Restaurant Leadership

Strong leaders forecast the weather and work to fortify their positions ahead of any unnecessary compromise for those in their care. Just as radar technology has improved dramatically for the weather industry, the same advancements can be made to corporate preparedness. These are the moments when market share moves the most.

For those restaurant CEOs who have really good forecasts about where the market is headed — and are looking for more than just quarter-to-quarter returns — now is the best time to leapfrog forward and ahead of competitors of today and tomorrow.

Strong castles are built before the invaders arrive — and fortifying castles for the future means commissioning reinforcements today. Effective leaders are looking past quarterly and year-over-year incremental improvements and creating leapfrog strategies that will take them past where the competition is going, to where the consumer is really headed.

We rounded up what’s keeping restaurant CEOs awake at night before and how the priorities for foodservice leadership are changing. Here are some additional issues restaurant leadership is facing when coming up with a holistic, bullet-proof strategy:

Saturation Leading to Consolidation: In many mature markets, the foodservice industry has reached a point of saturation such that any one company’s growth is coming at the expense of another. In the U.S. in particular, saturation has increased in the last years: the number of people per restaurant decreased by 16% from 2001-2018 (or, in other words, the number of establishments grew at rate 150% faster than population).

Saturation signals the onset of consolidation, and many of our clients are looking not just to get better, but to get far ahead. Restaurant leadership is waking up to the realization that those who are not growing fast are dying slowly. Strong castles are built before the invaders arrive — and fortifying castles for the future means commissioning reinforcements today (the strength of the leadership roles many times lies in recognizing the need for help).

Challenges to Grow: The bulk of all foodservice industry growth over the next five years will come from international markets, and the significant share of top growth brands derive an increasing percentage of revenue from outside their home markets.

Since 2005 we have advised dozens of multi-national restaurant operators and industry suppliers on growth strategy related to cross-border expansion, brand translation and adaptation to foreign markets, and where to play and how to win.

Indigestion at Integration: it’s not enough to just source and diligence a great deal, it’s also essential to get post-acquisition integration initiatives (plans, teams, expectations, and execution) pulled together exceptionally well so that a great bite at the apple does not turn out to be a deadly gulp (equally dangerous for both buyer and seller to get it wrong on a deal significant in the timelines of companies and careers of executives that served it up).

Beyond hunting and bagging a brand, restaurant business leaders must be prepared with exceptional and dedicated teams focused on a smooth and seamless post-acquisition world for shareholders and stakeholders alike. It’s entirely too taxing on the day-to-day teams to shoulder them with the responsibilities of both laying new tracks while keeping trains moving and attempting a knife throwing and catching exposition.

Innovation in the Restaurant Industry: Now, enough business leaders — and the investors that often determine fates — are adjusting to the new realities and economics of disruption to rethink their approach and strategic capital allocations. It moves faster these days, but Henry Ford knew during an earlier industrial revolution: business models that put the guest/customer and employee first (engineering convenience and ‘a better way’) reshape and create markets that dethrone incumbent and dismissive brand leaders.

This means, simply, that new formats, unit and system-level economic models, and evolved expectations for operating performance must be factored into the future of foodservice and those optimistic for its potential.

What’s happening (and is required) of organizations and leaders, both shaping and being shaped by these new and dynamic forces, is a necessary transformation and transition from what was to what will, can, and should be.

CAPEX Allocations: The CAPEX-to-revenue ratio of publicly traded restaurants in the U.S. decreased in 2017 (for the first time since 2008) by 29%, and has remained at low levels since then. While the majority of restaurant businesses are decreasing CAPEX investments and debating over where they should be allocating funds — whether to infrastructure improvements or buybacks or dividends — market share winners are gaining traction with investments in guest experience enhancements, technology, infrastructure, and other competitive moat- building strategies.

Every dollar in your CAPEX arsenal is like a soldier on your competitive battlefronts:

Sagging Sales and Profitability Shrinking: Even when the anxiety of sagging sales and falling margins due to increasing labor costs urges investment in new tools and fresh thinking, it may still feel like a bold decision is riskier than kicking the can to next quarter or budget meeting; waiting for the board to push the agenda versus building the case for leapfrog investments.

We have seen this playing out for two years now in the Middle East and see it increasingly with struggling industry categories in other geographies (especially casual dining operators, for instance).

Despite the pain and pressures of challenging conditions, it hurts less to remain indecisive — holding one’s breath waiting for the situation to improve itself – than it does to bite the bullet on bolstering the team, capabilities, competencies, and critical thinking that’s needed to confront the issues head-on. Waiting may hurt less, but it costs a lot more in the long run.

Assessing Risk:  While most foodservice executives recognize the need for innovation to keep pace with evolving consumer demands and behavior, many resist creating these new ideas on their own: they’d rather someone else take the risk than stake their capital. Not only does this leave them with pale imitations of restaurant strategy tailormade for a competitor, but it also means they miss out on the incredible valuations that come from being a leader in the field.

The challenge is to recognize which risks are worth taking. Market research provides leaders with relevant, actionable insights that help them make sure-footed decisions in a period of incredible change.

Differentiation: There’s increasing competition in the industry, and not all of it comes from other restaurants (now, chains have grocery stores, meal kits, food trucks, and more to compete with). The need to differentiate — and develop a solid strategy to keep consumers loyal — has never been more apparent.

Short Term Priorities: We encourage our clients to think and plan on both time frames: short-term wins are necessary to gain momentum and fund longer-term initiatives, but lasting organizations that transform the industry look past the next earnings call to three-, five-, and ten-year horizons — and beyond.

Glossary of Terms

Activist Investors: activist investors are groups or companies that purchase a large percentage of a public company’s share and attempts to take seats at the board to influence the restaurant business plan.

CAPEX: Restaurant Capital Expenditures are expenditures to acquire or improve an asset. These investments are key to the long-term performance of the company.

Hospitality Industry: The hospitality industry is part of the service industry and it includes NAICs code 72 “Accommodation and Food Service”.

Public to Private: In public-to-private mergers and acquisitions a company is taken out of a public market (delisted) when an investor buys all or most of the company’s shares.

Restaurant Board of Directors: The board of directors is a group of accomplished leaders in the industry that oversees the performance of a company. They represent shareholders and meet regularly to evaluate management.

Restaurant CEO: The CEO (Chief Executive Officer) is the manager at the top of the organizational pyramid, the top executive responsible for the company.

Restaurant Management: Typically, restaurant management refers to the person in charge of a single-unit or a handful of restaurants, in charge of personnel, running the operations smoothly, monitoring cash flow, growing sales and accounting.

ABOUT AARON ALLEN & ASSOCIATES

Aaron Allen & Associates works with leaders of global foodservice and hospitality companies on strategic issues. Specializations of the firm include multinational expansion, system-wide sales building, brand and portfolio strategy, modernized marketing, industry trends, technology, and advanced analytics.  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.

Our clients span six continents and 100+ countries, collectively posting more than $200b in revenue. Across 2,000+ engagements, we’ve worked in nearly every geography, category, cuisine, segment, operating model, ownership type, and phase of the business life cycle.