IS THE RESTAURANT BUBBLE ABOUT TO BURST?

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It could be very easy to state that the restaurant industry has never been stronger, never more robust, and never more promising. There are, according to the National Restaurant Association, more than 1 million freestanding restaurants in the U.S., generating $800 billion in collective sales and serving a population that now spends nearly 50% of their annual food budget in restaurants. Sounds pretty solid on the surface. Once you dig under the surface, view the rumblings of change in other industries, and talk with chefs and owners, the story gets a bit more tenuous. So why, when things seem to be going so well, would I infer that the bubble may be on the verge of bursting?

[]         THE WORKFORCE

It may seem like a broken record of late, but the problem continues to intensify – restaurants are unable to find enough people to do the work. This shortfall is in every area from dishwashers to line cooks, servers to bartenders, and chefs to managers – the people are just not there. This is true throughout the free world. There are, as we have discussed in numerous previous articles, many reasons, but let’s just review in bullet format:

  • Low wages
  • Benefits that are few and far between
  • Lack of appreciation for those who do the every day work
  • Excessive hours
  • Unpredictable scheduling
  • Lack of training
  • Insufficient restaurant resources to support a larger investment in staff

Unless the restaurant industry, as a whole, begins to address this dilemma it will only continue to spiral out of control. The only other solution is to reinvent the business model to minimize the accepted level of human action and interaction.

[]         THE GROWING COST OF LABOR IN A LABOR INTENSIVE BUSINESS

Restaurateurs will state that the current cost of labor is the single most significant expense in their operation and the funds to pay more, offer more benefits, or invest in employee skill development are simply not there.

[]         THE CHALLENGES OF BRICK AND MORTAR

The challenges associated with buying or leasing restaurant space include changing population demographics that can transition a successful site into one that struggles; the predictable and unpredictable increases in lease requirements once a restaurant has reached an acceptable level of success; and local and regional taxes that can push a restaurants occupancy costs over the top.

[]         THE INTEGRITY OF THE FOOD SUPPLY

Consumerism defines what and how businesses operate, how they buy ingredients, and produce finished products. In the case of restaurants, there is an increased awareness of quality issues that have risen to the forefront when a restaurant guest decides with whom they will do business. This pushes restaurants to invest more time and effort in defining the source of ingredients and the logistics of bringing those ingredients to the restaurant back door.

[]         CUSTOMER OBSESSION WITH TIME

Today’s consumers have become truly spoiled when it comes to access to product and service. Blue Apron brings quality ingredients and process instructions directly to your door, quality grocery stores are investing much more effort into home meal replacement that makes meal preparation as easy as warming up, and the drive thru is a business model that has converted the car interior into a dining room. People are busy and are less inclined to view 1-2 hours in a restaurant as an efficient use of this limited resource.

[]         COST OF GOODS

The cost of ingredients continues to escalate and rarely moves in the opposite direction. With a clear ceiling on what restaurants are able to charge for the meals they prepare the ability to earn a budgeted profit becomes more and more challenging.

[]         LOW PROFIT MARGINS

The already accepted low profit margins associated with restaurants (4-6% is considered a profit margin that demonstrates success) are challenged even more with increases in cost of goods and limits on selling price ceilings.

[]         CASH FLOW DEPENDENCE

If every restaurant could depend on high levels of guest participation on every operating day, then a predictable and controllable financial picture could be drawn and anticipated. This is, of course, not the case. Keeping solid records, analyzing data and predictive models, and pushing a strategic marketing plan can help to plan a realistic budget, but in the end restaurant business remains predictably unpredictable.

[]         THE NEW COMPETITION

Restaurants have always been living in a highly competitive market, but today’s operation needs to look outside of their typical competitive set and pay attention to quality grocery stores, convenience stores, food trucks, on-line programs like Blue Apron and Weight Watchers, and even Amazon delivery of groceries and prepared foods through their interest in acquiring Whole Foods Markets. As competition increases the slice of the dining out revenue pie continues to be cut into smaller pieces.

me at dinner

[]         THE LAMENT OF SOCIAL MEDIA REVIEWS

The customer is in control! The beauty of this favors the paying guest who is empowered to demand and even force change in restaurants. Many guests no longer accept the prescription of experience that restaurants had been use to for decades. Requesting menu changes, directing operators to accommodate dietary restrictions, and expecting something that parallels the 24/7-access model that the Internet has provided through other industries, has left the restaurateur and chef with the challenge of mass customization. When a restaurant fails to meet these expectations of a guest there is an all-to-frequent turn to social media in an effort to let the world know about a guest’s displeasure. Restaurants can complain about inaccuracies or exaggerations, but the reality is that potential customers read these reviews and believe them – making decisions based on the experience of others. Chefs and restaurateurs must monitor, respond with grace and in some cases change an approach in an effort to counteract dicey social media reviews.

Where will all of these issues take the restaurant industry in the short and long-term? Although the restaurant industry will always have a strong place in the U.S. Economy it is safe to say that those who live in this environment are faced with many serious challenges. Will the bubble burst and force change? Will the restaurant industry evolve and morph into something that we can’t even imagine at this time? Look to other industries that faced similar challenges in the past and analyze how they acted or reacted. Look no further than retail shopping, the demise of shopping malls, the purge of destination stores at the hands of on-line shopping, and the many solid retail giants who are now shuttering doors if you want to make the need for change as real as possible.

PLAN BETTER – TRAIN HARDER

Harvest America Ventures, LLC

www.harvestamericaventures.com

Restaurant Consulting and Training

  1 comment for “IS THE RESTAURANT BUBBLE ABOUT TO BURST?

  1. August 9, 2017 at 8:13 pm

    Chef, you are so right on the money with this article! I had my restaurant for 16 years. all the accolades and awards in the world didn’t help when cost of goods, labor and everything went up every year. I sank every penny I made for the first 3 or 4 years and made a nice little 175 seat bistro. made a decent living and employed a couple of dozen talented, wonderful folks until 2007-2008, (the great recession) and then the business just tanked. We won “Best Restaurant, Best Chef” the year we closed. I wondered for a long time what I did wrong and beat myself silly. It just seems like the small business guy really can’t make a go of it any more.
    Thanks for what you do.

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