never come back.
Consistent execution is crucial to repeat business and long-term success.
6. TECHNOLOGY INVESTMENT PRIORITIES
Investments in technology and systems has accelerated post COVID. As labor and costs become challenged, operators are seeing technology as part of answer. In addition to streamlining the operation and driving efficiencies, technology is also making ordering and paying easier for customers. KDS technology is making running the kitchen easier and decreasing mistakes. And training technology is lowering the burden on managers and increasing the time new hires spend learning the operation.
The top area of technology investment over the past year has been e-commerce systems and digital app functionality. This is not surprising given the dramatic growth of off-premises.
The five key areas of technology investment that operators are now prioritizing are:
- E-commerce and digital app functionality
- Social media marketing
- Employee scheduling and training
- Supply order and inventory management
- Management analytics tools
7. MENU INNOVATION and LTOS
The pandemic changed how operators are approaching innovation. This is driven by two things. First, the need for greater efficiency in how operators use existing pantry items and the need for prep simplicity given labor turnover, and secondly, higher expectations to launching winners. There is less forgiveness among franchisees for offering a complex new menu item that doesn’t move the needle.
This has led to a significant change in operator’s “innovation mindset.” The Emergence survey chart, below, is a fascinating look into how operators are thinking about innovation. The top innovation mindset is “Embracing change,” followed closely by “Sticking to a brand’s core.” These seem to be at opposite sides of the innovation spectrum, but truly stand together. Operators and suppliers that are open to change but understand that the DNA of what made them successful needs to be respected.
LTOs—How operators are approaching LTOs has also changed. In the past, it was about creativity and trying unique on-trend menu builds. In some cases, it became comparable to throwing darts to see what would stick.
Today, there’s no room for throwing darts. According to the Q2 Emergence survey, the top LTO strategy is about avoiding complexity—i.e., keeping it simple. The top four survey answers are below, and there is no mention of creativity or differentiation.
Top four LTO strategies
- Avoiding complexity for both customers and staff
- Making it easy to prep and execute
- Lower food cost and/or higher margins
- Must travel well and hold up when delivered
8. OFF-PREMISES OPTIMIZATION
Arguably, one of the greatest impacts of the pandemic has been the growth of off-premises orders and the resulting expansion of operator’s off-premises services. All segments are now investing to expand the percent of off-premises business they do and to optimize its profitability.
New prototypes are proof of the importance of off-premises—smaller footprints, less dine-in seating, streamlined drive-thrus, curbside pickup. Even casual-dining chains are now incorporating drive-thru service and curbside into their smaller restaurants of the future.
For many concepts this remains a challenge. In some cases, their menu is not designed to travel, or a lot of their value and differentiation is in the dine-in experience. For others, their design doesn’t accommodate takeout, curbside, or third-party delivery pickup. All operators are struggling with the high cost of third-party delivery, which must be passed along if they can’t absorb it. Additionally, the cost of fuel has made finding drivers one of the most difficult positions to fill.
Below are the top five off-premises areas of optimization.
- Third-party costs and standards
- Curbside technology and infrastructure
- Catering and bundling menu
- Ghost/virtual kitchens
- Dedicated parking spots for off-premises ordering
9. REVENUE GROWTH PRIORITIES
Although top-line growth has always been a business goal, the closure of dining rooms in 2020 amplified the need to find new streams of revenue. Off-premises, in all its forms, was clearly one of these, including catering, home family bundles, and virtual brands.
As we’ve moved into the post-pandemic transition to the new future, we’ve seen other areas of revenue growth take hold, including hybrid store designs, for example a combination quick-service—polished casual restaurant.
Operators and manufacturers must both challenge the status quo of how our industry is designed and explore new revenue streams, but ideally do it in a way that maintains simplicity and doesn’t compromise execution.
Below is a chart that frames up the results of the Emergence survey question: What are your largest opportunities for top-line growth? Catering is the No. 1 revenue growth opportunity, and has been for the last four quarters, but in Q2 2022, “More consistent execution” moved up to be a close second.
The Evolution of the Restaurant of the Future
Success is determined by our willingness to adapt and change. The restaurant of the past is gone. The restaurant of the future is here and evolving. Success is based upon having an open mind, adapting as needed and simplifying everything possible for both the customer, the team member, and supplier partners.
As Jimmy Dean once said, “I can't change the direction of the wind, but I can adjust my sails to always reach my destination.”
Bruce Reinstein and Tim Hand are partners with Kinetic12 Consulting, a Chicago-based Foodservice and general management consulting firm. The firm works with leading Foodservice suppliers, operators and organizations on customized strategic initiatives as well as guiding multiple collaborative forums and best practice projects. They are also keynote speakers at operator franchise conferences and supplier sales meetings. Their previous leadership roles in restaurant chain operations and at Foodservice manufacturers provide a balanced industry perspective.
Contact us to talk or learn more about how we can help your organization understand the Restaurant of the Future and how Emerging & Growth Chains will define the future of Foodservice. Online at Kinetic12.com or email firstname.lastname@example.org and email@example.com.