Outside Insights | December 2013 | By Jonathan Marek

What’s Cooking for 2014?

An industry analyst’s take on restaurant trends we should expect in 2014.

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New types of competitors, digital innovation, and rapid economic changes are transforming the restaurant business. Based on Applied Predictive Technologies’ ongoing partnerships with the world’s leading restaurants, here are the key trends to look out for in 2014.

1. Taking advantage of mobile ordering. Pizza giants Papa John’s, Domino’s, and Pizza Hut report that a significant portion of their sales now come through digital orders. BJ’s Restaurants and numerous other casual-dining players similarly offer online ordering. Though many larger chains have built their own digital systems, apps such as Seamless, GrubHub, and Order Ahead are enabling smaller concepts to take advantage of digital ordering. As an increasing number of consumers order online, chains may have an opportunity to reallocate labor, increasing order efficiency and reducing costs.

However, restaurants will need to carefully understand how digital ordering impacts check size, as traditional upselling methods, including menu inserts and suggestive selling by servers, are not possible in the digital environment. Using the data collected through online orders, restaurants will increasingly test promotions and upsell offers built into apps. Restaurants will also test new labor strategies to adjust for the possibility of reduced labor needs in some positions.

As restaurant chains install digital menuboards or tablet-based menus, they will have an opportunity to more effectively change prices based on historic demand during the given day of the week or time of day.

2. Making dough through variable pricing. For years, airlines and hotels have added millions of dollars to their bottom line through variable pricing strategies. Restaurant chains similarly understand that reducing price during off-peak hours can be a successful strategy to drive traffic. Typical tactics include happy hours and “Kids Eat Free” promotions on slower weekdays. As an increasing number of restaurant chains install digital menuboards or tablet-based menus, they will have a good opportunity to more effectively change prices based on historic demand during the given day of the week or time of day. And since an empty table is lost revenue, an entrée that costs $15 on Friday evenings could be profitably sold for much less on Wednesdays. Digital menus will also enable more cost-efficient and easy-to-implement price testing.

3. Growing slower dayparts. Making better use of existing assets has always been key to profitable same-store sales growth, and it appears that this trend is picking up. Jack in the Box is pushing the boundaries of late night with its “Jack’s Munchie Meals,” which includes such items as The Exploding Cheesy Chicken Sandwich. Meanwhile, casual diners continue to fight back against the onslaught of fast-casual competition, with numerous casual-dining brands offering faster lunch options at cheaper prices than their fast-casual counterparts.
As restaurants implement new daypart-specific programs, they will need to determine whether sales in the target daypart are truly incremental or if they simply cannibalize demand from other meals. Additionally, restaurants will need to figure out where daypart-specific programs (e.g. expedited lunch programs, increased advertising focused on breakfast, etc.) will have the highest return. For example, a casual-dining restaurant located in an area with many businesses nearby may see a lot of success with a new lunch program, while a quick serve may experience success with a late-night program close to college campuses.

4. Efficient staffing for better cost management. California’s minimum wage is set to rise by $1 to $9 an hour on July 1, 2014, and will increase to $10 in 2016. As this and other wage increases take effect, understanding which strategies will help offset the increase in restaurants’ second-largest cost will be crucial. To offset rising labor costs, restaurants will look to streamline complex menus in order to reduce service time, implement technologies that enable more efficient ordering, optimize labor hours during slower dayparts, and test new service formats.

5. Daily deals lose appeal. Despite a solid rebound from late 2012, Groupon is trading at less than half of its IPO price, which may be an indicator that the future for daily deals is not bright. For restaurants with low brand awareness, daily deals have a chance of being profitable by generating incremental trials that may lead to full-priced future visits. Additionally, deals focused on add-ons, such as $5 for $10 in drinks, are likely to lead to checks that include profitable full-priced entrées.

Unfortunately, daily deals are often redeemed by guests who would have purchased anyway; after taking into account the decreased selling point and revenue split with the daily deal provider, the initial economics of such deals look bleak. Restaurant chain operators should test daily deals, and all promotions, to understand if redeemed deals are actually generating incremental trips and larger transactions, or if they are simply giving away money.

Across of all these areas, more than 25 restaurant brands, including Darden, Wendy’s, Panera, P.F. Chang’s, and Denny’s, have found that the best way to profitably respond to emerging trends is by running scientific in-market tests. Such tests allow restaurants to be maximally creative with minimal risk and keep pace with changing consumer preferences, regulations, and technologies.

Jonathan Marek is senior vice president at Applied Predictive Technologies, a software company that provides business analytics software to enable leaders to make better, fact-based decisions faster and more efficiently.