The restaurant industry is increasingly splitting in two.
At one end, luxury dining continues to command a customer willing to pay for a truly exceptional experience. Michelin-starred restaurants, high-end steakhouses and special-occasion concepts can still thrive because their customers have the means and motivation to spend.
At the other end, value wins. McDonald’s and other quick-service brands know exactly what they are selling and to whom. When consumers are watching every dollar, an inexpensive meal with a clear value proposition makes sense.
Then there is everyone in the middle.
This is where I believe our economy’s K-shaped recovery is becoming particularly painful. Operators face persistently higher labor, food, occupancy and financing costs while serving a customer who is increasingly sensitive to the price of eating out. Many restaurant groups built for a different economic environment are discovering that raising menu prices again isn’t a viable strategy.
I’ve spent more than two decades turning around troubled companies across industries, and one lesson holds remarkably consistently no matter what the industry: good businesses rarely collapse because of one catastrophic decision. More often, they suffer death by a thousand cuts.
For restaurants in the middle, the answer isn’t another gimmick or a sweeping reinvention. It’s getting relentlessly good at the fundamentals again.
Put the Restaurant Back in the Restaurant Business
Somewhere along the way, parts of the industry began treating restaurants more like investment theses than operating businesses.
I’ve watched sophisticated people approach restaurants with impressive financial models while lacking an appreciation for how extraordinarily difficult these businesses are to operate. You can understand capital structures, growth strategies and unit economics and still not understand what happens inside a restaurant at 7:30 on a Saturday night.
Restaurants are operating businesses first.
That means understanding food execution, labor, throughput, purchasing, the guest experience and the P&L at the individual restaurant level. It means leaders getting close enough to operations to understand not just what a spreadsheet says is wrong, but why it is wrong.
This is especially important for emerging groups with five, 10 or 30 locations. Success can become its own problem. The instincts that allowed a founder to operate two great restaurants don’t automatically become systems capable of supporting 20.
Before adding another strategy, platform or layer of management, operators should ask a more basic question: Does this help us sell more meals profitably or operate our restaurants better?
If the answer is no, challenge why you’re paying for it.
Attack the Slow Killers
Restaurant operators understandably focus on their largest expenses. But smaller costs accumulate quietly.
Technology is a perfect example. Restaurants have assembled increasingly complicated technology stacks involving POS systems, reservations, delivery, loyalty, scheduling, analytics and countless other services. Individually, each may seem defensible. Collectively, the fees on top of fees can become meaningful.
Credit-card fees are another slow killer. Three percent doesn’t sound existential until you consider the amount of revenue passing through cards and the fact that restaurants operate on notoriously thin margins.
Then there is SG&A creep. As businesses grow, expenses accumulate because each one can be individually justified. Eventually nobody steps back and asks whether the organization that exists above the restaurants is actually making the restaurants more profitable.
Operators should go line by line through overhead and ask: If we eliminated this tomorrow, would our guests notice? Would our restaurants perform worse? Would sales decline?
If the answer to all three is no, you should have a very good reason for keeping it.
Don’t Cut the Things That Make People Come Back
Cost reduction, however, is not the same as indiscriminate cutting.
This is where conventional turnaround thinking can be dangerous in restaurants. You cannot spreadsheet your way to hospitality.
Cut labor until service deteriorates, cheapen ingredients until guests notice, eliminate the little touches people remember or stop investing in the community around your restaurants, and you may improve next month’s P&L while damaging next year’s revenue.
Marketing is a good example. A struggling restaurant may see it as discretionary. But for smaller groups, the better question isn’t whether you can afford marketing. It is whether you’re spending those dollars where they actually influence visits.
For many restaurants, that means less emphasis on broad corporate programs and more disciplined local-store marketing. This like relationships with nearby businesses, community involvement, neighborhood events and giving individual operators the tools and accountability to build demand around their restaurants can make an impact.
Protect what creates traffic and loyalty. Cut what doesn’t.
Start Experimenting Again
One of the most dangerous sentences in business is some version of, “That’s how we’ve always done it.” There is no improvement without experimentation.
Restaurant groups need to continually test menu composition, operating hours, labor deployment, purchasing, technology, promotions and the dozens of other variables affecting unit-level economics. Not every experiment will work. That’s the point.
Restaurant operators don’t have to wait for a crisis to start challenging their assumptions.
Ask why you’re doing something the way you’re doing it. Test an alternative in a few locations. Measure the result. Keep what works and abandon what doesn’t.
Know Exactly Why the Customer Chooses You
The middle of the K is difficult because “middle” isn’t much of a value proposition.
If you’re not the economical choice and you’re not the extraordinary experience, you need a compelling answer to why someone should spend their increasingly precious discretionary dollars with you.
That doesn’t necessarily mean moving down-market or up-market. It means understanding what you’re uniquely good at and making sure the operating model supports it.
The restaurant business has always been brutally difficult. Inflation, debt and a pressured consumer have made it harder, but difficult does not mean doomed.
There are a lot of fundamentally good restaurant businesses caught in a bad environment. Many don’t need to be reinvented. They need operational accountability, disciplined experimentation and leaders willing to get close enough to the restaurants to see what’s actually happening.
The restaurant business is simple.
Simple is just incredibly hard to execute
Jeff Sands is an award-winning turnaround executive who has spent more than two decades revitalizing distressed companies, restructuring debt and helping businesses regain their footing across dozens of industries. A three-time Turnaround Management Association Turnaround of the Year Award winner, he is also the author of Corporate Turnaround Artistry: Fix Any Business in 100 Days, published by Wiley.
James Vitrano, Esq. is a seasoned C-suite executive and corporate attorney with more than 20 years of experience driving growth, turnarounds and value creation across restaurant and hospitality businesses, including leadership roles with Fat Tuesday, Sucré, Ruby Tuesday and Einstein Noah. He has led more than $400 million in M&A transactions and specializes in stabilizing underperforming businesses, improving profitability and building scalable organizations positioned for growth and successful strategic transactions.
