Industry News | December 8, 2016

Data: Increasing Labor Costs Concern Operators the Most

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Applied Predictive Technologies released its annual State of Business Experimentation report for restaurants. The report outlines what leading restaurants say are the biggest threats to their business and how they are solving these challenges.

Jonathan Marek, head of APT’s restaurant practice, says, “It’s incredible to see the wealth of value that comes from these insights about restaurant strategies. Our restaurant clients are using the data to understand where they’re investing more or less than their peers, and what strategic opportunities lay ahead for 2017. We’re thrilled to share these results more broadly, and are excited by the value they’ll drive for executives who are thinking about conducting more experiments.”

Increasing labor costs, strong growth of traditional competitors, and changing consumer preferences are the three biggest threats to restaurant organizations this year, and restaurants are responding to each of these challenges by experimenting with new innovations. Here are the key trends for each area, and how leading restaurants are reacting.

1. Restaurants are responding to increasing labor costs by conducting pricing, labor, and operational experiments.

Given the recent proliferation of wage rate laws, 30 percent of restaurants identified increasing labor costs as the largest threat to their business in 2016. As a result, many restaurants are preemptively preparing for these new labor costs by testing price increases. Some restaurants also tried new operational strategies to increase employee productivity, including improving training programs, altering compensation and incentives, and adding digital ordering. Conducting business experiments to understand new strategies in a subset of locations before minimum wage changes are enacted gives restaurants an advantage to learn which ideas are most profitable and curtail any negative impacts.

Menu-wide price increases and variable pricing were the most popular pricing strategies that restaurants experimented with in 2015, each tried by 37 percent of restaurants. Other pricing experiments included item-level price increases and localized pricing (11 percent of restaurants). Some restaurants even tested item-level price decreases with the hopes of driving traffic and increasing overall check size.

2. Restaurants are leveraging marketing and promotions to combat growth from traditional competitors.

Growth from traditional competition is heating up, and 25 percent of restaurants named this issue the biggest threat to business in 2016. In response, restaurants experimented with new strategies across a broad range of functional areas. The three most frequently tested areas included marketing and promotions (37 percent of total tests), menu (27 percent of total tests) and capital expenditures (26 percent of total tests).

Within marketing and promotions, restaurants started to test a wider range of mobile, loyalty, and digital initiatives. However, TV-related strategies were still the most frequently tested marketing area, comprising 36 percent of all marketing and promotions tests. New item introductions and localized menu items were the most frequently tested menu ideas.

3. Quick serves and full serves are adopting fast casual elements to satisfy changing consumer preferences.

20 percent of all restaurants identified changing consumer preferences as the biggest risk to business in 2016. The fast casual industry has fulfilled many of the latest consumer needs for healthy, affordable, and quick meals. To keep pace, many quick serves and full serves are adopting elements from the fast casual industry into their business models.

70 percent of quick serves tried adding fresher menu items, and 50 percent invested in in-restaurant technology and order-ahead options. Additionally, quick serves tested upscale remodels, loyalty programs, and tweaks to existing service models. 63 percent of full serves responded to fast casual players by reducing wait times for guests, and other popular strategies included adding lunch offerings, introducing value menu pricing, and adding to-go/delivery services, each tested by 38 percent of restaurants. Experimenting with these strategies is allowing quick serves and full serves to cater to the speed, menu offerings, and overall dining experience that guests desire.

For each of these initiatives, restaurants are finding that business experiments maximize learning and profits. To that end, restaurants conducted over 60 tests during 2015 on average, with the top quartile of restaurants conducting over 125 tests during the year. Restaurants also reported that 27 percent of these ideas did not break even, enforcing the need to test each new idea before broad rollout. By testing each new initiative in a subset of locations and comparing performance to similar restaurants that do not implement the new initiative, restaurants can learn which ideas are most successful. Testing also allows restaurants to learn how initiatives can be refined for further success and targeted to only a subset of the network for maximum benefit.

Biggest Threat to Business in 2016 (percent of restaurants):

  • Increasing labor costs: 30 percent
  • Strong growth of traditional competitors: 25 percent
  • Changing consumer preferences: 20%
  • Economic headwinds: 10 percent
  • Other: 10 percent
  • Continued growth of fast casual: 5 percent

Testing by Functional Area in 2015 (percent of total tests):

  • Marketing & promotions: 37 percent
  • Menu: 27 percent
  • Capital expenditures: 26 percent
  • Labor & operations: 6 percent
  • Pricing: 3 percent
News and information presented in this release has not been corroborated by QSR, Food News Media, or Journalistic, Inc.

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