State of the Industry 2008

State of the Industry 2008

It’s clear that the year ahead is going to be a bumpy ride. With the economy in turmoil, it’s time to run your business to the best of your ability. If you stay focused and work hard you can thrive in 2008.

By The Editors

Hold on Tight

There’s good news and bad news about the year ahead. The good news is that this stagnant economy may lead to a premature dirt nap for some of your competitors. The bad news is that you may run out of luck, too, if you don’t play it smart.

There’s little room for the cavalier or the foolish in an economy where energy prices are elevated, food costs are soaring and the real estate market is severely depressed. Factors like these have a way of making consumers think twice about spending hard-earned dollars. In fact, consumer spending last year was at its weakest level in four years. If you operate a foodservice outlet that is average or worse, 2008 will not be pretty.

A few weeks back, the Federal Reserve, reacting to panic in global financial markets, cut lending interest rates during an emergency meeting by three-quarters of a percentage point. The last time it cut rates between regularly scheduled meetings was shortly after Sept. 11, 2001. Meanwhile, President Bush and congressional leaders pledged to jumpstart the economy with about $145 billion in tax rebates and tax breaks. But interest rate cuts usually take from six to nine months to work, say economists, suggesting the government reacted too slowly and a recession may already have begun.

With that said, eating in restaurants is no longer a mere luxury for most people. Restaurants have become a way of life. Consumers may pull back on their spending, but they’re going to eat out. It’s your job to make sure that they eat at your place and not the other guy’s. What follows are the thoughts of several industry experts who have an eye on the future. They will offer you ideas and suggestions on how you can become the restaurant of choice and thrive in an anemic economy.

Despite the economic downturn, the National Restaurant Association is predicting the industry will achieve its 17th consecutive year of real growth. Sales in full-service restaurants are projected to grow to $187.4 billion this year. When adjusted for inflation, that’s a mere 0.7 percent increase over last year. The good news is that disposable personal income, the amount of cash consumers have to spend, is projected to increase at a respectable 3-3.4 percent inflation-adjusted rate, says the NRA. The bad news, according to Technomic, a Chicago-based consulting company, is that consumers may have money to spend, but it doesn’t mean they will. It predicts that real spending will be down this year in light of a 4 percent inflation rate.

Late last month, Technomic, citing a larger-than-expected slowdown in discretionary spending, revised its 2008 foodservice growth forecast downward from 5.1 percent to 3.6 percent.

“Because the restaurant industry often serves as a leading economic indicator, our opinion is that the U.S. has most likely entered a recession, or is headed for one,” says Ron Paul, president of Technomic.

Bob Derrington, an equity research analyst at Morgan Keegan & Co., agrees that the year ahead could be a bumpy ride. “Given the economic headwinds facing consumers, it could be a very difficult year for the restaurant industry,” he says. It doesn’t help, he adds, that the industry’s fourth quarter economic numbers are coming in very weak.

Casual dining was down four to five percent last year, and that trend will likely repeat itself the first half of this year, says Derrington. The second half of this year could be a “real crapshoot” as well. In addition to all the other factors mentioned above, he’s also concerned about the Olympics and the elections. Both take place later this year and have a tendency to reduce restaurant traffic while people stay home to watch television coverage.

And if that’s not enough of a buzz kill, Derrington also points to the damaging effects of labor cost increases, particularly minimum wage and tip hikes (see last month’s Editor’s Letter). As you might expect, the fast feeders are faring the best under these conditions because of their low price points and increasing level of quality. But, says Derrington, the competition is so intense in this segment, another round of value wars is imminent.

Keep an eye on this segment. With McDonald’s recent announcement that it would staff all of its units with Starbucks-like baristas by the end of the year, it’s upping the ante and cutting deeper into your wallet. [Check out RH’s recent online newsletters on this subject.] The lesson here is obvious: keep your brand fresh and continually innovate.

While you pay attention to local competitors, also keep your eye on world commodity markets. Because of efforts to cut the country’s dependency on oil, an increasing amount of our food crops are being redirected for fuel. The worldwide demand for ethanol is consuming big chunks of the corn crop, which is keeping commodity costs elevated. Add to that the devaluation of the American dollar, and you can see why many experts believe a recession is imminent.

Top 20 trends for 2008
  1. Bite-size desserts
  2. Locally grown produce
  3. Organic produce
  4. Small plates/tapas/mezze
  5. Specialty sandwiches
  6. Craft/artisinal/microbrewed beer
  7. Sustainable seafood
  8. Grass-fed items
  9. Energy-drink cocktails
  10. Salts (e.g., sea, smoked, colored, kosher)
  11. Ethnic fusion cuisine
  12. Flatbreads
  13. Martinis/flavored martinis
  14. Mojito
  15. Asian entrée salads
  16. Pomegranates
  17. Asian appetizers
  18. Micro-distilled/artisinal liquors
  19. Organic wine
  20. Specialty beer (e.g., seasonal, fruit, spice/herb, beer cocktails)

Source: National Restaurant Association, 2007 Survey of more than1200 members of the American Culinary Federation

Consumers are very skittish, according to the RBC CASH (Consumer Attitudes and Spending by Household) Index. Consumer confidence fell across the board in early January, reflecting a “severe case” of post-holiday blues.

“The decline in the overall Index, to its lowest level since data collection began in 2002, highlights the impact that rising food and fuel costs and declining house values are having on consumer confidence,” says T.J. Marta, an economic strategist for RBC Capital Markets. “With none of these headwinds likely to abate any time soon, consumers could pull back further on spending, increasing the risk of recession.”

While those who keep a sharp eye on economic figures are less than optimistic, others, including New York City-based consultant Clark Wolf, say it’s no time to freak out.

“Economic downturns usually don’t affect restaurants like they do other industries,” he explains.

“When people decide to hold off on buying a new car, it doesn’t stop them from buying a good hunk of cheese. They may delay going on that European vacation, but it’s not going to stop them from buying a good bottle of olive oil or visiting their favorite restaurant.”

There are other reasons why restaurants will fare well through any impending recession, he adds. During hard times, people come together and reconnect, and restaurants have become a “third place” where people relax away from the pressures of work and home.

12 Trends To Capitalize On

Tiny Treats

Quantified Marketing Group founder and CEO Aaron Allen predicts the top 12 trends poised to influence the restaurant industry in the coming year.

  1. Modified-Casual Dining A new category in the restaurant industry, modified-casual dining, is poised for rapid growth over the next several years. Modifiedcasual dining offers the same benefits of large casual dining chains or mega-independent casual operation, but in a much smaller footprint. And it offers more promising sales-to-investment ratios than fast-casual concepts. A modified-casual operation may cost less than $800,000 to develop, but can generate more than $1 million in annual sales.
  2. Seasons 52 Continues To Define The Trend Restaurant brands across the nation will continue to emulate the culinary approach, menu offerings, and service standards first introduced by Seasons 52 in 2003. Its more healthful preparation techniques and petite-sized shot glass desserts have shown up on an increasing number of restaurant menus across the nation.
  3. Compressing Size To Drive Sales Restaurant operations are diminishing in size to boost efficiency and profits. The high sales-to-square-foot ratio leaves no room for inefficiency in design or floor space. Some operations are turning to commissaries to produce original recipe products off-site.
  4. Global Consciousness One of the most powerful words in branding is “consciousness.” Consumers today are seeking out businesses that are focused, not just on making profits, but on making the world a better place.
  5. Non-Traditional Sites Escalating real estate prices and dwindling premium locations are convincing many fast-casual operators to open in places such as airports, stadiums and office buildings where construction costs are lower, rental terms are more reasonable and volume and sales rival traditional venues.
  6. Drastic Concept Overhauls As the casual-dining segment continues to erode, midmarket chains like Applebee’s will be forced to reinvent themselves to win back guests. Many will need to introduce new menus or conceptual designs to survive.
  7. Experiential Branding Restaurants can’t just be concerned with good food, good service and good ambience anymore. Experiential branding is a restaurant’s opportunity to build lifelong relationships with guests. Operators must ensure the restaurant’s brand is in action through all touch points—including culinary offerings, service, uniforms and even wall decor—to win credibility and loyalty with customers.
  8. Single-Product Concepts Restaurant brands that find a following with a single, wellproduced product (e.g., Starbucks and Pinkberry) will stand out in the restaurant world and potentially dominate a market niche they help carve out themselves.
  9. Future Brands Traditionally, there has been something of a law of inertia at work in the restaurant industry; large, successful brands will continue to be successful overall unless something significant changes. However, new and innovative concepts can now quickly gain market share if they find the right approach.
  10. Healthful Eating The growing emphasis on healthful eating will continue. Americans will focus their attention on portion control, moving away from trans fats, and will seek out products offering health and convenience and foods that claim to have a medicinal effect on consumers’ health.
  11. Bold-Flavor Diet Middle America is beginning to embrace robustly seasoned fare including Latin cuisines. Bold flavors are starting to take center stage because consumers are continually looking for ways to incorporate foods with higher flavor concentrations into their daily diets.
  12. The Familiar Made Unfamiliar A new gourmet hot dog chain called Franktitude introduced a salmon hot dog to the U.S, market last year. Taking two very approachable flavors and combining them to form a novel fast food has been a hit with consumers. This idea has led to the idea of taking a comfort food to the next level.

Elevated gasoline prices should not be that much of an issue for well-run restaurants, says Wolf. Good restaurants develop a strong base of customers who live within a short radius of their location. Now is the right time to further cultivate that relationship, he says, and if you’ve dropped the ball in this area, begin marketing now to potential customers within a five-mile radius.

As for competition from the quick-service chains, Wolf says if you’re worried about it, then you’re not doing a good enough job. Even at their best, you should be able to kick the butt of quickservice competitors with a quality level they can’t achieve. He’s particularly stoked about a new segment that falls somewhere between casual and upscale. Sometimes described as polished casual or modified casual, this segment has been drawing many of the upscale operators, particularly chefs, who are offering very hip versions of casual and fast foods.

“When you see upscale chefs like Thomas Keller opening burger joints, you know something is afoot,” says Wolf. “Sure, the burgers are going to be more expensive than you’ll find at McDonald’s or Applebee’s, but they will still be affordable and much better than everything else. It’s a great niche to be in during a tough economy.” [Editor’s note: this segment will be the subject of RH’s May cover story.]

The bottom line is this, says Wolf: “The mark of a successful culture is the ability to eat at the top of the food chain. In a slow economy, you’re still going to sell a lot of steaks because the rich people want to show everyone they still have it, while the rest of us want a good piece of meat once in a while because it makes us feel good.”

Top 7 challenges for fullservice operators in 2008

Percent of fullservice-restaurant operators, by type of operation, who mention: Fullservice segment
Family dining Casual dining Fine dining
1. Recruiting and retaining employees 17% 23% 14%
2. Building and maintaining sales volume 12% 11% 22%
3. The economy 13% 13% 17%
4. Competition 17% 6% 13%
5. Labor costs 11% 10% 10%
6. Gas and energy costs 11% 8% 5%
7. Food costs 7% 10% 3%
Source: National Restaurant Association, 2007

Lynne Barra, president of Paradigm Foodworks in Lake Oswego, OR, agrees with Wolf’s premise. “Historically, if the economy is bad, when disaster strikes, people buy food.”

Food is different from other categories, says Ron Tanner, v.p. of the National Association for the Specialty Food Trade, because people use it for comfort. Though many will think twice about paying $200 for a pair of jeans, they won’t hesitate to pay $4 for curry mustard because they don’t want to live without it.

People won’t stop going out to eat, says lifestyle marketing expert Herb Karlitz, but they’re looking for more than good food. “Now they want an experience that provides a context for that meal, whether it be in a four-star restaurant, a fast food outlet or at home . . . .”

And that’s a key point. If people are feeling skittish during hard times, it’s your job to make them feel comfortable; to give them a retreat away from their problems. It’s what the restaurant industry does and those who do it best will thrive.

Staying Ahead Of The Curve

To stay ahead of the curve, San Franciscobased Andrew Freeman & Co suggests you keep your eyes on these trends.

  • Saline Solution
    Artisan salt: fleur de sel, sel gris, Hawaiian pink, Himalayan black; even smoked salt has appeared in dishes from tuna tartar to salted caramel ice cream.
  • The Aussie Invasion
    OZ has arrived. Well beyond wine imports, menus are loading up with Aussie olive oil, honey, fruit pastes and seafood.
  • The Lounge Around
    More full-scale dining room menus and innovative bar menus are being offered in the lounge and bar. Now, guests can relax, order as much or as little as they like and be casual as friends come and go.
  • Small Plates Go Global
    From Japanese Izakaya, Indian Chaat, Middle Eastern Mezze to Spanish Tapas, the small plates craze keeps going and growing in every kind of restaurant concept across the country.
  • Artisans in Residence
    From house-made salumi like prosciutto, sausage, coppa, salami, mortadella to house-cured olives. Chefs take more pride in making everything in-house. You say salumi, I say salami.
  • Blooming Chefs
    Chefs with a green thumb are growing their produce, usually organic, on their own farms, behind their restaurants or on rooftop gardens. You can’t get more local than this.
  • The Cupcake Revolution
    From delicious cupcakes with buttercream frosting to homemade twinkies and oldfashioned butterscotch puddings, nostalgic desserts remain a favorite. Now many are garnished with retro treats like Pop Rocks and Caramel Corn.
  • That Size Fits You Perfectly
    Dishes now come in small, medium and large portions to satisfy a wide range of tastes and appetites. The entrée as we know it is not going away, but size does matter.
  • Fine Dining Re-Defined
    Diners still crave four-star cuisine and service, only now they want these experiences in more relaxed settings.
  • I Can Get It For You
    Fine dining goes retail. Like that pasta or hand-crafted teapot? Today, even the best places have to-go sections or catalogs.
  • Sweet Says Hello to Savory
    Caramel with foie gras, sorbet in your soup, salt on desserts and truly tangy frozen yogurts—sweet and savory join forces with delicious results.
  • Extreme Green
    Obeying the mantra of SOL food (seasonal, organic and local) is almost the norm. Now, restaurants are going completely sustainable with biodegradable disposable tableware, eco-conscious cleaners and green business practices.
  • Sexy Unisex Bathrooms
    Please put the seat down when you’re done. Unisex bathrooms are popping up in hot restaurants, bars and lounges across the country. Will this be the end of long lines for the ladies?
  • It’s A Split Decision
    A range of wine service options: by the glass, the bottle, the 2 oz. taste, even the quartino. Quaffers have plenty of choices now. Still can’t decide? Split the difference and get the half bottle.
  • 99 Bottles of Beer on the Wall
    Gastro-pubs with dedicated beer lists, featuring special brews, house-made drafts and hard-to-find ales are all the rage. Adding to the experience are custom glassware selections and special pairing menus.
  • Reaching Beyond Riesling
    Gruner Veltliner and Blaufrankisch. These wines from Germany and Austria (and others from beyond) may be tough to pronounce, but they are easy to drink and pair. Will we be Hungary for more next year?
  • Bar None
    The chef’s new signature dish: bar snacks. Homemade pretzels, paprika-tossed nuts and hand-rolled sesame sticks take the place of stale popcorn and keep guests reaching for more.
  • Shaken, Stirred, Muddled and Organic
    Bar chef/mixologists get more creative with hand-crafted one-of-a-kind organic cocktails utilizing fresh fruit, herbs, spices, vegetable purees, house-made syrups and innovative infusions. More and more bars now have a selection of organic beverage options.
Dante de Magistris
Dante de Magistris

Perhaps nobody does that better in Boston than Dante de Magistris, the chef/owner of Dante, an upscale, modern Italian restaurant at the Royal Sonesta in Cambridge. Still, he admits these are “scary” times. “People keep whispering about a recession,” he says.

Nevertheless, it’s not keeping him and his two partner brothers from opening another restaurant in the months ahead. “People are still going to go out to eat, but they’re going to be more cautious about where they go and how much they spend,” he says.

He’s concerned about Dante, because its price points are realtively high because of choices he has made, such as using organic ingredients. “But it’s going the way we want it to go. We’re hitting our numbers.”

De Magistris’ new restaurant, Il Casale (which means old house in Italian), is a much more casual, rustic version of Dante. “While the check average at Dante is around $60, Il Casale’s will be closer to $35,” he says. “And while we’ll still serve hanger steak at Il Casale, it won’t be organic, allowing us to charge considerably less.”

Because the environment will be more relaxed at Il Casale, fewer servers will be required, says de Magistris. “Another big benefit is that Dante is busy during the summer, but slower other times of the year, while we expect the new restaurant to pick up the slack during slow times,” he says.

Menu Innovations Are Constant
Percent of operators, by type of operation, who reported that they took the following steps in 2007 Family dining Casual dining Fine dining Quickservice
Added new food items 90% 87% 95% 90%
Added new dessert items 74% 69% 91% 50%
Increased portion-size choices 27% 20% 19% 11%
Improved quality of existing menu items 82% 84% 88% 68%
Source: National Restaurant Association operators survey, October 2007

“It looks good on paper,” adds de Magistris. “We’re confident enough to press ahead, and with some good luck and hard work, it will succeed.”

Hard work is key, says Bryan Lockwood, president of Tavistock Restaurants, which operates several concepts, including Freebirds World Burritos and ZED451. “People just don’t work that hard anymore. Lots of folks made a bunch of lazy money when the real estate market was hot, but it won’t be that easy anymore.”

Now that the economy is sinking, he added, it’s time to keep your people focused. “We can’t solve the economy’s problems ourselves, but we can do what we do better than anybody else.”

Despite economic roadblocks, Tavistock is pushing ahead with its growth plans, which are driven by the company’s ability to fund all its expansion with its own cash. ZED451, a three-unit, radizzio-style steakhouse, currently has three new stores under construction, while the 20-unit Freebirds has plans underway to add another eight to 12 new units.

Expansion plans not withstanding, Lockwood said the battle will be won on the unit level in the trenches. “No matter what people’s socioeconomic standing may be, they’re still looking for that ‘me’ experience,” he explaines. “So, make sure you have a point of differentiation from your competitors and outwork them. When times are tough and people go looking for their favorite barstool in front of their favorite bartender, you want it to be your barstool and your bartender.”

He offers a more poignant example: “How many times have you and a companion walked into a restaurant and the hostess says to you ‘Two for dinner?’ I feel like saying to her, ‘No, we came in for a haircut.’ We make sure our hostesses have a story to tell when a guest comes through that door. It may be about how the chef found an amazing piece of fish that will be on the dinner specials. Customers notice stuff like that.”

Isn’t it all about getting noticed?