This post is the fourth in a series focused on how mandated changes to labor are changing our industry. The first post looked at controlling labor through better forecasting and scheduling; the second, the limitations of productivity and pricing; the third, alternative responses that operators can use besides the traditional tools of productivity and pricing. To read the past blog entries, see the links below:
The handwriting is on the wall. As a result of mandated changes to labor laws, whether minimum wages, definition of salaried personnel, or franchisor/franchisee relationships, the industry’s economic models are changing. Post three concerned how costs could positively impact the trade-off between menu pricing and productivity gains and the utilization of technology to improve productivity. A drawback to enhanced technology is the resulting displacement of employees. An abrupt reduction in labor may negatively impact both public relations and subsequent future expansion of a brand. The responses to the changing environment that we have previously discussed have been short and medium term, requiring timely decisions from operators to adapt to a faster changing environment.
LONG TERM CHANGES
The longer term impact will be to the industry itself. When the economic model changes, the last piece to change is the footprint/design/location of the unit. The footprint must by economic necessity become smaller. We are all aware that real estate is not getting cheaper. Consequently the design of the unit will become, also by necessity, more efficient. The piece that never changes and makes, or breaks a restaurant concept is location, location, location.
Location of the available labor force
Location of the target market
Location for further growth
Location for easy guest access
As a result of these changes, real estate markets will evolve. Operators must consider the following options to maintain, or grow their business in the long term. Real estate choices over the longer term will favor the more efficient.
- Design: Research footprint reductions redesign, re-conceptualize to realize efficiencies.
- Build: Scrape, rebuild and redevelopment opportunities.
- Challenges of Redesign.
- Location strategies must also change as target markets change.
DESIGN EFFICIENCY IN
Restaurant footprints will get smaller, and must get more efficient. Menu evolution needs to center on fewer items reduced to core, high quality, and “craveable” items. These smaller “boxes” are already centered in the QSR and fast casual segments. For casual dining, these boxes need fewer seats. Fewer seats can have the upside of exclusivity. Quality of service, not just speed of service will be paramount in order to meet the top line goals amid the interplay of menu, prices, size, and seating.
The impact on the casual dining segment is enormous. This segment has already struggled for over a decade with long-term legacy investments in large buildings and older footprint design. Large buildings require large operating investments in labor. Restaurant companies that have kept control of their real estate will find these changes easier.
Over the last 15 years, many casual dining companies sought to maximize returns on assets and equity, rather than improve margins or evolve the concept. It should come as no surprise that management teams sold off the real estate.
Smaller footprints will mean a reduction in average unit sales. The industry has typically built restaurants to meet capacity demand at peak hours of consumption. In order to allay that large investment, operators have sought out non-peak diners. Finding customers who eat at non-peak hours continues to be difficult as the market is small. It was common for seniors who were not time sensitive, but are price-sensitive, to be given a discount to eat during these off-peak hours. Baby Boomers are now the seniors. They define themselves with young attitudes. They are active, and often still employed. They would not want to be seen as “seniors”, or old. They may appreciate a deal, but it may be a dinner of small plates, rather than a time that “old people” eat.
CHALLENGES OF NEW DESIGNS
Smaller footprints require less staffing, but more productive staffing. The rapid rise of fast casual concepts requiring more efficient square footage and utilizing less labor is in part a reaction to higher real estate costs and the rising employee wages and benefits. We see the replacement of humans by technology a continuing, in fact accelerating, trend. Kitchen organization, equipment layout and production sequences will have to be well thought out and predictable for the concept to be profitable.
Another challenge of smaller footprints is smaller storage spaces. We see a continuing trend of restaurateurs looking to the supply chain. Suppliers will be required to hold their products in inventory, smaller, more frequent deliveries. This might raise costs, possible menu outage issues, etc., or opportunities to acquire or partner with storage and delivery companies.
Ultimately, the market is always changing. The age of the large footprint casual dining operations will likely be limited to a disappearing consumer. Large boxes are a dinosaur headed for extinction. Operators who do not work with, instead of against this change will be managing a decline, rather than growing their business. The resulting acceleration of unit closures in casual dining, potentially leads to a glut of large box real estate in some markets. No one wants to end up with real estate that doesn’t fit current market needs.
This property glut might drive rents down in the short term, but to contract for locations with footprints larger than the local market can support could be terminal for the ill-prepared and be dangerous to any concepts’ livelihood.
Other hard-scape, or bricks and mortar, changes are currently under way. The high demand (and limited supply) for the optimum fast casual sized spaces of 2800-3200 square feet is already generating upward pressure on rents. The rapid increase in these rents, and the facilities built under these conditions, is already creating a shake-out in some concepts. In fact recent closing announcements by Shop House, Zoe’s, Noodles, etc may only be the start of this trend.
The overriding concern is how operators can anticipate and react now. Operators need to be thinking about how, when and where their concepts need to change to reflect the realities of tomorrow’s market. Marketers need to know the customer of the future and operations needs to execute on that vision.
Purchasing may have to look outside the “big box” suppliers and entertain the idea of managing more, smaller, but nimble purveyors of local and unique food stuffs. Having a dynamite construction team will be important. Obviously speed and flexibility as you re-develop sites will have ramifications on your financial results and will eliminate “out of sight, pit of mind”.
One more challenge and opportunity is to completely re-think an existing brand and effectively project forward beyond the changing economic environment and the consumer’s demands is a challenging one. But, it can also be a hugely profitable one should your team hit the target.
Redevelopment may include scrape/rebuilds that results in multiple units occupying a site previously housing a single casual dining entity. Also, where the strategy, by some large companies, had formerly been to build multiple concepts on an enlarged pad, the opportunity may be to scrape and rebuild multiple concepts adding additional retail
Another in our strategic list is to consider different location strategies for different footprints. The successful restaurateur of the 21st century may need to look at this option. Cracker Barrel recently created a concept that utilizes its strengths in breakfast, “country cooking”, but mostly leaves behind its country store and interstate roadside location strategy. Hollar and Dash remains rooted in the southern style and cuisine that made Cracker Barrel famous, and its shareholder’s rich. While the judges may be out for now, my exposure to the brand/concept lead me to believe that the concept will fare well in the marketplace. Operators who can achieve this level of creativity in menu, design and operations could have a future paved in gold.
LOCATION, LOCATION, LOCATION
There are places in the continental United States where inevitably population density is increasing; markets like Nashville, Birmingham AL, and Kennesaw GA. Urban markets in low-tax states with their rapid growth in downtown condos and apartments offer the millennial generation the convenience of easy access to work, retail and restaurants. Ride sharing reduces the need for the millennial generation to spend income on cars and gas and parking, thereby permitting my consumable spending. This generational landscape offers the opportunity to alter your concept to fit these emerging locations and their cutting edge customer base.
The preceding information is the work of NRCP. It cannot be copied, or reproduced without the express written consent of NRCP.
National Retail Concept Partners, LLC is a full-service consultancy based in Denver, CO. working with a variety of industries, including the automotive, retail, restaurant and hospitality industries. Partners Larry DeVries and Dean Haskell wrote the preceding post. These recurring posts can be accessed at their LinkedIn profiles. NRCP recently shared its labor optimization success at the Restaurant Finance Conference. The partners can be reached by email at firstname.lastname@example.org and email@example.com. Mr. DeVries is based in Denver, Colorado and Mr. Haskell is based in Nashville, Tennessee.