Tips + Strategies, 12 June 2018

Is too much of a good thing threatening the restaurant industry? (And what you can do to ensure your success!)

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Is too much of a good thing sending the restaurant industry towards a crash? There are more restaurants than ever in the U.S. – and those numbers keep growing at an unprecedented rate, despite speculation that it’s completely unsustainable. In fact, The New York Times, Washington Post, and others have questioned if the hospitality industry is now a bubble that will soon burst.

Fed by a variety of factors from widespread private equity investment to transformation in the labor market, demographic shifts to cultural norms, more and more people are picking up a menu.

But how much of a good thing is too much, and how can your restaurant stand out from the crowd and ensure success?

Let’s take a closer look:

There are now an estimated one million restaurants in the U.S. or about one for every 325 people in our country.

However, it’s not just the number of existing establishments that’s so concerning, but the fact that they’re growing at a rate about twice the population.

Between 2001 and the end of 2016, the number of restaurants jumped by 150,000 – a 30% increase. But in some states, the eatery establishment growth rate was even more profound. Georgia, Arizona, Mississippi, and Texas saw a 40% growth int hat same period; the District of Columbia, 57%; and Nevada, an astounding 70%.

But opening tens of thousands of new restaurants every year hasn’t proved sustainable. In fact, the growth of sales has slowed to the lowest rate since 2010 despite a myriad of new locations – or because of it.

At chain establishments, sales levels began dropping in early 2016 and have continued to slide.

According to a report by the National Restaurant Association, the restaurant industry enjoyed 20 consecutive months of growth between 20014 and 2015. But since then, they’ve seen positive growth in only four of the last 22 months!

Granted, sales are still up, which can be considered a net positive.

In fact, by all accounts, Americans are eating out more than ever. 2016 was the first year that we saw our country spend more on dining out than groceries.

And Millennials – the largest demographic in the U.S., are also hitting their local restaurant in record numbers, as studies show they prefer to spend their money on experiences (including dining and drinking out) instead of consumer goods.

But many hospitality industry experts point to a bubble that will inevitably burst, sending many restaurants out of business and bankrupting droves of owners.

The impact of super-saturation has been felt most acutely by independent restaurants, which don’t have a buffer of multiple locations and the leverage that chains do.

The restaurant and hospitality industry(s) have accounted for a huge portion of job growth in the U.S., too. Since 2010, restaurants account for one in every seven new jobs. That’s a rate four times higher than national job growth according to the National Restaurant Association, and the highest sector of employment over that time, surpassing the healthcare field.

 

Is this all sustainable?

 

Let’s look at some factors that are both lifting and weighing in the restaurant industry:

 

Labor shortage and labor costs

You may have heard the adage, “It’s hard to find good help these days,” but it’s REALLY hard to find good help these days. Not only is competition fierce for good workers since there are so many more hospitality establishments hiring, but new minimum wage laws have drive labor prices through the roof for many restaurant owners.

 

Slimmer margins

While there are more restaurants than ever, owners aren’t bringing home the bacon like they once did. Increased competition always means prices need to stay tight, but food, labor, and operating costs have also skyrocketed at the same time, meaning you have to stay lean and mean to turn a profit.

 

Increasing real estate costs

We’ve seen a significant escalation of real estate prices – including in commercial leases post-Great Recession. These costs, combined with smaller margins, make it harder than ever to find, secure and float the perfect location.

 

Shifting consumer desires

In decades past, families used to stay loyal to their one favorite restaurant, often a Mom-n-Pop establishment. But these days, people see eating out as a cultural experience driven by variety, which means they’d rather try that new place down the street.

 

The franchise model has shifted

Restaurant chains now operate via economies of scale, satiating private equity investors by selling off new units to franchisees, not holding and reaping steady rewards through franchise fees and royalty payments. This “churn and burn” model means that new locations keep being added to an already over-expanded market.

 

But here are some encouraging factors that are boosting the restaurant business:

 

Americans are eating out more than ever, as well as spending more on dining and drinking. As we mentioned, 2016 was the first year that we spent more on eating out than groceries, and we now spend about 44 cents per every dollar of our food budget on restaurants, according to the United States Department of Agriculture Economic Research Service.

With longer work hours and tightly packed family and social schedules, there’s no reason to think that trend away from our kitchens in favor of eateries won’t continue.

Sure, the restaurant market is oversaturated in the U.S., but meal prices have stayed relatively steady – or even declined – if we look at real (inflation adjusted) dollars. Tracking hospitality costs over the last fifteen years through the consumer price index, we see an increase that is a gentle curve, with no sudden spikes and valleys that characterize a restaurant bubble.

Thanks to reality TV, cooking channels, and digital media, Chefs are now celebrities on par with musicians and professional athletes. No longer hidden back in the kitchen, they achieve name recognition and a following like never before – and they can leverage that fame into signature locations, free promotion, and even favorable terms.

That same “food fame” phenomenon is accessible for anyone who focuses on 5-star customer experience, from the largest luxury eatery to the smallest local food truck.

By doing so, they build a celebrated brand and attract an army of loyal patrons that vault them to success.

Food is no longer just sustenance, and it’s even morphed away from a family event.

Eating out is now directly tied to culture, and those who go on culinary adventures gain an air of sophistication. As I like to say, “Restaurants are the new art.”

The American trend of eating out more, and at more establishments, signals that restaurant owners who focus on quality and differentiate themselves by providing superstar customer experiences will continue to thrive and grow!

© Jill Raff 2019