Restaurant sales grew in 2016 for the 25th straight year, according to Restaurants Canada. In the first eight months of the year, sales grew by a healthy 6.8% compared to the same period in 2015.
That seems like cause for celebration for those of us in the restaurant industry, doesn’t it?
Don’t break out the party hats quite yet. There are some rather unsettling facts behind this figure that pose a real challenge for the foodservice industry. But there is also opportunity for operators who take steps now to address these underlying issues.
Step one is to identify and understand certain gaps that are emerging in the restaurant business.
Canadians are spending more in restaurants, but restaurant visits aren’t necessarily keeping pace. Global information company NPD Group reported that visits to Canadian restaurants declined in the second quarter of 2016.
That would mean that consumers are paying more for fewer restaurant meals, a worrisome trend in a sluggish economy. The Conference Board of Canada, in its Industrial Outlook: Canada’s Food Services Industry–Winter 2016 report, suggested that slowing disposable income growth and record household debt levels could translate into weaker demand to dine out.
That’s one reason Restaurants Canada predicts sales to slow to 4% growth in 2017.
According to Restaurants Canada, grocery food prices in September 2016 fell by 0.9% compared to a year earlier. It was the first year-over-year decline since March 2008. Menu prices, on other hand, rose 2.5% during the same period. That’s higher than the 2.3% average of the past five years.
“In this environment, price-sensitive consumers may divert some of their food dollar to grocery stores,” wrote Restaurants Canada Senior Economist Chris Elliott in November of last year. Indeed, Wendy’s CEO Todd Penegor pointed to the widening price gap between eating at home and dining out as the reason for the company’s weaker-than-expected sales growth in North America.
Overall restaurant sales are up and wholesale food prices are inching down—but operator margins are tighter than ever. Labour costs are the primary culprit. Restaurants Canada reports that labour costs had a negative impact on 72% of foodservice operators in the fourth quarter of 2016, compared to 59% of operators that said food costs hurt their business.
Rising minimum wages and labour shortages in some areas are further compressing already-thin profit margins. In a perfect world, restaurants would be hiking menu prices even more than the 2.5% they managed last year. But competition—from other restaurants and from grocery stores that are expanding prepared meal offerings—make that a dicey proposition.
So what can you do to close these gaps? How do you lure more people back into your restaurant more often and still protect your margins? Here are a few ideas.
1. Employ a barbell strategy. Consumers see grocery prices falling and wonder why restaurant prices aren’t following suit. They’re in the mood for savings. One way to satisfy them is to approach your menu as a barbell—big at the ends, narrower in the middle and perfectly balanced.
“One end of the barbell represents your brand differentiators,” explains Gordon Food Service® Commercial Segment Manager Doug Owens. “If you’re known for burgers and ribs, for example, they’ll occupy that end. You need to protect the value of these differentiators by maintaining their premium prices.”
The other end of the barbell consists of non-core products. That’s where discounting can occur. Identify menu items you can afford to cut prices on and then promote the savings. Once you get discount-minded customers in the door, tempt them with the quality of your burgers and ribs. If that doesn’t work, servers can push high-margin add-ons, such as desserts, as a way for customers to “reward” themselves for being smart shoppers.
2. Analyse your menu. Going through your menu with a fine-toothed comb helps identify items that have margins to play with, in addition to dishes that are dragging down your gross profits. It will tell you if your brand differentiators are priced appropriately to maximize profits. Menu analysis should be an annual process, but it’s often neglected. Current conditions make it imperative to do one now.
3. Analyse your costs. Look everywhere you can to improve margins by cutting costs, Owens urges. “Are you executing things in the most efficient manner? Can you change production methods, use value-added products, cross-utilize more products? Is your menu the right size to minimize inventory costs?”
4. Expand convenience options. Grocery stores and c-stores are offering higher quality and more unique prepared food items than ever before. Consumers can make a quick stop after work and pick up all they need for an easy meal.
Think about what you can do to compete with this phenomenon, which is more about convenience than price. Do you offer takeout meals? Do you make the pickup process as smooth as possible? Do you offer a selection of prepared meals your guests can take home for tomorrow’s lunch or dinner? Do it right and you’re an even easier option for consumers.
5. Emphasize the experience. Dining out is qualitatively different than eating at home and you need to leverage this distinction. It starts with the food. “Consumers value dishes they can’t easily make at home or find at nearby restaurants,” says Gordon Food Service Corporate Consulting Chef Gerry Ludwig, CEC. Make sure your menu satisfies consumer cravings.
Service and ambiance are just as important. Guests need to be pampered. Your menu and environment should support socializing and relaxation. Pick up a meal at a grocery store and you still have to set the table and wash the dishes—that’s a clear advantage for restaurants.
6. Stay relevant. Operators must keep up with eating trends, Owens urges. Make sure you pay attention to what’s going on in the restaurants and grocery stores in your neighborhood and around the country, and adjust your business plan accordingly.
At this point, there’s no way of knowing whether the conditions that opened up these gaps will be temporary or long-lasting—but failing to account for gaps can give your competition a leg up in the short term. Get started today.