7 Strategies to Recession-Proof Your Restaurant
No matter the economy. Most full-service operators have come to realize that running a restaurant will never be the same. Fortunately, they have made significant pivots to their businesses to address this new post-pandemic world. Where business used to revolve around in-house dining, there is now a greater balance with off-premises business. Where labor was once plentiful, it is now difficult to find and equally difficult to keep. Where expanding the menu and adding SKUs was easy, it is now almost taboo. And where cost increases were predictable and manageable, it is now a challenge to make money at all. With change comes understanding and perspective. This can be incredibly useful as we move forward, especially given that the business environment is still in flux and a possible recession looms on the horizon. Let’s now look to the following seven strategies, which can help operators lead a successful restaurant evolution.
Why 2023 Will Be a Year of Weaker Sales
And higher margins. In 2022, restaurants watched their profits shrink even as their sales growth remained strong or even accelerated. This year should be the opposite, as last year’s price increases coupled with an improving inflationary environment lead to improved profits even as sales growth weakens. That, at least, is according to Fitch Ratings, which on Monday suggested that restaurants will see weaker volumes but stronger profits. “Restaurant sector margins should rebound modestly in 2023 as recent price increases take effect and inflationary pressures moderate,” the credit rating firm said. But it also noted that profitability “will likely remain below pre-pandemic levels” despite the improvement. Restaurant sales rose 11% year over year in December, according to federal data released earlier this month. Most of that was driven by higher prices—menu prices at restaurants, bars and schools were up 8.5% over that same period. Wage rates for leisure and hospitality workers rose 6.3% over that same period while wholesale food costs rose more than 14%. But inflation is showing signs of slowing. Numerous operators have suggested that it’s easier to find workers these days and wage rate growth for low-level workers has slowed from its peak over the summer. Meanwhile, wholesale food costs declined 1.2% from November to December, according to the U.S. Bureau of Labor Statistics. Operators now go into 2023 with higher prices and improving inflation, which should help recover some of the margins lost last year. But Fitch does not expect the industry to recover from the margin compression of 2022.
Earnings Instability Has Led to Fewer Restaurant Lenders
Institutions pulling back from offering loans to restaurants. Rising commodity and labor costs have hurt restaurant margins over the last 12 months and have triggered concern among lenders. Even though restaurants hiked menu prices to help profitability, it hasn’t been enough to impact core operating performance over the last year, said Erik Herrmann, CapitalSpring partner and head of restaurant investment group. As a result, operators are finding it increasingly difficult to secure a loan and acquire capital. “[Operators] have to eat the margin squeeze in the meantime and that’s been painful for folks depending on the nature of their concept, and what type of commodities they’re buying,” Herrmann said. This environment has made fewer traditional banks willing to lend to restaurants. Interest rates have also nearly doubled, making it more expensive to take out a loan, he said. CapitalSpring manages about $2.3 billion of active capital commitments and has invested in over 70 different restaurant brands, from quick-service chains to fast casual and casual restaurants. Given this portfolio, it has endured the impact of restaurant problems ranging from labor shortages to rising commodities costs.
Americans Are Gobbling Up Takeout Food
Restaurants bet that won’t change. McDonald’s Corp. MCD -2.71%decrease; red down pointing triangle has a new restaurant outside Fort Worth, Texas, with no tables or seats for customers and a conveyor belt that routes food to drivers who order ahead. Chipotle Mexican Grill Inc. CMG 0.74%increase; green up pointing triangle also offers no place for customers to sit inside an Ohio restaurant that only takes digital orders. Taco Bell is evaluating a new design that features four drive-through lanes, double the typical two. America’s biggest restaurant companies made a bet during the pandemic that you would rather eat the food cooked on their premises someplace else. Now they are gambling you will want to do so for years to come. The strategy from these giant chains is to orient their operations around drive-throughs and online ordering while testing new restaurant concepts that only serve food to go. They say these designs will make them more profitable and efficient since restaurants that bring fewer customers inside cost less to build, maintain and staff. The challenge these companies face is to make such changes without sacrificing hospitality. Their risk is that consumer behavior accelerated by the pandemic becomes fleeting, as happened with exercise bikes, streaming of movies and shopping from home.
Hire and Retain Better Restaurant Workers
In 2023. We all know that for restaurants – reputation is everything. But in a difficult hiring environment, how do you build a great reputation without jeopardizing your bottom line? It all comes down to your staff. And in 2023, that’s the problem most hiring managers in the restaurant industry are facing. The pandemic changed how restaurant workers view the industry – and it also changed their needs. Understanding these changes will be the key to achieving success. According to CareerPlug, “81 percent of restaurant operators say they are short at least one position. Servers and dishwashers are in the highest demand, and one-third of restaurants report that they are short on both positions.” In a 2022 Toxic Work Environment Report, “CareerPlug found that 52 percent of employees in the restaurant and food services industry do not feel like their manager genuinely cares about them/their performance at work. TouchBistro found that only 39 percent of restaurants are investing in professional development opportunities to stay competitive, compared to 43 percent in 2019. Employees actually do want signs of long-term career prospects and manager recognition, such as promotions. Opportunities for professional development and career growth are critical to employee satisfaction and, subsequently, lower turnover rates.” This is beneficial not just for your employees but for the restaurant itself, both financially and operationally.”
New for Restaurant Labor in 2023? Optimism
Worker experience as a key driver of recruitment, retention. Restaurant operators foresee the labor market loosening somewhat in 2023, although hiring and retention will remain challenging for the industry overall. The December Business Conditions Survey from the National Restaurant Association reported that 89% of operators said labor costs are a significant challenge, and 62% don’t have enough employees to support existing demand. The survey found that operators are actively looking to boost staffing levels, with 87% saying they will likely hire additional employees during the next six to 12 months if there are qualified applicants available. However, 79% of operators said they have job openings that are difficult to fill. Operators contacted by NRN said they are approaching the tight labor market with a focus on providing a rewarding experience for their employees, while at the same time streamlining operations to minimize their labor costs. They are leveraging technology solutions and process redesign that not only have the ability to enhance the guest experience and drive increased sales, but also can remove some of the pain points that workers encounter in the course of performing their jobs.
Pandemic-Era Stigma Cost Asian Restaurants $7.4B
In lost revenue. Stigma against Chinese cuisine in the first year of the pandemic cost Asian restaurants in the United States an estimated $7.4 billion in lost revenue in 2020, a recent study found. In a year in which tens of thousands of restaurants closed and many barely scraped by, the study — published online last week in the journal Nature Human Behaviour — reported that Asian restaurants across the country lost 18.4% more in foot traffic than other restaurants in 2020. Prominent reports of anti-Asian racism, from harassment to direct violence, flooded the country in the years after the pandemic’s outbreak. Stop AAPI Hate, a national coalition that formed in response, recorded nearly 11,500 such incidents from March 2020 to March 2022. But the goal of this study, in addition to determining “the cost of anti-Asian racism during the COVID-19 pandemic,” according to researchers from Boston College, the University of Michigan and Microsoft Research, was to highlight instances of anti-Asian discrimination that were less overt despite significant economic impact. “When you have something like folks just choosing not to eat in a Chinese restaurant, that is something that’s a lot more subtle and under the surface, but it’s also a lot more common,” said co-author Masha Krupenkin, an assistant professor of political science at Boston College.
How Restaurants Are Getting Creative
To attract workers. “Help wanted” signs are now ubiquitous at many of America’s restaurants, and the pandemic and Great Resignation made worker shortages even more common. “Given the onset of remote (work) that COVID brought on, a lot of people have more options for jobs,” said Vivian Wang, founder and CEO of Landed, a firm that helps hundreds of restaurants hire workers. Annual turnover rates in the restaurant industry were always high, sitting around 130% prior to the pandemic, Wang said. But now, she estimates that rate is closer to 200%. The job market is more competitive than ever, and workers now have more power to shop around for jobs. “It is 100% an employees’ market,” Wang said. For that reason, many companies have boosted wages to keep up. Data gathered by the restaurant publication TastingTable found that the average hourly wage for U.S. restaurant workers jumped around 20% between the summer of 2020 and the summer of 2022. Restaurants have pursued a range of strategies to finance these wage increases. One couple who founded a cafe in Portland, Maine, decided to decline the use of expensive scheduling and reservation software and even use the laundromat next door to wash their table linens in order to pay their employees the state’s full minimum wage (restaurant owners often pay a lower wage for tipped employees). They also added a 20 percent service charge so customers could help cover the cost. Their workers earn at least $20 an hour plus tips.
Private Restaurants Can Cost Up to $300K for Entry
Are They Worth It? You are not allowed into Chapel Bar. A firm but polite hostess will tell you, smiling, that you may not have a table this evening at the members-only bar located in Manhattan’s Flatiron district. Perhaps you can try nearby New York restaurants Gramercy Tavern or Union Square Cafe, she might suggest, warmly, while showing you toward the exit. In fact, that’s exactly what happened to the lovely couple that walked through the imposing carved wood doors just before me. Chapel Bar has a strict members-only rule, but this evening I’ve somehow managed to weasel myself and a friend in for drinks. Private bars and restaurants like Chapel Bar, for which members pay up to $2,500 in yearly dues and fees, are on the rise across the country. They purport to offer members a more elevated, luxurious hospitality experience. They also afford guests something infinitely more valuable if not intangible: the feeling of exclusivity. At a cost, of course. Members-only restaurants like ZZ’s (rumored to cost members $50,000 per year) in Miami, or The Britely (which costs $2,900 annually) in Los Angeles, offer patrons bespoke, high-end dining experiences, often at a steep price, and usually after interviews and referrals.
Did You Know?
The start of a trend? New concept bets on French fries in wraps. Ever thought of putting French fries in a wrap before? If so, you’re in luck: A San Diego kebab concept just introduced the dish as its latest menu item after noticing customers were making it on their own as a secret menu item for years. “Being in San Diego, putting French fries inside your wrap was commonplace at like taco shops and stuff,” said Wally Sadat, chief marketing officer of The Kebab Shop. Customers were asking for French fries and feta cheese on their wraps so much that The Kebab Shop finally decided it was time to make it accessible online and in person.
Why overcommunicating with restaurant employees can lead to higher burnout. When customers dine at a restaurant, communication can help make or break the experience. If there’s overcommunication—imagine the waiter takes orders just minutes after the menu has been handed out—diners may be annoyed, but too little communication, and the diner will feel like they aren’t being taken care of properly. The same can be said for the employees themselves and the relationship they have with their managers. Working in a restaurant can be a high-stress and difficult job. That’s why the average tenure for restaurant employees is just 110 days, and 52 percent of food service/hospitality employees left their jobs in 2021 due to burnout.
Bielat Santore & Company – Restaurant Industry Alert
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