Was it really Amazon’s fault?

It’s probably too convenient to just say the Internet killed retail. Or at least retail as we knew it. Of course there’s no denying couch-shopping hurt in-store traffic. The real story, though, is a bit more nuanced. From 1970–2015, malls grew at twice the rate of the population. Was there simply too much retail for too few people? You could ask the same of restaurants.

“The resulting closures are less of an unexpected apocalypse and more of a course correction,” says Partners + Napier.

Or as Warby Parker president Neil Blumenthal puts it: “It’s not the end of retail; it’s the end of bad retail.”

Restaurants happily dove into the real-estate gap left behind. One of the biggest drawbacks in this industry, more so than most, is start-up costs. The retail correction eased the dynamic. Barriers to entry were lowered. Landlords were suddenly willing to negotiate terms and many brands and concepts were born. This is especially true of fast casual. Partners + Napier spoke to Sisha Ortúzar, co-founder of ‘wichcraft, a brand fueled by “Top Chef” head judge and renowned restaurateur Tom Colicchio. He said “everything changed” in New York City two years ago. “Suddenly landlords were going out of their way to get tenants and rents definitely adjusted.”

Per data cited by the WSJ, restaurants are also now growing at twice the rate of the population. You could blame investors for this, to some degree. Since the early 2000s, banks, private-equity firms, and other financial-backed powers have poured billions into the food industry. The reason: restaurants are considered by many investors to be more tangible than dot-com start-ups. Many PE firms have also seen success in taking public restaurant companies private, as a rash of M&A activity recently suggests.

The result, however, stirred a familiar pot of issues. Too many options. Too few customers. Not enough money to go around.

Bankruptcies have proliferated the industry at a far more rapid place. Darren Tristano, CEO of Foodservice Results, said earlier that oversaturation has led to declining traffic. In turn, restaurants are raising prices to remain viable. Those who can’t do so are “on the bubble.”

“They’re struggling with debts and loans,” he said. “They can’t afford to remodel, and they lack the ability to innovate around the menu.”

Dave Bennett, CEO of Mirus Restaurant Solutions, added there’s been an abundance of inexpensive money people dipped into. As interest rates climbed back up, those same people have to write debt at a higher interest rate.

Toss in third-party delivery and added competition—C-stores, grocers, etc.—and restaurants find themselves mired in what Bennett calls “a zero sum game.”

“For every restaurant that opens, we close one,” he said.

Bennett also suggested that restaurants could, essentially, split into two industries due to the same real-estate issues Partners + Napier alluded to.

With rising rents in retail malls and high-traffic areas, such as the urban locations so many fast casuals gravitated toward when prices dropped, the industry is caught at an inflection point, he said. These brands are suddenly strapped with expensive leases, declining guest counts, and high costs (mostly jump-started by wage pressure).

How would the industry split? “Retail focused and convenience, where the food is brought to you,” Bennett said, noting the industry could be headed for a 15 percent reduction over the next few years. That would eliminate roughly 100,000 restaurant sites.

The restaurant correction?

Partners + Napier suggests restaurants could be headed for a similar fate as retail. To put it frankly, restaurants won’t die, but bad ones might. Trend analyst Jess Kimball Leslie was quoted in the report, saying, “restaurants that fall into the ‘ugly middle’ won’t last.”

The market will become bifurcated, with some restaurants focusing only on speed and accessibility and others finding ways to elevate the dine-in experience. Pretty much right in tune with what Bennett said.

It’s further proof of the power of brand distinctiveness in today’s lexicon. And why the “all-things-to-all-people” position is on life support.

As Partners + Napier points out, restaurants that choose convenience will play a role akin to the one e-commerce enjoyed in the retail breakdown. Domino’s and its tech-driven road to 30,000 restaurants is a good example. The chain is thriving in this era as it invests in a frictionless ordering experience.

“There are those who are prepared for what’s coming and are willing to change to meet it, and those who are not prepared,” Ortúzar added in the report. “Only one group will survive.”

The silver lining

Restaurants, unlike retail, have an example to follow (or not follow). They can predict what’s coming next based on what took place roughly a decade ago with companies like Sears and Toys R Us. What separates those survivors from the collapsed brands?

Partners + Napier offered up three learning experiences from the retail correction.

Diversify your revenue sources          

Given there are fewer retail spots to drive foot traffic, restaurants can no longer count on spontaneous transactions. You see this vividly in the mall space, although A centers are still in solid shape.

Here’s a retail example Partners + Napier provided: In LA, Popuphood launched in an attempt to revitalize a struggling neighborhood. It removed barriers for new retail entrants by giving owners six months rent-free to get started. Some were able to turn that benefit into a lasting business. Others were not. Those who succeeded did so by turning their stores into experiences. Operations that went beyond the brick and mortar. Brands with online stores, wholesale businesses, blogs, and Instagram accounts. They showed an ability to adapt.

For restaurants, Moon Juice, also based in LA, wanted to separate from the pack. So the company created a wholesale herbal supplement business in addition to its restaurant fleet. Stores still exist today but “only because [owner Amanda Chantal Bacon] has adjusted her business model to leverage the brand in a different category altogether,” Partners + Napier said.

Create connections on a human level

As companies like Walmart and Amazon redefine access to semi-prepared foods, restaurants need to find a way to offer more human-based knowledge, connection, and experiences, Partners + Napier said. Just as retail did, it comes down to offering guests something they can’t get from a digital competitor.

The example Partners + Napier uses here is fast casual sweetgreen. In an ultra-crowded category, the brand separated itself by going beyond just selling a product. As one story goes, in Washington, D.C., sweetgreen was struggling to generate traffic to its second area location. So it set up a speaker outside and blasted music every weekend. It also handed out samples. “… once we got the customers, we kept them,” co-founder Nicholas Jammet said.

The brand created a lifestyle and vibe that attracted guests who felt they belonged. Sweetgreen provided an experience consumers couldn’t get from their living rooms. In the famed Starbucks model, it came down to cultivating a “third-place” that was worth the price of admission. And one people jostled others to join.

Differentiate

You might label this the obvious target of an oversaturated industry. Create a brand that stands out because it’s a fresh face in a sea of sameness. But how do you get there without attaching your restaurant to a flickering trend? Andrew Martino, principal at Martino Hospitality Consulting and founder of Ghost Truck Kitchen, said in the report, “With ‘regular’ customers less common due to the number of options available, acquisition is increasingly important. Strong branding is definitely a way to make yourself stand out, particularly if your competition is not well-branded.”

The retail example: Target. The company struggled earlier in the 2000s as it became just another discount store. Now (you can credit Netflix for a similar vision), the company is focusing on private-label products, like its Cat & Jack brand. Products that mean something to customers.

Partners + Napier highlighted the following quote from Brian Spaly, co-founder of Bonobos and Trunk Club. It speaks true to restaurants, too. “The idea that everybody needs to be terrified of Amazon is completely wrong. Everybody needs to figure out what makes them special and use those weapons to compete.”

BurgerFi, a fast casual launched in 2011, leans on a very specific message—beef that’s in the top 1 percent of all product worldwide. Read more about the chain’s growth here.

They have very defined selling points to a specific audience: chairs made from upcycled Coke bottles. Tables created from more than 700,000 upcycled milk jugs. Wood-panel walls designed from No. 2 Southern Pine Lumber—renowned for its renewable nature. Ten-foot fans that consume 66 percent less energy. Countertops made from 100 percent compressed recycled paper.

And this all fits and blares to an audience backed by store data. Thirty percent of the brand’s demographics are aged 25-30, with 55 percent female and 45 percent male. Less than 5 percent are 65-plus; less than 10 percent are 55–64. Know who the customer is and go out and meet them.

BurgerFi is also a brand that grew quickly out the gate before things shifted. Between 2013–2015 it added about 25–30 units per year. Executives then hit the pause button to focus on tech, accessibility, and the in-store experience—all in an effort to adapt to an oversaturated better-burger market. The chain opened a call center to field off-premises orders and lessen the four-wall stress for employees, which, in turn, bottlenecked service times. It also worked on GPS-enabled location services, kiosks, and other digital ordering platforms, among other customer-facing changes.

Takeaway

Partners + Napier sums it up. Restaurants have an opportunity, right now, amid the headwinds to build for lasting success. Diversify, connect more deeply with guests, and differentiate. “Those that do will survive the industry contraction and emerge on the other side with fewer competitors. Those that don’t will likely struggle to succeed in the new world,” it said.