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Restaurant Survival Post COVID-19

When the impact of the COVID-19 pandemic is finally behind us and surviving restaurants are able to offer a full array of food options again, the industry’s operating environment will be very different than it was before. It’s likely a sizable number of units will permanently shutter because owners did not have the financial resources to hang on while any number of local, state and federal restrictions were placed on their everyday operations.

2020 front of houseOver the past few years, it became increasingly evident the industry had too many units for a decreasing level of demand. The weakest operators will close as demand for their food offerings diminishes even further despite the possibility of being able to offer food via carryout and delivery. Many will not have the financial wherewithal to reopen at a later time.

Regardless of the fact that competition among restaurants may temporarily diminish once units begin to reopen, surviving operators will need to change their go-to-market strategies in order to rebuild sales and profits.

Attempting to run your restaurant in the same manner as before the pandemic will likely not result in a return to normal. The new normal will no doubt be quite different, particularly for those full-service operators who had been dependent on on-premises sales.

One factor fueling that change is the growing strength of fast-casual concepts. The fast-casual segment continues to bolster its market position for several reasons, including unit growth, which has led to a much greater presence within the marketplace. In addition, fast-casual operators have worked hard to improve their food quality, so consumers perceive it to be closer to that of casual-dining restaurants versus traditional fast-food places. Along those lines, fast-casual operations offer a wider array of cuisines. Early iterations centered on burgers and Mexican-themed menus, but fast-casual has branched out extensively since then.

Americans continue to accelerate the need for less frequent on-premises eating occasions. In addition to the fast-casual influence, customers have increased their reliance on delivery, and the growing trend of eating meals at home mixes elements from both restaurants and grocery stores. As such, what components of an entire operation should restaurant owners and franchisees review to ensure that each maximizes profit potential? Let’s start with the front of the house.

Think Hard About Profit Potential

Every restaurant’s seating area requires some consideration. If a restaurant has traditionally been dependent on customers eating on premises, now is the time to think very hard about downsizing. Seating may be full on Friday and Saturday night, but what about the rest of the week? How many tables are not used or used more than once each evening? How many loyal customers have changed the way they purchase meals from their favorite restaurants? Do they order more carryout or delivery instead of dining on premises?

Even if customers change one on-premises occasion in favor of one off-premises occasion, restaurants will most likely sell fewer beverages, appetizers and desserts. What’s significant about these items is that they all tend to have higher margins and add proportionately more to a restaurant’s bottom line.

As of mid-2019, approximately two-thirds of all restaurant meals were eaten off-premises, according to data from The NPD Group. And that percentage will certainly grow in the future. More telling, almost 20% of dinners eaten at home contain at least one item purchased from a restaurant, according to The NPD Group’s CREST 2019 report — up almost five percentage points from 2015.

In the short term, the novel coronavirus remains the primary driver for fewer restaurant visits eaten on-premises. Beyond the pandemic, though, a slew of additional factors will impact restaurants, and it is important to take these into consideration when operators envision potential modifications to their seating areas.

The first consideration is ongoing and relates to important demographic changes within the U.S. population. In 2019, more than 28% of households were comprised of individuals living alone, up from approximately 17% in 1967, according to the U.S. Census Bureau. While older individuals account for the majority of Americans living alone, this group also includes younger adults. In other words, people living alone do not represent a monolithic demographic group.

Second, individuals 65 years and older are the largest demographic group in the U.S., whether they live alone or with others. As Americans age, though, we tend to eat at restaurants less often on a per capita basis as healthcare and pharmaceutical costs begin to gobble up more of our discretionary income. Regardless, because of the sheer size of the population of people 65 years and older, restaurants need to do a better job accommodating single diners and parties of two.

Single diners now comprise 35% of the total share of restaurant visits, making them the largest group of customers to visit restaurants in the U.S., according to NPD Group data. Parties of 2 account for 27% of visits. Parties of 4 only represent 12% of restaurant visits. Solo diners were only one of two groups to increase their visits to restaurants in 2019.

What does this all mean? Restaurants that better align their seating to singles and parties of two will stand a better chance of surviving and growing in the future compared with those who remain reliant on families with kids and larger party sizes.

For existing operations, start by exploring whether it is possible to reconfigure the dining area to accommodate more high tops or two-person tables versus primarily utilizing tables or booths that accommodate four people. Does this exercise reduce wasted seating?

As a result of years of declining demand for seating in restaurants, when some chain operators construct new units or remodel existing ones, the locations often feature a smaller footprint. Today, this is occurring primarily among quick-service and fast-casual operators.

Firehouse Subs offers one example that drives home the benefits of a smaller footprint. The chain introduced a new prototype in mid-2019 that has a smaller dining area, with seating for only 28 people, including an 8-seat community table. In the past, most Firehouse Subs had 50 seats. The new prototype places the kitchen area in the rear of the store, instead of the front, highlighting a designated off-premises pickup area. This is critical for Firehouse Subs as the chain estimates 62% of sales are for off-premises consumption.

There is no reason that full-service operators cannot do the same and reduce the footprint as they renegotiate existing leases and more space opens up due to weaker operators and other businesses closing their doors. In addition, labor was a pain point for operators before the pandemic, and it will remain so once the economy starts to rebound for all the same reasons and more. Operators will still need to deal with factors such as a shortage of qualified labor, higher labor costs and more. As such, the opportunity to reduce front-of-the-house staff with a smaller seating area will help to reduce ongoing labor costs.

Other Segments Reducing Footprints

Restaurants are not the only businesses moving toward smaller, more efficient footprints. Grocery retailers and mass merchants continue to build smaller units in urban areas as a way to hold down rent, labor costs and inventory.

Among major retailers, perhaps Target is best known for its limited-assortment urban stores, having built approximately 100 of these units in the past five years. Each unit averages about one-third the size of a traditional Target store. Based on the success of the new format, Target had planned to open as many as 30 new units per year over the next few years. As of late March, the Minnesota-based chain revised its plan downward and now plans to add 15 to 20 small-store openings in 2020, with the remainder pushed to 2021.

As more jobs are created in urban areas, grocery retailers also need to adjust their value proposition to better compete with restaurants for on-the-go meals. This means having more prepared items like salads and fresh-made sandwiches closer to the store entrance to minimize the time shoppers must be in store. Retailers continue to create space in refrigerated cases for healthier premade items, taking advantage of the growing trend of sandwich roll-ups, smoothies, juice drinks and even sushi. Best-in-class examples of the addition of fresh-made items include grocery retailers Mariano’s in the Chicago area, Lunds & Byerlys in the Minneapolis market and any number of urban Whole Foods around the country. These items support urban workers’ need for grab-and-go meals at lunch, a need once almost completely filled by restaurants.

What else should restaurant operators consider while evaluating their front-of-the-house spaces? If a restaurant has created a strong carryout business, is there space for lockers in the lobby area? This could allow customers to enter, provide a code for a specific locker, grab their food and leave without utilizing the host or cashier to gather their food or make payment. Panera pioneered this concept when the chain created cubbies in its lobbies for customers who ordered food online. As more restaurants selling hot foods moved to digital ordering, they had to create a method to keep food warm without sitting under heat lamps for an extended period.

Equipment providers now can create a rack of heated lockers that will open with unique codes that the customer receives upon completing an online order. Use of these locker systems has expanded to such operators as Little Caesars, and Wingstop is testing them too. Not only does this type of equipment save staff from activities that detract from their primary roles, but it also enables restaurants with a sizable carryout business to reallocate staff to speed up overall service times.

If the restaurant’s lobby area lacks room for the lockers, operators should designate a separate space specifically for pickup and delivery staff. Operators must make every effort to separate customers and third-party delivery people to facilitate an orderly flow of the various types of customers that now enter the business with different expectations, time constraints and more. Doing so will help avoid confusion, long waits and incorrect or incomplete orders going out the door.

Finally, having a cashier move back and forth between customers coming in for takeout and a kitchen located farther back was becoming more of a common practice before the pandemic that denigrated the dining atmosphere. The farther staff have to travel to get orders from the kitchen for takeout and delivery, the worse it becomes for customers and staff. An area located closer to the front door of full-service units helps mitigate this issue.

In the restaurant industry, time equals value. The more time an operator can save their customer, the greater the satisfaction level of the customer. This is how fast-casual restaurants continue to make inroads into full-service restaurants’ share of visits: shorter wait times for food that customers perceive as similar quality at a lower price.

Similarly, with different types of customers using the space (those dining on-premises, customers taking their food to go and third-party delivery drivers) having functional signage around the restaurant becomes all the more important. Choose a background and colors that stand out for good visibility from close in and farther away. This means using a legible font in signage: large, clear and easy to read.

As operators modify their front-of-the-house space, an opportunity exists to enhance the appearance and ambience of the remaining seating space. For example, is ceiling lighting needed directly over tables so that patrons are not forced to use the flashlight on their cell phones to see the menu? Given that a large proportion of the country is 65 years and older, the need for strong direct light is becoming a necessity in order to avoid extended ordering times due to an overabundance of questions about the menu. Not every restaurant has an abundance of large picture windows to let in natural light. And it’s important that lighting and food presentation also translate well to social media.

Every restaurant should continue to create a front-of-the-house area that reinforces a positive brand image. Yet limited thought about the complete aesthetic of this space can lead to customers’ dissatisfaction with their meal and staff. Given the large number of alternative sources of meals, nearby competitors and consumers opting to combine food with components made at home, an operator must strive to make each customer feel that the visit was a worthwhile expenditure of time and money. If not, that visit will take place at another operator the next time.

Warren Solochek looks at the future of the restaurant industry in this third installment of FE&S’ 2020 Vision series. He takes into consideration the reality that hit operators as the COVID-19 crisis took hold as well as industry trends that were building before the pandemic. Solochek offers his insights as an independent foodservice industry consultant with nearly 40 years of industry analysis experience.