As one of the industries to be hit hardest by the pandemic, the restaurant industry has bounced back in the last year, but restaurant leaders still have concerns and continue to strive toward being operationally agile, better leveraging data, and attracting and retaining workers.
These factors were reflected by speakers at a recent Restaurant Finance & Development Conference, and they reflect the latest assessment of how the restaurant industry is dealing with the current business environment.
Among the concerns shared by industry and economic leaders were the likelihood of an economic slowdown, signs of which are already being seen in the industry. Industry leaders also discussed new strategies to attract and retain customers, many of whom have had new expectations of their dining experience in a post-COVID world.
Inflation and what’s next
While a predicted economic slowdown has yet to materialize, there are still signs one is imminent. In the restaurant sector, overall sales dipped in November, and again in December, from an October high of $89.3 billion. Even without a slowdown, Grant Thornton Audit Services Partner Bill Bishop said the restaurant industry is already seeing a trend in customers “trading down” — going to restaurants that are not as expensive as what one would typically patronize.
What restaurant owners need to understand is that not every economic trend will follow prior patterns. Retailers who thought consumer behavior early in the pandemic would be the new normal were surprised when consumers began adapting, changing the products they were buying, and leaving many retailers with too much inventory or products now less in demand.
Restaurants in city centers that relied on a lunch traffic crowd have been badly hurt by the loss of office workers. Work-from-home and hybrid accommodations are the new normal, but restaurants should watch for signs that business traffic could come back, maybe not every day, but in new patterns. A recent study of office occupancy patterns by Kastle bears this out, with an arc of occupancy percentage peaking Tuesdays and Wednesdays before tailing off on Fridays.
Further, the Kastle study shows a wide variety in occupancy rates by city. For example, Houston and Austin occupancy rates were above 65% on the busiest days, whereas Philadelphia and San Jose on the busiest days were below 50%. Management should be aware of regional differences and listen to their local general managers and area managers to understand what staffing is needed in each particular location.
“To expect that the future will be a straight line from the current trend is a losing strategy,” said Grant Thornton Strategy & Transactions Managing Director Kevin O’Connell. “Being nimble and leveraging data and insights to identify new consumer patterns as they emerge to adapt operations will be the key to success.”
Reacting with agility
Restaurant leaders should consider how to build an edge through data, said O’Connell. An evolving trend discussed frequently at the conference was leveraging new data tools and digital menus/online ordering to take new approaches to dynamic pricing. As costs have risen, restaurants have also increased their prices, but a “blunt force” solution of simply raising prices could accelerate guest count losses. Instead, taking a strategic approach to increases through dynamic pricing, driven by better data on customer behavior and digital menus, can help leaders address these cost pressures.
The concept of dynamic pricing — a lunch or happy hour special — isn’t new, but the idea can be applied on a much more targeted basis through new analytics and tools. With dynamic pricing, leaders can have more opportunities to align price points with the flow of the business to maximize revenue and profitability. The concept is easier to implement since so many restaurants use digital menus, especially for online ordering, which makes the logistics of menu changes economical.
Dynamic pricing also makes geographic market pricing more practical, implementing price increases in locations where the market can absorb it, said Alex Rhodes, National Managing Partner, Hospitality and Restaurants. As gas stations have done for a century or more, restaurants with more than one location can use dynamic pricing to drive customers to certain locations. Analytics tools also give quicker feedback to price elasticity to measure the true business impacts of pricing shifts.
Overall, dynamic pricing trends are about using data to set prices more effectively and aligned with demand. It’s not about changing prices constantly. Businesses have to effectively communicate pricing to set customer expectations. “You can’t just surprise customers with different prices,” O’Connell said. “It has to be aligned with the experience.”
Another concern for restaurants is the trend of check averages — the average spend per guest — continuing to increase while guest counts are consistently trending down. In the short-term, this trade-off is protecting revenue and potentially increasing margins, but in the long-term, restaurants need guest count growth to grow.
Rhodes said this trend, a parallel to what is happening in the lodging industry, where growth has been increasingly driven by higher room rates as opposed to occupancy, can be interpreted as a sign of a coming recession. This could point to a trend where people with a stable income situation are continuing to go to restaurants and spend money but, increasingly, people in the opposite situation are deciding not to eat out.
A factor that can help restaurant leaders make better decisions is gaining a deeper understanding of customer behaviors, including dining occasion drivers, frequency patterns and churn rates by customer segment, price elasticity and loyalty program effectiveness that can be accomplished by collecting customer data and applying new strategic analytics tools to reveal insights and identify actions that can position the organization for growth.
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