For such a mature business segment, the restaurant industry continues to go through some dramatic developments. For example, in the not so distant past, consumers who wanted food prepared outside of the home had to visit any one of variety of restaurant locations: freestanding, in-line, universities, food courts, etc. And for those who wanted restaurant-quality cuisine delivered to their home or office, they usually had two choices: pizza or Chinese food.
Nowadays, though, customers can get almost anything they want delivered to them at a moment’s notice and that includes myriad food choices. This restaurant evolution has foodservice concepts continuing to opt for other ways to grow their brands, including dark kitchens and even changing from one format, such as full service, to another, such as fast-casual service.
Ever wonder what’s driving these dynamics?
Well, part of the answer is very simple. Some operators need to change because their current business models and concept designs do not have the right unit economics for the way consumers want to use them. Let’s be clear, some brands have to change not because they want to, but rather because they have to in order to continue to grow. In some cases, they must evolve to capitalize on new opportunities, such as changing from full-service to fast casual.
Here’s a hypothetical example. In a market that has high real estate cost and high labor costs, building a 2,400 square-foot fast-casual restaurant that uses around 20 people as its base level of employees, with 7 to execute service during peak hours, may be much better than building a 4,500-square-foot full-service restaurant that uses 45 employees or more. Even in the case where the sales for the fast-casual concept are less than the full-service concept, growing this way may be better in the long run provided the fast-casual concept’s unit economics and, subsequently, profitability are better.
In the case of some full-service concepts, finding and retaining labor can become more expensive and difficult, particularly in those markets where servers can’t earn tips. Mandatory minimum wage hikes up to $15 per hour can further amplify labor challenges, in some cases. This can make the decision to go with a smaller concept even easier.
As restaurant companies contemplate such decisions, the new concepts they develop may hit the market under a different brand name or a side name. Take, for example, Hooters, which opened a smaller, fast-casual concept known as Hoots.
Dark kitchens represent another concept operating in the fast lane. Why? Start with the fact consumers continue to eat more food prepared outside of the home in places other than where it was prepared. For this reason, many operators no longer require a dining room or more traditional front of the house. Roughly 60 percent of all dining occasions are off-premises these days, per data from the National Restaurant Association. If that’s the case, why build a traditional brick and mortar concept when consumers don’t physically see it?
The financial dynamics for a dark kitchen tend to differ greatly from traditional restaurants since the real estate cost can be much lower and the facility may require less, or at the very least, different labor. Working with delivery drivers from third parties such as GrubHub or PostMates may come with some costs through their fees. This scenario has a flipside, though. Because the restaurant don’t employ these drivers, the operation pays only for the delivery-related labor it consumes. Considering the cost of third-party delivery service continues to level off and get lower in some instances, such a growth vehicle becomes more financially feasible. Indeed, it seems like dark kitchens and third-party delivery will continue to shape restaurant design for the foreseeable future.
Even vending machines play a role in this non-conventional growth strategy and mix. Fast-casual salad concept Coolgreens rolled out smart fridges to help satisfy consumers’ appetite for better-for-you foods and the convenience of grab-and-go formats.
If a concept can operate in certain venues with a robot or vending machine, why not do it? Sell where people are at but do it in a way that allows the concept to make money with the correct unit economics. A machine may have no direct guest service labor cost, it still carries some labor cost. This can take the form of prepping the food that goes in the machine, delivering the items to the machine, loading the machine and maintaining the machine. But the profit and loss on these units differ greatly in comparison to that of the typical brick and mortar restaurant. When I think about vending machines, I can’t help but to go back to these days when I used to buy hot sandwiches and sodas during my elementary school days. We’re going back to the future!
Which of these growth vehicles should brands pursue? It depends on their financial structures, i.e., line item costs, how consumers want to access the restaurants’ products and how much the restaurants are willing to pay for the convenience.
So, what is the best growth vehicle nowadays? The answer is very simple: the one that enables the concept to grow profitably, while delivering the best customer hospitality, since this is a way to drive the unit economics that keeps shareholders engaged and willing to continue to invest.
Give me “Unit Economics”, or give me death!