Outside Insights | September 2016 | By Guest Author

Keeping Up with the Foodie Generation

Driven by Millennials, the U.S. restaurant industry develops a taste for smart, small, and on demand.

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As Millennials have grown up, so have their tastes. And now that they’re entering their 30s, the restaurant industry is rising to meet their expectations. The 75 million Americans who make up this generation are bringing new perspectives, preferences, and expectations to their decisions about which restaurants to visit.

The Millennial generation’s sophisticated palate marks an enormous opportunity for U.S. restaurant industry. Although Baby Boomers spend more money on restaurants, Millennials spend more as a percentage of their overall credit card bills. Clearly, in keeping with their focus on experiences over possessions, this younger generation is primed for restaurants that truly understand what they want.

And the industry is racing to meet this demand, with a surge in well-funded, concept-driven startups in the past five years. Private equity is driving much of this early-stage investment in smaller, less established restaurant brands aiming to be different, even disruptive. And the IPO markets are embracing smaller concepts and rewarding them with high valuations. Those valuations have moved up materially in the public equity markets, with returns on many small- and mid-cap restaurant companies outpacing the S&P in recent years.

Within this new, hyper-competitive landscape, we’ve identified three major trends that will define the winners in the years ahead.

1. Food that stands for something

Much has been said about the cause consciousness of today’s Millennial consumer, and that instinct extends to their choice of restaurants. From Starbucks’ focus on responsibly grown and ethically traded coffee beans to Sweetgreen’s message of inspiriting healthier communities, the these consumers will give their business to restaurants that share their values. For the Panera Bread company, this meant addressing food insecurity in some of their more economically challenged communities by opening Panera Cares Community Cafes, where patrons have the option to pay or not pay according to their circumstances.

Millennials also tend to focus on a restaurant’s commitment to environmental sustainability, ethical treatment of the animals that the food comes from, and fair treatment of farmers and others in the supply chain. Along similar lines, vegetarian and vegan diets are more popular among Millennials than prior generations, prompting restaurants to increase their veggie options.

2. Quality over quantity

The Millennial generation values healthy living and puts a greater emphasis than other generations on “eating right” as a basic requirement for maintaining good health. Health- and value-conscious Millennials are speaking, and restaurant companies are listening. As a result, big portions are out and quality ingredients are in. For companies this has meant a different approach to their supply chains, as organic ingredients, such as antibiotic-free chicken and cage-free eggs, are sourced in a cost-effective manner. For truly ambitious chains, locally grown and seasonal ingredients offer an even more nuanced way to connect to their customers and local suppliers. Ultimately the question for owners is a matter of how much they are prepared to pay for such quality ingredients.

3. A seamless experience online

Like everything else in their digital-dominated lives, Millennials want their restaurant experiences to be fast, seamless, and on-demand. Millennials are much more inclined to use mobile apps to make restaurant reservations (e.g., OpenTable), pay for meals and pay for delivery (e.g., Seamless and Grubhub). Companies have answered in recent years with mobile-optimized websites and sophisticated online menus, which make ordering online easy and delivery or pick-up fast and hassle free. Many customers are almost exclusively ordering over the web and no longer need a brick-and-mortar experience.

Technology has enabled another key innovation, with companies appealing to and deepening their relationships with customers through mobile-enabled loyalty programs. So on one level, technology is expensive and can represent a significant upfront investment for restaurant companies. But the upside can also be significant, so can that initial investment be offset with greater sales or lower labor costs down the line.

A critical time ahead

There is the feeling among restaurant industry watchers that now is a critical time for companies to reach Millennials and truly cement their loyalty. Millennials’ spending at restaurants is reflective of social trends we’re seeing within this generation in other areas, as they get married, buy houses, and have children much later in life than previous generations.

As a generation that entered the workforce during a crippling economic downturn, their mindset has been focused by the need for more affordable luxury. Value is an important watchword for Millennials, as is sincerity. Perhaps also because of this negative experience in their young working years, they want to buy well-made goods from honest companies that are also community-minded.

The challenge for restaurant operators is to adapt and create the kind of dining experience that draws Millennials in the door and wins their loyalty. It is a challenge that already is being met by forward-looking food service enterprises. For restaurant companies that can connect with this generation with a business model and a creative concept that resonates, the table has been set for even more growth in the years ahead.

Roger Matthews is managing director and head of restaurant investment banking at Bank of America Merrill Lynch in New York. Cristin O’Hara is managing director and market executive for restaurant investment banking at Bank of America Merrill Lynch in Boston.


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