NEW YORK -- The U.S. restaurant industry is bracing for another year of disappointing growth, as dining frequency is expected to drop slightly or remain flat over the next 12 months, according to a survey of 1,000 U.S. adults by business-advisory firm AlixPartners LLP. Restaurants--no longer able to count on growth solely by opening new locations--are facing a new reality that requires strategic brand differentiation, innovation in marketing and continued cost management.
"Moving forward, growth will be achieved through fierce competition for market share, or 'stomach share,' across and within segments in the restaurant industry. The winners will be those who have a firm grasp on the key drivers and influencers of consumers' dining choices, and implement targeted programs designed to drive growth in an uncertain environment," said Adam Werner, managing director at AlixPartners and co-lead for the firm's Restaurant & Foodservice Practice.
The annual AlixPartners Restaurant & Foodservice Industry Review gauged consumers' anticipated dining behavior and the drivers of dining choice across the core restaurant segments--quick service (QSR), fast casual, casual, fine dining and convenience stores. The study also examined the financial performance and fiscal health of more than 75 restaurants and nine foodservice companies representing approximately $200 billion in annual revenue and one-third of the overall industry.
The restaurant industry has struggled through the past few years as consumers who continue to lack confidence in both the overall economy and their personal situations cut back on discretionary spending. Brutal price competition across and within all segments, coupled with spikes in most major commodity costs, made for a continuing difficult operating environment in 2011.
Winning restaurants experienced incremental revenue and EBITDA gains by scrutinizing their balance sheets and cutting waste while focusing on customer demand for healthy, high-quality food. In addition, several chains looked to mergers and acquisitions, store redesigns and international expansion for their growth.
Much like the retail industry, the restaurant industry is experiencing a barbell-shaped consumer economy. On the high-end, the industry has seen an uptick in fine dining as corporate travel has increased, while at the other, value-seeking consumers have been trading down from casual to fast casual, QSR and convenience stores. The result: The middle, mainly the casual segment, is getting squeezed and is struggling to maintain traffic and overall profitability. This overall, bipolar phenomenon will be a major theme of 2012--both across the industry, and within segments.
According to the consumer survey, consumers this year expect their restaurant visits to decline slightly (3%), citing both their personal finances and a desire to improve health and wellness as reasons. In addition, diners intend to pay approximately 5% less per visit vs. the prior year. Against this challenging backdrop, restaurants will have to use new strategies to capture market share and grow.
Key Trends & Opportunities in 2012
1. Brand differentiation and consumer relevance to drive revenue growth. In the past, restaurants competed largely on the basis of food and operations. As the competition for stomach-share plays out, restaurants across and within segments will be competing more on brand management and loyalty, and their ability to make themselves more relevant to today's consumers.
"This is the next great frontier in the restaurant industry," said Eric Dzwonczyk, AlixPartners managing director and co-lead of the Restaurant & Foodservice Practice. "There are some older concepts out there, and we will continue to see a lot of makeovers in the next 12 months."
The survey found that many QSR names are especially vulnerable, with consumers reporting a 15% drop in dining frequency at QSR restaurants over the past year.
"With increasing competition from convenience stores and Fast Casual, brand differentiation will be especially critical for fast-food restaurants," said Dzwonczyk. "The good news is, in the past few months we've seen QSR concepts begin to step up and innovate by testing and implementing interesting tactics, including new day-part food strategies, kiosks and new delivery options. But a lot more can be and needs to be done."
Innovative restaurants will be exploring new, flexible formats and pursuing strategies to lift business during different parts of the day--such as breakfast. Despite little improvement in real job growth and therefore the number of Americans going to work each morning, breakfast, which accounts for 12% of the restaurant industry, has become the most attractive day-part and a key area of growth across segments.
Diversified beverage offerings are also being explored. "Alcohol and alternative beverage options can be another opportunity to quickly reposition a brand--good programs can be a major driver of traffic, margin growth and loyalty," said Dzwonczyk. "Winning restaurants are drawing in diners with happy-hour promotions and incentivizing increased spending by featuring exciting options such as seasonal or craft beers or signature cocktails."
2. Convenience, value and quality are key. As restaurants pursue new strategies, it is important to keep in mind that food quality is still No. 1 for consumers. But not far behind on the pecking order is their demand for a balance of high-quality, on-the-go options with convenience, value-pricing and variety. The survey showed that 65% of consumers view food quality and taste as the most important area of potential improvement and innovation, followed by customer service, at 37%, and menu variety and healthy options, at 27% and 26%, respectively.
"Food quality is still king, and will need to be a central focus of any restaurant's strategy and brand positioning," said Kurt Schnaubelt, a director at AlixPartners. "We're starting to see innovative efforts around food quality from QSR restaurants, but c-stores are the ones to really watch in 2012."
Over the past year, c-stores increased their focus on quality food and beverage offerings--and consumers took notice. Across all segments, c-stores were the only segment to see an increase in traffic. Significantly, the survey also found that c-stores are evolving into a destination for buying food--in the survey 46% of consumers visited c-stores to buy a meal.
"You can expect a lot more than a hot dog and a slushy from convenience stores today. The creative ones are now offering made-to-order sandwiches, improved coffee and tea programs, and even items like sushi," said Schnaubelt. "Both QSR and fast casual need to recognize the c-store threat and will need to up their innovation to protect against further encroachment."
3.Healthy menu is "tablestakes". Though food quality and price remain the key drivers of restaurant choice, the desire to eat healthy has become an increasingly important factor in consumers' decision-making.
"Healthy menu options are no longer just 'good to have'--healthy is now tablestakes," said Werner. "Restaurants are beginning to recognize this, and while some have responded with new offerings such as healthy menu options for kids, we believe there's a lot more in this trend that can be tapped."
Over the past several years, the need to save money has been the chief factor preventing diners from dining out more. But looking ahead, the survey found a shift in consumer mindset from a focus on personal finance to health. Of consumers planning to dine out less, 56% cited the desire to eat healthier (up from 35% in AlixPartners' survey in 2009), while 51% cited personal finances (down from 63% in 2009).
Furthermore, 44% rate healthy menu options as somewhat or extremely important, and 62% say nutritional information on menus is affecting their ordering decisions (up from 50% in an AlixPartners mid-year survey six months ago).
"When it comes to healthy, it's as much about being proactive as it is about being truly innovative--winners will be the restaurants that stay a step ahead of both the consumer and regulatory demands," said Werner.
4.Mobile and local marketing are great untapped opportunities. To win in the coming brand wars, restaurants will need to employ a diverse media strategy to include social media, mobile marketing and local marketing. Many restaurants are exploring differentiated marketing tactics, but as a whole, says the firm, restaurants are underdeveloped in this area.
According to the survey, digital media's impact on dining decisions rose in the past year, with 42% saying digital media is effective in influencing dining-out decisions (up from 37% in AlixPartners' survey in fourth-quarter 2010). Younger consumers are even more open to digital marketing, as 60% of consumers in the 18 to 24 age group and 56% in the 25 to 34 group say digital media influences their dining decisions, both up from 44% in the fourth quarter of 2010.
"Digital and especially mobile marketing is the great untapped opportunity for restaurants to build brand loyalty and capture share," said Schnaubelt. "It's not just about TV, big ads and mass media anymore; it's more about knowing diners, connecting through new media and then connecting on the local level as well."
5. Discounting and promotions will continue--but new techniques will also emerge. In 2012, consumers plan to spend 5% less per meal, but they are not looking to spend or cut restaurant spending across the board, says AlixPartners.
The survey found a significant percentage of consumers are gravitating to meals under $5, expecting to spend 4% more in that price range than they did last year, and planning to cut back in the $10.01-$20 and $20.01-$30 spending ranges. Tactics consumers will use to get checks under $5.00 include taking advantage of promotions and discounts, ordering less food (e.g., skipping appetizers) and drinking (free) water.
With consumers unwilling to move on price, the "meal deal," promotions, limited-time-offers and discounts that have flooded the market for the past few years are here to stay.
"When it comes to pricing, restaurants need to be just as creative as consumers have been in figuring out ways to lower the bill," said Dzwonczyk. "Overall, the restaurant industry's level of sophistication in pricing is relatively low when compared with other industries; however, we will see innovative techniques and strategies emerge in 2012."
Some restaurants are already becoming better at pricing menus in a way that allows them to manage their margins. Advanced techniques include tiered pricing -- for example, charging higher prices for appetizers and drinks instead of for popular, "center-of-the-plate" items.
"Pricing should be a combined effort of the finance, marketing and product-development departments. But the foundation has to be analytics that take into account factors such as demographics, local competition, margin targets and costs," Dzwonczyk said
6. Commodity costs increases and volatility continue--manage that supply-chain. Restaurants should not expect commodity spikes to go away in 2012.
"Price volatility among core commodities--such as cheese, pork, beef and milk--made for a difficult operating environment 2011," said Werner. "And, with little relief in sight, supply-chain excellence and risk management will be more critical than ever this year."
Core strategies include establishing a "center-led" supply chain department, which can maximize global synergies; employing inbound logistics conversion, which allows greater flexibility for local sourcing; having raw materials-source monitoring, which enhances food traceability; and raising store-level productivity, which reduces administrative costs and enables efficient value chains.
"Winners will be restaurants that actively pursue a more nimble supply chain and a holistic approach to managing supply costs," Werner concluded.
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