Insight guru Warren Solochek takes a deep dive into industry data this month to provide a no-nonsense analysis of the industry. Readers can look forward to his continued perspective throughout the year as part of FE&S’s 2020 Vision series. Now an independent foodservice industry consultant, Solochek’s been trend-spotting for nearly 40 years, most recently for NPD Group Inc.
Commercial restaurants in the U.S. represent one of the country’s largest industries. Americans make almost 61 billion visits to restaurants each year, according the NPD Group’s CREST study for 2018. In those visits, consumers will spend upward of $863 billion in total, according to the National Restaurant Association’s 2019 State of the Industry Report. Yet, as we enter 2020, a very important question must be considered: What does the future hold for the commercial restaurant industry?
This question is asked more and more as visits to restaurants continue to decline. It does not matter which source of data you might use, the fact remains that visits, or use occasions, to commercial restaurants have been essentially flat, despite growth in total dollar sales, for more than six years. How can dollars grow when visits continue to trend downward? This occurs when the increase in check average grows at a faster pace than the decline in visits.
The continuation of this trend is fine until the industry finds that it has become too expensive for the average American to use on a regular basis. At that point, consumers will begin to cut back their use of restaurants at an even faster pace. It is not clear how far into the future this tipping point will occur. But with the growing unease among Americans regarding their current and future economic status and the growing potential for recession, we may reach this point sooner rather than later.
Observers of the commercial restaurant industry have long focused on visits or use occasions as a key indicator of demand. Declining visits over an extended period signals slowing demand for restaurants. There is less concern when restaurant use declines on a temporary basis, as was the case during the recession of 2008 to 2009, because we can attribute slowing visits to a specific circumstance. Unfortunately, the industry’s ongoing weakness is taking place during a period of economic expansion and job growth. In theory, when more adults are working, they have less time to prepare meals at home. Restaurant visits should grow. Something has changed.
To be sure, some industry components continue to grow. Delivery deservedly receives a great deal of positive press, as has been the case during the past four to five years. Why? Because delivery represents the only part of the restaurant industry that keeps demonstrating continuing growth in consumer demand. Today, delivery still comprises a small percentage of total restaurant use occasions, somewhere in the 5 percent to 7 percent range, depending upon the source. Several industry sources forecast a compound annual growth rate for delivery orders of more than 10 percent between 2019 and 2024. Delivery keeps operating
in the fast lane.
So then, why, even with very robust growth of delivery, does demand for restaurants continue to wane?
Factors Negatively Impacting Restaurants
A number of factors keep negatively impacting the use of restaurants. To begin, consider the changing demographic composition of the U.S. population. As the industry expanded from the 1970s through 2008, owners and franchisees built their restaurants for a traditional family of four, with an emphasis on on-premises meals. Seating areas were comprised of tables and booths to fit a group of four easily. Front-of-the-house seating was plentiful so that there was no wait for a table. If there was a bar on premises, it was in a separate area so those sitting down for a meal did not mix with those visiting primarily for a drink. And until recently, delivery was primarily the domain of pizza and Chinese food outlets.
Today, the traditional family of four has transformed into multiple variations of size and ethnicity. In addition to the family unit evolving, the U.S. population continues to age. Baby Boomers represent one of the largest demographic groups in the U.S., comprising 74 million adults in 2017. As a group, Millennials are almost the same size as Boomers (73 million) and will become the largest demographic group in 2020 as Boomers begin to die at an increasing rate.
Given their current ages, Boomers continue to retire in ever greater numbers. As this occurs, Boomers’ need for convenient (restaurant) meals will decline because more time will exist to create meals at home. In addition, as Boomers age, they spend a greater percentage of their income on necessities such as medical care and medicine. This leaves less disposable income to spend on restaurant meals. As Boomers continue to age, and with history as our guide, we should expect a sizable percentage of the U.S. population to begin reducing its use of restaurants into the foreseeable future.
On the other end of the spectrum, Millennials seem to be more inclined to prepare meals at home than were earlier generational groups at a similar age. As a group, Millennials are more experienced cooks than were Baby Boomers and Gen Xers at the same stage in their lives. Today’s younger generations find it easier and more entertaining to prepare meals at home because of the proliferation of online recipes. The desire and ability to search online for interesting and new meal ideas appears very much tied to interest in the Food Network and the plethora of TV cooking programs.
If Millennials do not want to cook from scratch, the opportunity to find a perceived healthier and broader variety of prepared foods has expanded immensely. Manufacturers have worked hard to improve the perceived quality of frozen and refrigerated prepared foods. Grocers can generate higher margins from fresh prepared foods sold from their deli counters and/or in meal kits. Though the prices for prepared meal components may be higher than other options, Millennials have shown time and time again a willingness to pay more for food perceived to be more convenient and higher quality than meals from a restaurant. Consuming fresher food is a much higher priority among Millennials than it is/was among older demographic groups.
One other factor which sets Millennials apart from older patrons: They are much more accustomed to grab-and-go meals and snacks. Millennials are much more likely than Boomers and seniors to eat off premises, minimizing the need for a large seating area.
Finally, Millennials who have attended college have incurred very high levels of debt. The average cumulative student debt balance in 2017 was $26,900 for graduates of public four-year schools and $32,600 for graduates of private nonprofit four-year schools, according to The College Board. The amount of college debt carried among many Millennials leaves a sizable percentage of this cohort with less disposable income for restaurants compared with prior generations. As a result of all these factors, we can expect Millennials to reduce their use of restaurants over the next 5 to 10 years.
Meal Alternatives at the Ready
The broad and growing availability of alternative sources of away-from-home meals also serves to suppress the use of restaurants. Until perhaps 10 years ago, if Americans did not want to prepare a meal from scratch at home, they went to a restaurant. Today, the number of alternatives directly competing with traditional restaurants continues to grow. Three key alternatives to traditional restaurants continue to shape the industry.
Supermarkets represent the most prevalent alternative to traditional restaurants. As sales and profits of commodities purchased from supermarkets have dropped, grocers have turned to prepared foods as a source of increasing customer visits and profitability. Many supermarkets around the country feature expanded fresh-food offerings that include multiple components of lunch and dinner meals. This ranges from side dishes to main courses to desserts.
More forward-thinking supermarket chains, such as Wegmans in the Northeast and Lunds & Byerlys in Minneapolis, now include seating areas in their stores for immediate consumption of prepared foods. Some grocers even create food courts to serve beer and wine along with the food purchased from multiple in-store venues. Why go to a restaurant when the food available from these chains is perceived as being fresher/healthier among many consumers? And, conveniently, consumers can complete their grocery shopping for home on the same trip.
A growing number of non-food retailers now incorporate restaurants into their store designs with the express purpose of attracting additional shoppers. Restoration Hardware (RH) has opened seven upscale restaurants in its locations around the U.S. as a hook to build sales beyond the company’s luxury home furnishings. In New York City and the Minneapolis suburb of Edina, RH’s attractive rooftop venues offer a view of the city through glass-enclosed structures.
One in-store venue worth mention is the new Lululemon restaurant, Fuel, that opened in July 2019 inside the apparel brand’s flagship store in Chicago’s trendy Lincoln Park neighborhood. Coincidently, this Lululemon location was abandoned by Restoration Hardware. The restaurant offers primarily counter service and serves a variety of grab-and-go foods and beverages. Table seating next to the counter encourages customers who have just finished exercise classes to stay and socialize.
“We know that food fuels you, but good food fuels you emotionally, too,” said Maureen Erickson, Lululemon’s VP of experiential retail, when the store opened in July 2019.
To create the menu, Lululemon partnered with Paul Larson, executive chef of Blue Plate Catering, part of Round the Table Hospitality in Chicago. Fuel represents Lululemon’s first foray into a food venture, and the chain considers it an experiment. The company has not announced expansion plans.
All of these examples address a key issue that many retailers have encountered in recent years: how to get customers to visit brick-and-mortar stores. The availability of convenient, high-quality food that supports a retailer’s image has become a strong incentive.
Food Hall Fascination
Though small in number today, the growth rate for food halls is quite high in larger urban areas across the country, where large captive workforces seek new and interesting alternatives to the standard restaurant experience.
Revel opened in the Chicago Loop three-plus years ago, and since that time, several additional food halls have opened in the downtown area.
One of those newly opened food halls is Time Out Market Chicago, which opened in November 2019 in the Fulton Market area; the location is surrounded by multiple large employers who have consolidated office space within a few blocks of the food hall. This is representative of a new set of competitors emerging: companies where foodservice or restaurants are not core elements of their businesses. Time Out, for example, started as a media company, and the Chicago food hall follows the brand extension that the company first created with Time Out Lisbon in 2014. Chicago marked the last of a slew of 2019 Time Out Market openings that included Miami, New York, Boston and Montreal. Future expansion cities include Dubai, London and Prague.
Also late last fall, Bon Appétit magazine opened a delivery-only concept in Chicago with Lettuce Entertain You Enterprises called Bon Appétit, Delivered. It’s marketed as bringing the dishes from the magazine straight to consumers’ tables.
Looking ahead into this year, a new food hall is in the works at Thrive City, near the new Chase Stadium arena built for San Francisco’s Golden State Warriors basketball team. And in Los Angeles, Grand Central Market, a European-style food hall that opened more than 100 years ago, experienced a rebirth via new owners about 5 years ago. Today, it is joined by multiple new food halls in the sprawling downtown Los Angeles area.
What is the appeal of a food hall? From a consumer’s perspective, there is something for everybody. Each location contains various vendors serving different cuisines with a large common seating area. In almost all cases, the food vendors are local establishments, not national chains, creating built-in appeal to younger visitors.
From the operator’s perspective, food halls provide a less expensive outpost with limited floor space and a limited menu requiring limited staffing. Go into any food hall during lunch, and despite long lines, the atmosphere is loud and vibrant. These new venues create a win-win for customers as well as restaurant operators, which makes for fierce competition among local restaurants when food hall operators solicit bids for space. Real estate development firm Cushman & Wakefield forecasts the number of food halls in the U.S. in 2020 will almost triple the number that existed in 2017.
The growth of nontraditional restaurant concepts will only accelerate in the coming years, especially if the existing nontraditional locations continue to be a success. A view of future competition can be seen at Nordstrom NYC, the retailer’s new flagship store in Manhattan. Shoppers can order food from various concepts inside the store and have it delivered to them by headset-enabled salespeople while they shop. Vincent Rossetti, vice president of restaurant operations for Nordstrom, claims the company has installed a total of seven food and beverage options, banking on an unlikely statistic to contend with the current state of retail: One in every four transactions at Nordstrom’s 117 full-line stores is a food or beverage purchase.
While restaurant visits may be declining, nontraditional venues are popping up on the owner/operator end. Non-food retailers, such as Crate & Barrel, are opening in-house restaurants. The first Table at Crate (top) opened last summer and the housewares chain plans to expand the concept to more stores in the future
“It’s the idea of F&B as blood sugar maintenance — to keep shoppers in stores longer,” he says.
Additional forms of competition on the rise will include ghost restaurants, which are simply kitchens created for food preparation with no seating. Customers place orders online or via the phone. Food prepared in these locations will either be delivered or will be picked up at a common counter. In one case, a multibrand ghost kitchen was developed by DoorDash in Northern California. These operations introduced cuisines that the brand did not previously offer in the area.
Airports will continue to see growth of restaurants requiring smaller footprints. These locations are a less expensive option than a typical stand-alone unit for many fast-food brands and benefit from an on-the-go mentality of many travelers looking for a familiar name with fast speed of service and without much regard to price.
Operators on university campuses have built-in, captive audiences who seek convenience of location and who graze much of the day. Again, these outlets require a smaller footprint and fewer employees, and they benefit from a sizable potential employee base.
These account for but a few food options that will have a growing influence on use of traditional restaurants. All have one advantage over traditional restaurant outlets: They all benefit from being closer to their customers when the need for food arises. These restaurants can more easily “go” to their customer than can a traditional outlet. And, they can do so at a lower cost due to a smaller footprint and fewer employees. Given the current/future lack of available labor, development of these types of outlets will accelerate for many operators in the future. These nontraditional locations will become a major source of restaurant unit growth in the U.S. for years to come.
There is one additional factor affecting restaurant use that has primarily impacted chains: private equity (PE). Private equity has become very active in funding acquisition of small and midsized chains. Some chains have struggled to gain their footing since the recession. In some instances, this has led to the closing of some locations. It can be daunting for chains trying to jockey for position in a very crowded marketplace. Having a unique offering or positioning can help in these situations. Many PE companies believe they can turn the acquired business around and then either flip it to a new buyer or manage it if the chain begins to demonstrate long-term potential.
The bottom line is this: In order to survive, some restaurants may identify the need to change in order to remain a relevant option for food. We are seeing interesting new concepts open which seem to have long-term potential. As a result, some existing operators may need to make tweaks to menus and operational efficiency as they attempt to improve image and profits. Successful restaurants of the future may need to evolve further to stand out from the competition.
Americans will not stop eating food. But they will continue to seek new options which provide food and beverages that are more relevant to their current needs. Restaurant operators will have to modify the way they do business in the future if they expect to survive.