5 Things to Watch in 2013
Last year was marked by continued economic uncertainty, the rapid expansion of the fast-casual segment, a devastating drought, and innovative new menu items and promotions. Here are the five top trends that will affect restaurants in 2013.
1. Competing with Fast Casual: The Quick-Serve Empires Try to Strike Back
Fast-casual restaurants continue to grow faster than quick serves. While the fast-casual sector has distinguished itself with ambience and food quality, quick serves have generally underinvested through the weaker economy, resulting in outdated locations, deferred maintenance, and food innovation generally focused on value. The pressure will come to a head in 2013, as more quick-serve brandss will attempt to compete with fast casual by investing in upscale seating and décor, cleaner and more inviting designs, and food improvements.
In 2013, executives will invest tens of millions of dollars remodeling their restaurants, while trying to convince franchisees to willingly spend hundreds of millions more to do the same. Already, restaurant chains from Panda Express to Domino’s to El Pollo Loco have begun extensive remodel programs that include such elements as open kitchens, metalwork, new LED lights, large TVs, and exterior enhancements. However, as many restaurant chains have learned in the past, some of these remodels will not work, and unprofitable capital investments will cause the valuation of some restaurants to suffer for years to come. Those that will fare the best will understand exactly which remodel components are needed in each location to drive the greatest return on invested capital.
To compete on food quality, quick serves will continue to introduce new health-focused menu items, often with upscale flavor profiles, and support these launches with significant media investments. In 2012, we saw a number of such menu item introductions (such as Taco Bell’s Cantina Bell menu) that were coupled with competitive advertisements. With nutritional labeling regulation on the rise as well, expect this trend to accelerate in 2013 and 2014.
2. Labor Costs: Uncertainties Create New Opportunities
Employee-mandated health coverage, part of the Patient Protection and Affordable Care Act, is set to take effect in 2014 for businesses with more than 50 full-time employees. Although some restaurants already offer health coverage to full-time employees, many others will be challenged by rising costs. This additional cost will place a renewed emphasis on profitability and productivity. Given that all restaurants will face these changes together, the chains that take the right steps to improve productivity and staffing levels in 2013 will benefit for years to come at the expense of those that falter.
The most cost-efficient and low-risk way to determine optimal staffing levels is to analyze “natural experiments” of past changes in labor and staffing. By efficiently mining historic data, restaurants can identify instances in which staffing levels changed—due to employee turnover, hiring, etc.—in some locations but not others, and measure the causal relationship between these changes and key performance metrics. This type of analysis can help answer critical questions, such as: Where can restaurants get by with lower staffing? Where can we increase the level of part-time employees relative to full-time? Where are full time employees worth the additional cost due to their ability to improve guest satisfaction and generate repeat business? The most advanced restaurant chains will find answers to these questions and unlock a competitive advantage.
3. Pricing: The Conflict Continues
The severe drought throughout the Midwest in 2012 will likely continue to weigh on commodity costs in 2013. As food costs remain a concern, and as labor costs increase as well, restaurants will keep using menu pricing as a lever to reduce margin pressures. For the most part, restaurants managed this effectively in 2012, but as consumer pressures continue in 2013, executives will be faced with figuring out how to deal with the continued conflict between rising costs and tightening wallets.
When deciding whether or not to roll out price increases, executives will need to consider impacts on average check size, check composition, and guest count; targeting price increases to incorrect items may cause guests to purchase lower-margin items or result in lost guest visits. Restaurants will increasingly utilize more granular check-level data to understand which items can profitably support price increases. These are often subtle changes, but have a powerful impact on a restaurant’s economics. Those that build a rigorous and ongoing program of price testing into their normal course of business will have a distinct advantage.
4. Mobile: It’s More Than Following Food Trucks
Likely, 2013 will be the year mobile advertising becomes more mainstream. Though it won’t reach the levels of traditional media, mobile search and display may begin to challenge desktop search and display in the ad budgets of leading restaurant chains. The best restaurants will test restaurants with geo-targeted mobile campaigns in order to understand the true incremental benefit of these programs.
In the past year, we have seen top restaurant brands introduce or refine their mobile apps. Led by Starbucks’ breakthrough mobile payment app, many of these apps integrate mobile ordering and payment, along with basic features such as restaurant locators. In 2013, many third-party players will vie to expand their payment and loyalty solutions for restaurants, as well. Beyond simply creating another customer touch point, the best apps provide restaurants with an opportunity many have never had before: the ability to use customer data to optimize marketing and promotional activities. By first trying a promotion with a small group of representative customers, executives can not only determine the overall impact of their programs, but can also refine their promotions to make sure that they are truly driving incremental or larger checks and not just giving away money to guests who would have purchased anyway.
5. Technology: Ordering in HD
In-restaurant technology investments are no longer limited to just back-of-the-house operational initiatives or POS systems; increasingly, restaurants are turning to technology investments that directly improve guest experience. Using iPads creatively and installing WiFi are two steps restaurants can take (while debuting at Barbacco, iPads are not just for trendy San Francisco restaurants anymore, as anyone passing through Minneapolis-St. Paul airport restaurants can attest). Additionally, digital menuboards may be a key investment in 2013—their more customizable nature makes it easier to display flexible LTOs and to comply with regulations about displaying calorie count. Furthermore, digital menus will allow restaurants to more easily run tests regarding menu layout, messaging, pricing, and promotions. As with any investment, understanding which locations will respond profitably to changes is central to increasing program NPV.
Across all of these areas of the business, industry leaders such as Darden, Wendy’s, Panera, and others have found that the best way to profitably respond to industry trends is by running scientific in-market tests. Such tests allow restaurants to de-risk new ideas and keep pace with fast-moving consumer preferences.
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