By Raphael Gross
With many of the changes already made to survive a global pandemic, the U.S. restaurant industry should safely ride out an economic slowdown during the back half of 2023 should that occur. This is good news. Accounting for 4 percent of the GDP and 7.1 percent of the total workforce, the sector is critical to the U.S. economy.
In 2022, 29 percent of people ate at a restaurant more than once a week, and we see no reason this trend should change materially. However, the important consideration for investors and operators is that inflation-weary customers are more sensitive to excessive pricing and are becoming more selective in their choice of restaurants. Post-COVID traffic counts remain negative for most sit-down dining and quick service restaurants, and restaurants therefore need to be more creative and innovative to get people in the door. Differentiation is critical in a sea of sameness. What else should operators and investors keep an eye on? Here are six trends in today’s restaurant industry.
As one-to-one engagement continues to replace broad-based advertising, restaurants have become far more targeted in how they are spending their marketing dollars. Building relationships through social media and restaurant apps will be a mainstay of their go-to strategy but their success in developing and nurturing dialogue with customers on an ongoing basis will depend on how well they understand their needs and desires. Loyalty programs are also being used less as a discounting mechanism than before since restaurants are seeking to reward their most loyal customers but not incentivize them simply through lower price points. These programs are being driven in part by the amount of data they collect by guests using QR codes or online ordering history.
Quick service restaurants are the natural beneficiary of consumers trading down, as fast food always benefits whenever people tighten their belts. At the end of Q2, most fast-food chains were back to operating at pre-COVID levels, however drive-through traffic was still higher than in 2019. Convenience is still the great differentiator in the quick service space.
As many in-dining establishments had to close their doors to customers during the pandemic, off-premises sales kept the sector alive. To date, pick-up and delivery continues to be more popular than before COVID, with 66 percent of consumers more likely to order food for takeout in 2023 than in 2019. With over half of Americans saying take-out and delivery is essential to their lifestyle, off-premises sales will continue to account for a large portion of total restaurant sales than they did pre-COVID.
Still, operators need to be more aware that in an environment where people are looking to reduce unnecessary expenditures, eliminating delivery charges is an easy cut. Not surprisingly, many public restaurant companies have noted both transaction and check declines in their off-premises sales channel, even in situations where their dine-in traffic may be modestly positive.
Virtual brands – essentially delivery businesses without physical restaurants — proliferated on platforms such as Uber Eats, Door Dash and Grubhub during COVID, enabling restaurants to leverage their kitchens and idle staff to test new ideas and make up for lost dine-in sales. However, some restaurants also took advantage of the confusion, listing brands with different names but with the same menu (and of course being prepared from the same physical address). Since then, there has been a crackdown on virtual brands, with Uber Eats eliminating 5,000 of them from its app in May, reflecting about 13 percent of those on its platform at that time.
Many public companies similarly experimented with virtual brands throughout the pandemic to target new segments of diners or boost sales during shoulder periods. However, more recently some have been rethinking this strategy with the aim of supporting their core brands and mining customer data from their own platforms. Some have since shuttered their virtual brands, even if these brands offered differentiated menus from their core brand.
Lower input costs make for healthy margins in the restaurant sector again this year, however record profits are likely to be a thing of the past. The U.S. Department of Agriculture forecasts that food prices by the end of the year will have increased by 5.8 percent in 2023, and barring any significant supply chain disruptions, will level off at 2.4 percent in 2024. Overall, the pulse is that there will be fewer and lower pricing increases this year versus last year, although menu prices will remain elevated over the next several months compared to core inflation. Still, menu price increases are nowhere near the levels seen in 2022 and those who are seen as price gouging will feel the backlash from customers.
A break-down in the supply chain that helped push food and commodity inflation into the double digits in some cases is thankfully no longer an issue. The breakdown in shipping and the backlog in the trucking sector that limited menu options won’t likely be repeated in the near future.
However, other exogenous risks remain. On July 17 we saw Russia once again block the shipment of Ukrainian wheat through the Black Sea and has since attacked grain supplies in key Ukrainian cities, reportedly wiping out 60,000 tons of grain. Wheat prices automatically rose from $7.16 per bushel on the 18th to $7.77 on July 20th.
Restaurant chains experimenting with robots to ease and speed-up execution, installing or expanding the use of self-service kiosks, or testing AI voice technology to assist with call-in and even drive-thru orders is becoming more and more mainstream. Operators love adopting technology that addresses “pain points” while realizing labor cost savings. They have also expressed the importance of kiosks and voice AI in ensuring order accuracy and upselling.
While consumers have generally embraced the “guest-facing” technology and many actually prefer ordering via kiosks (and perhaps voice AI) than speaking to a person, what they do not appreciate is being charged an incremental fee for ordering food digitally versus through more traditional means. The recent debacle with Toast tacking on a 99-cent customer-paid fee (and later rescinding) to orders of $10 or more placed through the company’s online ordering channels, demonstrates the limitations of customers willingness to pay for something that they now view as integral to the ordering process (in the digital age) and not something that why should have to pay for incrementally.
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