Restaurant CEO priorities are shifting in 2020, and it makes sense given how quickly the consumer and competitive landscape are shifting as well as the introduction of new forces impacting the industry. Here, we round up ten factors influencing how leaders are evolving their views and approach.
1. The Impact of the Coronavirus Crisis on the Restaurant Industry
- The Leisure and Hospitality industry (of which restaurants represent 73%) accounts for 16.5 million jobs in the U.S. alone. Safety is a priority in these scenarios, as many of these employees are on the front line and in contact with 170 million people each day (under normal circumstances). That said, a coordinated effort with the government will likely be necessary to help ensure that millions aren’t out of work indefinitely.
- Some chains will be a leader in their response, but many operators will not be able to sustain 20%–50% revenue losses, even if they are able to secure debt. Large chains will have an easier time refinancing and working their way through debt and leverage that would be too difficult for the average independent to manage. The composition in the industry between chains and independents will move further in favor of the former.
- The economic model of the restaurant will be re-thought in a way that makes it more viable in the longer term. This is most relevant for full-service restaurants and, in particular, low-price point casual-dining operators who can’t keep up with the rapidly increasing cost of labor and rent. This is the area that will receive the biggest blow by the crisis, which will also result in massive layoffs.
2. Activist Investors Hungry for Weak Prey
Like a crocodile preparing to go after an antelope in the wild, activist investors are looking at the restaurant space with the hunger in their eyes.
Foodservice has significant growth potential and is relatively “recession-proof” (after all, people will always eat), though increased saturation and ensuing consumer trends have resulted in plenty of companies — particularly casual dining operators — struggling.
- Activists often concentrate on optimizing one core component of a business and removing what they think to be distractions from the primary offering.
- Investors who can help re-prioritize focus away from quarter-to-quarter thinking and put more of a premium on longer-term performance (i.e. guest experience initiatives that may be an investment in the near-term that pays returns in years ahead) will be ultimately rewarded.
- Ron Shaich, the former CEO of Panera Bread, was so frustrated by the focus on short-term performance in the public markets that Panera went private (it’s a fascinating industry case study, the history of which is captured here), and Shaich eventually created his own investment firm, Act III Holdings, with goals over intentionally longer holding periods.
3. Private Equity Has a New Trick: Public Company Activism
Not all activist investors take the same approach, and lately, there are some that prefer to participate in working collaboratively with management — rather than criticizing executive teams — to propose cost-cuts and other optimization strategies.
- Pershing Square Capital, led by Bill Ackman, made an investment in Chipotle (NYSE: CMG) in 2016. He went on record saying the “company’s issues were all addressable through better operations and oversight” and worked hand-in-hand with management to make improvements to the business (though that was before Pershing Square’s influence was used in a not-so-friendly way to oust then-Co-CEO Steve Ells, Chipotle’s founder, from his post).
- Hedge fund Arex Capital Management is in talks with Fiesta Restaurant Group (parent company of Taco Cabana and El Pollo Tropical) regarding strategy, operations, and corporate structure. When Arex disclosed an 8.5% stake, Fiesta shares rose by 4%.
4. Traditional Cost-Cutting Isn’t Cutting It Any More
The low-hanging fruit has already been harvested across many restaurant systems (think reducing food waste, cutting labor hours, etc.), so implementing other purely cost-cutting strategies would lead to cutting bone and ultimately undermining both the guest and employee experience.
In our experience, we’ve seen that many investors believe the value comes from stripping out expenses — but sometimes this can lead to pulling the soul right out of the business in attempts to exorcise out the costs. Reinventing and reimagining cost optimization strategies can help to find non-obvious areas to improve upon.
- In general, the restaurant industry has done very little to engineer improved labor strategies over the years. The agricultural and manufacturing sectors enhanced productivity with automation, setting a precedent for what could happen in the foodservice industry.
- To offset the rapid rise in labor costs around the globe, more creative strategies will need to be employed to maintain margins, market share, and guest satisfaction scores.
- A 2% increase in sales is equivalent to a 10% reduction in cost. Rather than focusing on only cost reduction strategies, enhancing efforts to grow sales can be just as — if not more — impactful to the bottom line.
5. Smart Captains Have Set Sail for Foreign Shores
The bulk of all foodservice industry growth over the next five years will come from international markets, and a significant share of top growth brands derive an increasing percentage of revenue from outside their home markets.
- Global foodservice revenue is expected to grow by more than $600b within the next 4 years, with the majority of it coming from outside North America.
- A compelling story of international expansion — coupled with effective earned media strategy — can drive valuation multiples.
- Four-walls operating margins can be as much as twice what the same brand may earn in a more mature foodservice environment, largely because the cost of labor is significantly lower in emerging markets.
6. Outsourcing and Rationalizing Corporate Headcount
The C-suite is not recalculating or computing as fast as the variables of the calculus are changing. While it may cost more on a unit-by-unit basis, outsourcing efforts can be far more efficient than traditional models.
And a lot more factors are in play in this era of the gig economy as more and more companies (and individuals) are becoming accustomed to the fast, flexible, and outcomes-focused environment where it’s easier to scale and replace roles as needed. In some cases, this can help to optimize resources and shift risks (pensions, labor unions, taxes, insurance, administrative burden) if you pay enough to keep mercenaries.
- Marco’s Pizza separated the franchising department into a new company (Marco’s Franchised Services). The spin-off revenue is derived from a share of franchise sales, royalties, and initial investment.
- Luby’s (the parent to Luby’s Cafeteria and Fuddruckers) is outsourcing some corporate systems including accounting, payroll, and operations analytics.
- Wendy’s outsourced its IT department to a third party, who will deal mainly with digital initiatives. Currently, digital represents 2% of sales, and that’s expected to multiply by 5x within five years.
If you're a foodservice operator or investor seeking to drive growth, optimize performance, maximize value, or create a modernized portfolio in the face of increasing competitive dynamics and an accelerated pace of change, we can help.
7. New CEO? Probably a New HQ.
The easiest way to clear a forest is a controlled brush fire. Companies taking an “out with the old” mentality and growing are often moving headquarters to support scalability and long-term growth, housing all functional areas under one roof, as well as looking to attract the best talent.
- In 2019, Wingstop moved to new headquarters to be able to support scalability and long-term growth.
- In 2018, Chipotle relocated to California (consolidating offices from two locations) only a few months after a new CEO was appointed.
- McDonald’s linked their move to Chicago with improving performance (by being closer to customers and trends) and better access to talent.
- After re-franchising (to only 8% corporate stores), CKE Restaurants consolidated Carl’s Jr. and Hardee’s headquarters into a smaller one in 2016.
- After being acquired, Bravo Brio moved headquarters in 2018 with the goal of attracting the best talent.
8. “We’re On Top Of It” Is Catching Up with Us
There’s a Jedi mind trick happening, with operators hearing about advanced analytics, or the influence of automation, the impact of delivery, or the intensity of challenger brands.
Many executives are seemingly calm on the outside, with an “uh-huh, we’re on it” response (either that or a dismissive “we’ve already missed it”). This demeanor is starting to catch up with CEOs who staked their credibility on guiding the company into the future now working with antiquated anecdotes and antidotes of managing the business of yesterday.
- At the NRA Show in 2009, executive team members of both Buffalo Wild Wings and Chipotle announced they were taking a “wait-and-see” approach to social media. In hindsight, it’s flabbergasting. And the pace of change has only been increasing since (and will continue to do so).
- Infamously, the former CEO of Blockbuster said that “neither RedBox nor Netflix are even on the radar screen in terms of competition” in 2008 — just two years before the company went bankrupt, largely due to the performance of those exact competitors.
9. “Everything Important Is Measurable” Takes on a New Meaning
With digital footprints now able to track nearly everything (and we mean everything) we do or say, transparency, accountability, historical analytical capabilities, and more intense corporate governance and expectations of the fiduciary very well may lead to rolling heads and executive compensation clawbacks. Golden parachutes increasingly have a tendency to be revoked after the CEO has already jumped (or been thrown) out of the plane.
The benefit of hindsight may reveal that executives may have been (intentionally or not) duping their boards into believing the right KPIs were being tracked.
Improved back-office systems can give leaders a meaningful and real-time view of the metrics that matter most. Paired with diagnostic systems that continually find and fix performance drains, these dashboards can become the most powerful weapon in the executive’s armory.
10. Killed or Catapulted by Labor Models and Modernization
Once the low-hanging fruit has been harvested, like a centrifuge the G-force is going to separate out those companies optimizing labor and those that don’t. For the foodservice industry, this is going to be the biggest brick of all; the net that’s going to catch the most companies hoping to swim to success.
For now, ahead of the sharp rise in labor costs, restaurants have maintained some degree of normalized EBITDA through price increases and been helped greatly by lower food costs, stabilized occupancy costs, low cost of capital, and some early wins with delivery and technology initiatives. However, looking into the future, labor optimization and modernization require reinvention, reimagining, and dramatically different thinking.
11. Pressure-Test Your P&L
Every restaurant bleeds; it’s just a matter of where and how much. An objective analysis of the business — ranging from policies, procedures, processes, and applying theories of industrial engineering — to pressure-test the P&L can help identify the potential for opportunity via optimization strategies across functional areas of the business.
A business need not be for sale to look at it through the lens of a potential investor and apply the kind of thought process employed by high-performance advisors who prestigious private equity firms turn to when diligencing businesses on the buy-side.
So What Can CEOs Do in the Face of Evolution?
- Be Your Own Activist, or find one to help you identify vulnerabilities before someone else does
- Share the Load of the strategy-shaping diagnostic and analytical work, knowing that better questions get better answers
- Realize that Asking for an Objective Opinion isn’t a Sign of Weakness, that’s just the ego-centric machoism style of thinking yesterday’s leaders were indoctrinated with
Relying primarily on the corporate intelligence that resides solely within your own organization is like relying on a radar system that tracks only your planes and troupe movements. And if you’re too busy to think much about any of these factors, hire someone else to.
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It’s a fascinating time for restaurant innovation around the world. The $3.1 trillion global restaurant industry is relatively predictable in terms of growth (it mirrors