In times of crisis (whether brought on my natural disasters or economic uncertainty), restaurant survival is difficult enough. But thriving — as a handful of chains have — is even more remarkable. Recent history has revealed restaurant companies who have been able to do just that: improve sales and traffic while others in the industry suffer. Here, we highlight restaurant survival stories which will not only serve as inspiration for operators, but as lessons for all in the foodservice industry.
The Restaurant Survival Rate
While some cite the statistic that “most restaurants fail within their first year,” that isn’t entirely accurate. In fact, a 2014 study by economists using BLS data found that only 17% of restaurants close in the first year, putting the failure rate for full-service restaurants around that of insurance agencies and brokerages. Of course, surviving isn’t easy, even for restaurant chains with years of experience and the budgets to invest in the latest technologies. Even the most notable restaurant CEOs are faced with challenges like labor costs, finicky customers, and activist investors (plus a slew of other issues that seem to crop up daily). Recently, Casual Dining chains have witnessed sagging sales, as consumers opt for newer, more convenient options. Some in the segment have managed to buck the trend, though. Between 2013 and 2016, Empire Resorts (which specializes in gaming and entertaining in addition to restaurants) and steakhouses Ruth’s Chris and Flanigan’s had market cap increases higher than Domino’s. These three, plus Texas Roadhouse and Darden, were able to keep investors interested and increase their market capitalization above the Casual Dining average. Increasing competition will mean pockets of the industry (particularly pronounced in the Casual Dining sector) will continue to struggle. Those who can adapt — through modern technology, engineering convenience into the dining experience, and simply by offering what others don’t — will thrive.
Restaurants That Have Survived in Times of Crisis
It was November 2008 — the height of the Great Recession — when McDonald’s announced its global same-store sales had jumped 8.2% over the month. That beat the company’s own prediction for a rise of 7.1% worldwide and came in what was otherwise a dismal month for most restaurant operators. Around the same time, sit-down chains were reporting steep declines in same-store sales and consumers continued to grow anxious about the possibility of a prolonged recession. Other companies (entire segments, really) were growing, too. Between 2007 – 2009, the sales of Fast Casual chains in the US (including all $1b+ chains and a few other brands) grew faster than the average of all segments combined (including QSR, Casual, Fast Casual, and Family Dining companies). However, not all brands grew the same way, and some were able to steal market share from their competitors. That was certainly the case for Chipotle, which came out of the US economic crisis with an increase in market share of 2.8pp (2009 vs. 2007) — the equivalent of more than $140 million in sales in 2009 alone. QSR sales (considering mainly hamburger concepts, as well as a few other close competitors, such as Chick-fil-A and Taco Bell) have shown to exhibit counter-cyclical behavior (i.e. sales growth was slower than average between 2003 and 2015 except in the two years of the Great Recession), which makes sense — consumers tend to trade down, and move to lower price points during weak economic times.
While some have held steady or even faltered during weak economic periods, others have stolen share from the competition. McDonald’s, for instance, increased its market share from 39.9% in 2007 to 40.5% in 2009 (i.e. close to $460 million in sales that the chain wouldn’t have seen had its market share stood steady at 2007 levels). Another example of expansion during this period was Five Guys, which could be also categorized within the Fast Casual better burgers segment, and who ended 2009 with sales of almost triple what it saw in 2007. Globally, chains are weathering economic storms, as well. In the GCC, which has suffered as the result of sagging oil prices, some restaurant companies are continuing to expand. Texas-based Brazilian steakhouse Fogo de Chão recently announced plans to open its first restaurant in Saudi Arabia, and Arby’s is looking to expand overseas, as well. In May, the fast food chain revealed it had signed an international franchise development agreement for 25 locations in Kuwait and Saudi Arabia, marking the chain’s first international push in seven years.
The Future of Restaurant Survival
Even during times of recession (even supposed “recessions” affecting the restaurant industry specifically), operators can take steps to ride out weak economic conditions. Industry standards like differentiation of product, brand, and experience will remain ever-important in times of crisis but, increasingly, adaptation will prove crucial. Those who can entice customers with menu items and experiences they can’t find elsewhere will rise to the top. Technology has proven to be an important part of this process — those chains offering unique mobile order technology, for instance, are reaping the benefits — and will grow to become absolutely integral to restaurants. Even some of the most well-known chains have suffered due to their lack of forecasting where the industry is heading — looking only to their historic competitors, rather than new players like meal kits and Internet giants like Amazon (in other words, companies offering the convenient options that customers crave). Today’s consumer has moved on from sub-par food served in a generic atmosphere to other, more modern, modes of dining. The chains who have been able to take this into account have proven distinct amongst customers, and thrived in the face of adversity as a result.
About Aaron Allen & Associates
Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketing, branding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion, span all 6 inhabited continents and 100+ countries, with locations totaling tens of thousands.
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