Finance | January 2017 | By Jessie Szalay

How Restaurants Can Survive the Economic Downturn

The restaurant downtrend will likely continue through this year, but brands can take steps to safeguard their growth.
Thanks to brand differentiation, Captain D’s maintains strong sales numbers despite an industry-wide downturn. Captain D’s / Tony Clark Photography
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It’s a new year, but many restaurants are looking to the future with apprehension, not enthusiasm.

The slumping sales trend of 2016 is expected to continue into at least the first quarter of 2017. In November, MarketWatch predicted that a recession in the restaurant industry was coming, citing a forecast from Moody’s Investors Service that slashed profit-growth expectations from 5–6 percent in the next 12–18 months to 2–4 percent.

But industry experts, as well as brands that have continued to grow despite the downturn, say operators can take steps to ride out these conditions.

“I know a lot of people in the restaurant industry are down, but this was one of our best years,” says Doug Koegeboehn, chief marketing officer at Wienerschnitzel, of 2016. Last year marked the brand’s fifth consecutive year of improving sales, and Koegeboehn expects the growth to continue.

Tennessee-based Captain D’s has had similar success, reporting its 20th consecutive quarter of strong same-store sales growth in 2016’s Q4.

Both Captain D’s and Wienerschnitzel attribute their success to differentiation of product, brand, and experience. For Captain D’s, items like $4.99 meal deals with whole-muscle proteins, two sides, and hush puppies help the brand stand out.

“We’re successfully democratizing seafood … and our guests are recognizing that and giving us a lot of credit for it,” says Phil Greifeld, president and CEO of the Nashville, Tennessee–based chain.

Wienerschnitzel has partnered with action sports brands like Motocross to promote indulgent menu items that appeal to target audiences. Koegeboehn says such collaborations bring a certain excitement to the brand.

Sources like the Wall Street Journal and The Fiscal Times have debated reasons for the restaurant stagnation, from the Affordable Care Act to decreasing grocery store and gasoline prices to the rise of at-home cooking. One cause that analysts and operators largely agree upon is oversaturation of restaurants. “There are more restaurants than there are people being born to fill them,” Koegeboehn says, pointing to the census from 2002 to 2012, which shows the number of restaurants doubling.

In the wake of the 2008 recession, many people couldn’t afford expensive recreational activities or travel, so eating out became a popular, affordable leisure activity, says Andrew Duguay, senior economist with Prevedere, a predictive analytics company. During the recovery, restaurants expanded rapidly—especially fast casuals, which marry a more sophisticated dining experience with affordable prices.

“I think it turned into something of a bubble,” Duguay says. “In early 2015, we were seeing year-to-year growth in restaurant sales upwards of 9 percent for an industry that typically grows 3–4 percent annually. We hadn’t seen growth like that since the early ’90s.”

Therefore, the predicted growth of 3–4 percent would be a return to reality, as Duguay puts it. He emphasizes that, overall, the economy is healthy and the restaurant industry’s challenge isn’t surviving amid a declining economy, but rather how to capture dollars in a growing economy.

Wienerschnitzel met that challenge by enticing customers with offerings and experiences they can’t get elsewhere. That doesn’t just mean offering deals, which many brands have done in response to the sales slump, Koegeboehn says. “Customers can get two-for-one deals anywhere, and only about 20 percent of people actively seek out deals, and they’re not loyal.”

To differentiate itself from competitors, Wienerschnitzel introduced several different flavors of chili cheese fries, hash browns with toppings called Loaded Po’Taters, and an Oktoberfest bratwurst.

But standing out isn’t only about the food—it’s also about the ideas and the audience, Koegeboehn says. Wienerschnitzel has done extensive research and identified different groups of customers. Among them are deal-seekers, foodies, routine customers, and adventurous, tech-savvy eaters.

“You must understand your audience’s attitudes and behaviors across generations rather than just going for a demographic target,” Koegeboehn says. “Saying [you’re] going to go after millennials won’t work.”

Captain D’s also attracts a wide variety of customers. It has differentiated itself not only by offering quality, affordable seafood, but also through its hospitality, coastal vibe, and elevated environment, Greifeld says.

Focusing on the restaurant experience could be an important tactic for brands looking to weather the financial storm. After the Great Recession, fast casuals were especially popular, as they provided cash-strapped customers with a strong dining experience, Duguay says.

Now that incomes are increasing and the economy is growing, consumers may trade up to full service. Therefore, focusing on convenience, atmosphere, service, and technological offerings like WiFi could be even more important.

In Greifeld’s opinion, now is an ideal time to make reassessments and improvements. The dollars are there, and whether the market is challenged or robust, there will always be winners and losers.

“In this marketplace, the winners will be those that execute extremely well coupled with those that are delivering a very compelling value proposition,” he says.