Restaurants struggle to remain relevant in fragmented food market
Friday, March 10, 2017
Last year was a rough year for the restaurant business. In 2016, well-known restaurant chains Logan’s Roadhouse, Black-eyed Pea and Johnny Carino’s were all forced to file for bankruptcy after experiencing lackluster sales.
In fact, 2016 resulted in zero growth for most restaurants, but this downward growth trend is not new; growth in the restaurant sector has been stagnant since the recession year of 2009. But with the economy in its eighth year of recovery, what is keeping Americans from dining out?
Americans have held on to the penny-pinching tendencies they developed during the Great Recession. A poll conducted by Reuters/Ipsos found that high costs are preventing Americans from eating out at restaurants. Eating at home, however, has become more affordable.
Grocery prices fell 2 percent in 2016, and consumers have noticed. Poll respondents noted that they believed eating at home is cheaper than eating out.
The reason for the lowered costs? An increased feed supply has resulted in a glut in harvests.
Restaurants are scrambling to compete but are finding themselves in a tough position. Raised rents, increased labor costs and a higher minimum wage have forced restaurants to raise the prices on their menus in order to make a profit. Menu prices have increased at a 2.7 percent rate.
No restaurant model has been immune to the lowered foot traffic, but chain restaurants have suffered the most. Chain restaurants, following past business models, have expanded too quickly without the demand to make up for costs.
Customers who normally stop in and eat after running errands are no longer coming in. With data reporting that 70 percent of Americans shop online regularly, it is not hard to see why.
Fast-casual chains have suffered as well, but chains that have promoted online ordering, like Panera and Starbucks, have managed to avoid financial losses. Starbucks has promoted its mobile payment system and has since observed that 24 percent of its orders are now being paid for using the app.
If a report predicting that orders placed via smartphones will make up more than 10 percent of all quick-service restaurant sales by 2020 is correct, restaurants across all sectors will need to incorporate mobile ordering into their business platforms in order to survive.
Increased online ordering helps, but restaurants, particularly casual-dining chain restaurants, also need to find a way to get more people through the door.
Fast-casual restaurants maintain relatively low operating costs, allowing them to expand at rapid pace. Chain restaurants are finding it hard to keep up.
The convenience offered by fast-casual appeals to a much younger demographic that is less focused on full service and more concerned with the quality of their food. Struggling chains vying for new customers have noticed this trend and are attempting to reinvent themselves by developing fast-casual concepts geared toward millennials.
One such example is what Denny’s is doing in their creation of their fast-casual concept The Den. The menu features Denny’s favorites such as the Grand Slam, but customers pick up their orders at a front counter and seat themselves.
The current locations are all located near college campuses and are open late. Casual-dining chains Cracker Barrel and Tony Roma’s have also created fast-casual dining concepts in hopes of enticing younger customers.
Targeting the younger millennial customers may be the way out for struggling restaurants. According to 2014 food expenditure data from the Agriculture Department, millennials spend 44 percent of their food dollars on eating out, which is more than baby boomers are spending.
And when millennials dine out, they value quality, low-cost food over a breadth of menu options. In the past, restaurants believed an extensive menu featuring numerous options appealed to customers because it gave them unlimited meal options.
However, in recent years, fast-casual chains have found success in appealing to younger customers by cutting down their menu offerings and promoting their use of high-quality ingredients. Shake Shack and Chipotle are two millennial favorites that have been unabashed in touting their use of non-GMO, natural ingredients.
As major grocers compete to offer the lowest-priced groceries, meal kits rise in popularity and fast-casual restaurants continue their popularity with the millennial generation, restaurants are forced to fight for food dollars in an extremely fragmented market.
In order to remain relevant, restaurants will need to focus more on the overall experience they are providing. Fifty-three percent of the restaurant market is now composed of either fast-food or fast-casual places geared toward a younger customer on the go.
Restaurants will need to find a way to meet the convenience and quality offered by fast-casual restaurants, whether it be through implementing digital ordering options or by revamping their menu to offer customers unique, quality options.
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