Consumer Trends | December 2012 | By Barney Wolf

12 for ’12

The biggest stories that shaped the restaurant industry this year.

New Yorkers protested a city wide sugary beverage ban in 2012.
Many New Yorkers were opposed to the sugary beverage ban. flickr/Bonnie Natko
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Our athletes went to the Olympics, our science went to Mars, and our people went to the polls. But what of the restaurant industry in 2012? These dozen items from the year had the biggest impact on the foodservice landscape and shaped the industry for a potentially game-changing 2013.

An Economy in Flux

The economic recovery isn’t lighting a fire under anyone’s feet, but the economy did at least improve, albeit slightly.

As of August, the National Restaurant Association’s (NRA) Restaurant Performance Index had been positive for nine consecutive months. It has since been weakening, however, indicating operators are less optimistic about economic conditions going into 2013.

“In the winter quarter [of 2012], we started to see things looking good,” says Bonnie Riggs, restaurant analyst with NPD Group, a Chicago market research company. “We thought we turned the corner. But then gasoline prices increased and people pulled back.”

The Congressional Budget Office’s outlook is for the economy to grow less than 2 percent in 2013. The Conference Board, a business group, is slightly more optimistic, estimating growth at 2.2 percent.

However, if Congress fails to avert a series of tax hikes and budget cuts due in January—the so-called “fiscal cliff”—analysts warn another recession could ensue, which could undo any kind of progress quick-service operators have made.

Health Headaches and Solutions

Health issues continue to impact restaurants, both in menu development and how operators deal with the Patient Protection and Affordable Care Act (PPACA), also known as “Obamacare.”

The U.S. Supreme Court this year upheld the constitutionality of most of PPACA.

Many restaurants may need to undergo some significant cost analyses next year to prepare for a wide range of regulations scheduled to begin in 2014.

“We’re going to see a lot of financial modeling going forward, and deciding how to manage the costs,” says Dennis Lombardi, executive vice president of foodservice strategies at WD Partners, a Columbus, Ohio, design and consulting firm. “It seems the way it may be playing out is to find ways to keep employee hours down and make more of them part-timers.”

One portion of the act that may go into effect in 2013 requires chain restaurants with 20 or more locations to display calories on menuboards.

Many companies have decided not to wait for the law’s implementation, though, including McDonald’s. In September, all of McDonald’s 14,000-plus U.S. restaurants began listing calorie counts on menuboards.

The proactive move by McDonald’s “is a real positive,” says Darren Tristano, executive vice president of Technomic Inc., a Chicago consulting and market research firm.

The calorie numbers “may be more of a shock at first, but when [consumers] return, they will still want to indulge,” Tristano says. “That’s what you do when you go out.”

Meanwhile, all types of limited-service operators began offering better-for-you alternatives, from oatmeal to sweet potato fries.

The Big Soda Ban

Any consumer who plans to visit a restaurant in New York City in March or after shouldn’t expect to buy sugar-sweetened beverages larger than 16 ounces. They’re outlawed.

In a stated bid to combat obesity, the city’s Board of Health instituted the ban at eateries, movie theaters, and other venues.

Restaurants call the action unfair, in part because it still allows larger drinks to be purchased at retail outlets and convenience stores. Whether the ban sweeps across the country, like the city’s earlier action against trans fats, is still up in the air.

We’ll have to take a wait-and-see approach,” Technomic’s Darren Tristano says. “I suspect if history serves us, it will likely become a political issue … and likely will spread to other cities.”

Commodity Costs Rise

The most severe drought in a quarter century has had a serious impact on U.S. agriculture and food prices. The damage done to corn and other crops was extensive and resulted in higher direct and indirect costs.

Many ranchers are running out of grass. Unable to grow enough feed crops—or unwilling to pay for higher priced feed—they are thinning their herds by selling cattle early. That will likely result in fewer cattle going to market next year, making beef and other proteins more expensive, according to the U.S. Department of Agriculture (USDA).

Wholesale beef prices were already up 10.5 percent by 2012’s third quarter, while poultry prices increased 11.5 percent. Heat stress and higher feed costs are expected to reduce pork production as well, the department says.

“If you look at the USDA forecast for a year ago, there was no contingency for a drought of this severity and duration,” says Hudson Riehle, senior vice president of the NRA’s Research and Knowledge Group.

Interactive Imitation

Consumers increasingly want to know more about what’s in their food, and also desire the ability to customize their dishes more than ever before. For years, quick-service concepts such as Chipotle and Subway have capitalized on this desire by giving guests the ability to craft their own dishes, choosing from an array of fresh ingredients.

In 2012, this build-your-own strategy continued to become more rule than exception, expanding into categories like pizza and even ethnic concepts. Newer brands, such as Pie Five, Atlanta’s Uncle Maddio’s, and Washington, D.C.’s Amsterdam Falafelshop, are now thriving on the model.

“We expect to see this basic model growing,” Tristano says. “Customers want to be part of the process, and the visual impact is important. Interactivity engages the customer. This is an emotional connection that makes loyal fans of these restaurants.”

A New Kind of Trade Down

Most of the restaurant industry suffered during the recession, but fast-casual restaurants still performed well. Folks may not have been eating out as often, but when they did, they were looking for quality and value. Many found those attributes at Chipotle, Panera Bread, and their fast-casual peers.

Numerous full-service restaurant companies took notice.

“Casual-dining chains continue to look at whether they have a limited-service opportunity,” Lombardi says. “It allows them to extend the reach of their brand, and in some cases move into areas where full service may not work as well.”

Abuelo’s Mexican Restaurant is one of the latest casual chains to open a fast-casual offshoot, which it did this year with its Abuelo’s Taqueria in Lubbock, Texas. The menu items and pricing are focused on promoting frequent dining.

The opening comes on the heels of several new ventures launched by casual chains in late 2011, including Red Robin’s Burger Works and Pizza Inn’s Pie Five.

Pie Five, which makes handcrafted pizzas in five minutes, has more than a half-dozen corporate-owned locations in the Dallas area.

“We will be looking at other markets [in 2013] from a corporate standpoint, as well as domestic and international franchising,” says Madison Jobe, senior vice president and chief development officer for Pie Five and Pizza Inn.

Other chains launching fast-casual units included Steak ‘n Shake, with its Signature unit in New York; Shoney’s, with Shoney’s On the Go; FATZ, with Tablefields Market Kitchen; and global beef bowl giant Yoshinoya, with Asiana Grill Yoshinoya.

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