25 Scary Things Keeping Restaurant CEOs Awake at Night

One thing is for certain – there’s a lot more uncertainty in the world today. And it’s having an impact on not just the economy around the world, but the restaurant business and sleeping habits of restaurant CEOs forced to contend with increasingly complex challenges brought on by globalization and modernization. So, let’s take a look at just 25 of what are literally hundreds of attention-demanding dots blipping around on the radar of restaurant CEOs today.

These are not paper dragons (nor are they doomsday fearmongering). These are just a few examples of the real bear traps, trip wires, land mines, and hungry tigers waiting in the woods for restaurant CEOs these days.

Labor Regulations

1

LABOR COST IMPACT (MINIMUM WAGE, OVERTIME, NATIONALIZATION)

There isn’t a restaurant in America that will be unaffected by the upcoming increases to minimum wage and new overtime rulings. Some will benefit while others will suffer. Most remain unprepared for what’s coming and ill-equipped to adequately address operational changes or build the sophisticated labor models to even understand the impact, much less apply the industrial engineering and analytical and forecasting tools that will be required to remain competitive in the future. And it’s not just a U.S. challenge. Around the world, similar pressures on labor costs and management will command the attention of the CEO (Brexit, nationalization programs like Saudi Arabia’s Nitaqat, etc.).

  • Of the 14.4 million restaurant industry employees, 7.1 million work for minimum wage.
  • New overtime regulations increasing the minimum threshold for overtime exemption from $23,660 to $47,476 will affect approximately 4.2 million Americans. The overtime rule is currently on hold per a Federal judge’s request but, in the meantime, robots are taking over the restaurant industry — so there’s that to worry about, too.
2

INCREASED COMMODITY COSTS & OIL PRICES

One-fifth of the cost of food is derived from the price of oil. So, while food and packaging costs are down a bit now, we all know they’re headed back up again very soon; and with it so too will the costs and impact to the P&L that CEOs need to explain away on calls with analysts.

3

FINICKY MILLENNIALS

They represent one third of the American population and are now the single most important restaurant demographic. Twenty percent of them will switch brands they’re loyal to in a hot second in support of a company with a (better) purpose (beyond profits alone), and half of them are in seek of employment with businesses that put ethics first. Forty percent of this finicky demographic orders something different every time they go to a restaurant. They’re twice as likely as Boomers to eat organic and 80% of them want to know how and where their food is grown.

Three out of four of Millennials prefer to spend money on experiences rather than consumer goods, so those marketing departments focused on discounts and promotions have it all wrong. And for all those thinking we’re in a restaurant recession, consider that 87% of Millennials will splurge on a nice meal even when money is tight. So, needless to say, Boomers and Gen Xers in restaurant CEO roles are staying up a bit later at night considering Millennials may be more than just an over-used buzzword; it may be part of their salvation (if they get it right).

Labor Pool

4

LABOR POOL BECOMING A PUDDLE

A low unemployment rate is a great thing if you’re a politician claiming responsibility. But if you’re a restaurant chain CEO or head of HR, you know it’s a serious factor in plotting new unit growth, labor costs, and serving the guest. As unemployment rates lower – a good thing on many levels – it also means a draining of the talent pool and in many markets all that’s left is a puddle.

Activist Investors

5

ACTIVIST INVESTORS, BLOGGERS & JOURNALISTS

No one is safe these days from Twitter-fast news cycles and risks that come with everyone carrying a camera device looking for something shocking to post. It used to be an upset patron would tell 10 people, now they may Tweet 10,000 while still sitting at the table; or upload a 6 second Vine to validate themselves while simultaneously wreaking havoc on your brand in a viral flash. The failures of restaurants make for easy ratings (so you can be sure anyone looking for ratings is eager to find a foothold in your brand).

And it’s not just camera-carrying critics, ratings-craving reporters, and activist bloggers; activist investors are also setting their sights on the restaurant industry. Even one of the most successful casual dining restaurant (CDR) chains in the industry (Darden) was put through the wringer by Starboard; forcing dramatic changes on the brand and business. McDonald’s, YUM, Buffalo Wild Wings, Panera, Chipotle, and others are also under fire from activist investors. Any CEO staring down this barrel would understandably need a tube of Tums.

6

GROCERY STORES, FAST CASUAL 2.0, READY MEAL KITS, & DELIVERY

After years of taking share from grocery stores, they’ve finally figured out new ways to claw lost customers back. And it’s working. There was a monthly yo-yo pattern in 2016 between restaurants and grocery stores for share of the American food dollar. Fast casual operators continue to grow at a rate double to quadruple that of QSRs and FSRs have for years on end. Expect fast casual 2.0 to kick in booster rockets and continue this customer migration from the big guys of yesterday to the new national brands of tomorrow (like Tender Greens, fast casual pizza players, etc.). The Ready Meal Kit industry (companies like Blue Apron, Hello Fresh, etc.) has come out of nowhere and already has 1% of the U.S. food dollar; and they’re only just getting started. Now with sophisticated (think Silicon-Valley-smart) and well-funded new delivery players (billions raised in the last 12-months to fund food delivery companies globally) there will be tens of billions in commerce and transactions shifting from traditional options (of dine-in, take-away, and drive-thru) shifting to delivery; reshaping the industry. We will soon see a lot more empty restaurants and a lot more delivery vehicles (having impact on future location strategies, restaurant layouts and equipment plans, and labor models).

7

SATURATION AND CANNIBALIZATION

The only way a new restaurant can open in the U.S. these days is if another one closes. The U.S. restaurant industry grows at around the pace of inflation and population (in some less saturated and mature markets, it can grow at a faster pace if it is taking share from traditional grocery stores as the U.S. restaurant industry did for many decades to reach the 50/50 split we see today).

As the U.S. population and inflation rates remain very steady, the only way emerging brands and categories can grow at the double-digit rates we see in so many pockets today is if they take it from somewhere else (like casual dining restaurants and other concepts and culinary strategies out of sync with the rapid shifts in consumer dining behaviors and consumption trends).

8

INTELLECTUAL COPYCATS, CROOKS & CHAMELEONS

Neuroscientists have now quantified that approximately 20% of the human brain is made up of what’s called “mirror neurons”. These are basically the copycat gene that – while helping us learn how to walk, eat, and stay alive as infants – is also still present in the adult brain and invariably means the less creative among us will copy the best examples of success they can find.

So, if you’re successful, you will have a limited window to capitalize on it before having your best ideas knocked off and replicated by quasi-competitors with chameleon-like abilities. And it’s not only an external threat. Many restaurant companies have had their valuable intellectual property walk out the door with former employees and managers that don’t so much see it as stealing as taking a shortcut to success. The CEO has to worry with not only making sure the company I.P. is locked down, but also steer clear of the other crooks, charlatans, and other corporate risks to intellectual capital.

9

TALENT POACHING

It’s not just your intellectual property and capital that’s at risk, it’s also your human capital. Today workers expect to be treated like paid volunteers; therefore, the CEO must consider more than just pay, perks, and promotions as a means of keeping top talent; they must now also factor in how to build a company “cause” (beyond a vision; a purpose) that will win the talent wars not just by what is put in their wallets but what is put in their hearts and minds in terms of work that has meaning.

10

EXECUTIVE COMPENSATION

If the board doesn’t pay enough, they won’t get the best CEO; and it trickles down the organizational chart from there. However, if they’re paid too much, the scrutiny and public outcry can also damage the company reputation and morale of the crew. QSR executives are often harshly criticized that the CEO can make as much as $26,000 (USD) per hour while the bulk of the company workers make minimum wage.

11

INGREDIENTS, SOURCING, SUPPLY CHAIN, SENSE OF PLACE & SENSE OF SEASON

Not getting it right on supply chain logistics can cost a company a lot more than just higher food costs; it can also limit growth into new markets, weaken the competitive proposition, and in terms of brand relevance and reverence on behalf of the consumer. Nearly a quarter of all American’s are willing to pay more for local food and drinks and 41% say locally sourced ingredients influence their restaurant choices.

A survey of professional chefs polled about their views on top food trends in 2016 shows a clear pattern (found repeatedly across all sorts of similar studies) – the supply chain, sourcing, and offering both a sense of place and sense of season in the menu resonates powerfully with today’s consumer. This requires a multi-functional team (made up of both internal leaders and external experts), on a mandate from the CEO, within any restaurant chain to adequately address in the present and properly plan for the future.

Culinary Themes

12

TRANSPARENCY, ACCOUNTABILITY, TRACEABILITY

While the consumer is certainly looking for more transparency (68% of consumers are familiar with the term “transparency” as it relates to a company’s business practices) with regard to where their food comes from, the ingredients, and corporate social responsibility, there is also another reason to wade through the complexities of a more modernized and responsible supply chain – the benefits of traceability.

Investments in traceability technologies and SOP can help a restaurant brand by: improving consumer trust, lowering liability costs, mitigating concerns related to the rise in counterfeit products and risks related to more food coming from countries with lower health and safety standards, being proactive against the increased threat of terrorism via the food supply, mitigating the economic loss from negative impact of recalls, and helping bolster the fragile consumer confidence and rising distrust of the food supply.

The Grocery Manufacturers Association in the U.S. estimated that the financial impact of a recall is over $10M in 52% of the cases and 23% exceed $30M. While restaurant CEOs trust their supply chain and food safety teams to get this right – which they almost always do – it only takes a small slip to bring down a big brand so this dot has to also remain on the radar for the CEO (also the same individual that will be called on to answer for any mishaps at any possible broken link within their supply chain).

13

FOOD SAFETY

It should be enough to terrify any restaurant CEO or restaurant industry investor to witness the $11.5 billion evisceration of market capitalization from Chipotle. While more on our minds now than a year ago, given their troubles, most companies still aren’t equipped to deal with the crisis communications fallout (and more important than that is avoiding the crisis in the first place).

  • Each year foodborne illnesses sicken 48 million Americans (approximately 17% of people in the United States) and lead to 128,000 hospitalizations and 3,000 deaths
  • Chipotle lost more than $11 billion in market capitalization following six food safety scares from July through December of 2015
  • Also see the 22 Biggest Crisis Communications Challenges in Restaurant History
14

FOOD SECURITY

There are 48.1 million Americans living in food-insecure households. Food loss from full-service restaurants in the United States accounts for 49.3 million pounds, and an additional 85.1 million pounds in loss from quick service restaurants. Re-purposing this waste would account for 2.8 pounds of food per each person living in a food-insecure house. With so many millions of Americans going to bed hungry every night and so many millions of pounds of food wasted, responsible restaurant CEOs have an obligation to give this fact a moment of their time and consider what role – if any – their company should play in bridging the divide.

15

ELECTIONS & GEOPOLITICAL INFLUENCES

In a recent survey of 1,400 chief executives of the globe’s largest companies 74% cited “geopolitical uncertainty” and 73% listed “exchange rate volatility” as big threats to business growth. As mature brands are increasingly pushed to look abroad for growth, the complexities of running an already complex business such as a restaurant chain are multiplied.

Add in other concerns with multi-national operations such as social instability, restlessness, large scale voluntary (and involuntary) migration, political upheaval, climate change-provoked food and water crises, economic volatility, regulatory changes, tax code changes, and uncertainty due to elections in all of the markets a restaurant chain may operate in now or plan to, it’s enough to keep not just the legal and accounting departments busy, it’s enough to have a CEO age before your very eyes.

16

EXECUTIVE SAFETY & SECURITY

As restaurant chains increasingly sprawl their systems out over the map, executives are more mobile and in the field in unfamiliar territories. While many of the large chains have risk management programs and training in place to teach mobile executives how to reduce their risk of being kidnapped or victims of violence, there remains a growing risk in important emerging restaurant markets that are attractive for growth.

In 2011, the Mexican government reported a more than 300% increase in kidnappings since 2005 (but many believe these figures to be seriously underestimated). The New York Times found that Al Qaeda and its affiliates pulled in well over $125 million in kidnapping for ransom from 2008 to 2013. Some consultants dealing directly with clients lacking kidnapping coverage for executives charge $3,000 per day, and that will need to be paid upfront well ahead of the actual ransom and extortion costs.

17

THE TIPPING DEBATE

The federal tipped minimum wage has been $2.13 since 1991. To put this into perspective, there have been six increases in the non-tipped wage since. Tipped employees have a median wage (including tips) of $10.22, compared with $16.48 for all workers.

To help even the playing field between front of house (often tipped) and back of house (not tipped) employees, the “to tip or not to tip” debate has been snagging global headlines (see Aaron Allen interviewed on the subject here). Some even made claims that the “U.S. has banned tipping” (though it was just Danny Meyer’s 15 or so restaurants in New York who implemented a “hospitality included” policy). Joe’s Crab Shack implemented a no-tipping policy at 18 of its restaurants, and at 14 of the test locations sales dropped between 8 – 10%, or a loss of about $300,000 in revenue per store, or an equivalent of about $630,000 in total tips lost for its servers. In Q1 2016, Ignite Restaurant Group (Joe’s Crab Shack’s parent company) sales were down from $122.1 million (2015) to $117.9 million (2016). This decrease of $4.2 million, or 3.4%, is about the equivalent of the 8 – 10% loss seen by the 14 no-tipping test locations.

18

TORT REFORM, LIABILITY & LAWSUITS

One easy way to know if you’ve made it is whether or not you’ve been sued. For any famous brand or successful business, it is almost a certainty you will be sued. That doesn’t mean that when it happens it will bring the CEO joy. What it likely means is months or years in meetings with lawyers dragging them through depositions, legal discovery (another way of saying legalized torture for business folks … basically it’s like having your fingernails pulled off but instead of with plyers it’s with intrusive questions and backroom bullying fierce lawyers billing out at $700+ per hour based largely on how uncomfortable they can make someone so they will settle to make it all stop), and ultimately the cost to board and business is ghastly.

The plans of the CEO can quickly be sidetracked by unexpected and costly litigation (if worrying that it might happen doesn’t keep the CEO awake, going through it almost certainly will).

19

SUSTAINABILITY & SPECIES EXTINCTION

Fifty-five percent of global consumers are willing to pay more for products and services provided by companies that are committed to positive social and environmental impact.

Along with the social pressures of being sustainable, restaurants will need to start paying attention to their supply chain and what kinds of items they are serving, and plan to serve in years ahead. Humans are creating the sixth great extinction of animals, and the extinction rate for species in the 20th century is up to 100 times higher than it would have been without man’s impact. As CEO, one must ask of the company, what’s our impact, position, and responsibility?

20

CROPS, COMMODITIES & CLIMATE CHANGE

Of course, the cost of raw food ingredients will have a significant impact on restaurant profit margins. Climate change trends and droughts have been steadily increasing the prices of food since 2010 – with the price of beef increasing by 34%, attributed to droughts in California and Texas. Produce prices have increased an average of 5% in the last two years (again with the California drought being the main factor).

It’s not just domestic influences either, as international production patterns and subsequent demand increases affect prices worldwide. While commodity markets, naturely, aren’t in the control of restaurant executives, appropriate monitoring and, more importantly, forecasting of food prices is critical when planning menu items and promotions.

21

PSYCHOGRAPHICS VERSUS DEMOGRAPHICS

As little as just a decade ago, restaurant marketing was pretty straight forward. It came down to media buys, ad value equivalency, and demographic segmentation. Today, restaurant CEOs have to check in with their head of marketing to be sure the company is staying on top of not just digital, social, mobile, web, sophisticated new approaches to CRM and loyalty; they have to also be sure the company is anticipating what’s next (and already applying the new sciences of neuromarketing, sensory branding, and have things like their signature scent and olfactory logos in place).

They must also segment and appeal to their audiences based on psychographic classifications (it’s not how old they are, but how old they feel and act; it’s no longer about ad impressions as a measure of brand strength and awareness, it’s about relevance to how your brand is perceived and how your current and prospective customers and employees self-identify). People now buy brands based on how well it reflects on them and how they see themselves (otherwise it’s based on price and convenience which aren’t always the most profitable proposition for growth-minded companies). This may sound like a lot of nuance, but it’s far from it; it’s neuroscience and something else that must now be on the CEOs radar.

Cybersecurity

22

DATA BREACHES & CYBERSECURITY

Data breaches have become more and more common in both the retail and restaurant industries. Following debit card information being stolen at more than 1,000 Wendy’s locations earlier this year, the company was served with a class-action lawsuit and its stock price took a significant hit (which it still hasn’t recovered from).

Technology is increasingly critical to running a successful restaurant. With 78% of customers preferring to pay with either a credit or debit card, and the fact that 87 percent of customers would not (or would not be very likely to) shop at a company that had faced a data breach involving credit or debit card information, failing to protect the company from cybersecurity threats is too big of a liability to let it slip the mind of the CEO.

23

TERRORISM, TRAGEDY & ACTS OF GOD (OR THE GODLESS)

Consumer spending makes up 70% of the U.S. economy, and some of the most volatile industries include airlines, restaurants, entertainment, and big-box retailers. After recent attacks in Paris and Brussels, even some of the most popular restaurants in the world were sitting near empty. Alain Ducasse’s restaurant at the Plaza Athénée hotel in Paris was serving only two tables during the lunch hour after the terrorism scares. And his restaurant has a coveted three Michelin star rating – so no one is immune to the affects. Restaurant CEOs also have to be on the lookout for deliberate attacks, as corporate sabotage isn’t out of the question. Many speculated that some of Chipotle’s recent food safety scares could have been planted by insiders from the GMO industry looking to make a statement.

Natural disasters – including floods, tornados, hurricanes, typhoons and blizzards – can all also blow earnings estimates and guidance out the window. Not only if the restaurant is shut down, but crippling after-effects that can compromise food safety, cause building code violations, and more.

24

SOCIAL RESPONSIBILITY & SUSTAINABILITY

About one fifth of consumers will go out of their way to eat at a restaurant which is socially responsible, and 45% of people will make the same choice if it is convenient. Corporate social responsibility (CSR) encompasses how a company treats all of its stakeholders – from customers to employees to the community.

As consumers are becoming more critical of transparent facades, they look for more concrete results. While McDonald’s, as a corporation, is very involved with multiple charities – principally its own Ronald McDonald House – and donates tens of millions of dollars each year, it still takes on a negative perception and gets more attention for its harmful impacts than positive contributions. Starbucks, on the other hand, has reaped the benefits of its many company initiatives to improve lives for its employees through healthcare benefits and education initiatives. CSR is not something that can be delegated by the CEO, it must be the CEO that sets the example and pace.

25

AND THAT’S ONLY THE TIP OF THE ICEBERG

There are so many more considerations weighing on the mind of the modern restaurant CEO that it’s little wonder why compensation packages are climbing as high as $26,000 per hour. And it’s not just the global view of the business and market dynamics, it’s remembering that each brand, location, country and operating geography, franchisee, and employee within the system also carry their own concerns and issues that could be escalated to the CEO.

Couple with this media pressures, earnings calls, same store sales trends, new unit growth, profitability, productivity, big data, disruptive technologies and innovations, nutrition and menu labeling, forecasting and predictive analytics,…again, the list goes on and on.

It’s a tremendous responsibility. Any mere mortal would be terrified. But not only must the modern restaurant CEO contend with all of these concerns and more, they must also do it with grace, dignity, empathy for others, and while looking cool and collected from every angle. And, fit in quality time with the family and sleep too (those without great teams often suffer poor results and/or stare at their ceiling in bed as if watching a ticker tape scrolling marquee of things to worry about rolling by).

There’s a lot to think through these days and the stakes seem to get raised every 6 – 12 months as innovation cycles seem to shrink and accelerate the pace of change. That’s why when asked how they do it, any successful CEO will say they are surrounded by great people both inside and outside the company. Because one person – no matter how terrifically charismatic and talented – can make it all happen alone (even if, ultimately, they alone must answer for the results).

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ABOUT AARON ALLEN & ASSOCIATES:

Aaron Allen and Associates is a leading global restaurant consultancy helping chain foodservice and hospitality executives understand new trends and market dynamics that can enable a future with higher productivity, profits, brand relevance, and to leapfrog the competition. For more information on our strategic planning services, facilitating an executive retreat, or to discuss other ways we can help your company solve its most complex challenges and achieve its most aspirational goals, let’s start a conversation.

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