A new study released today by AlixPartners, the global business-advisory firm, posits that the turbulence in the chain-restaurant industry of late—from underperforming results to an uptick in bankruptcies to renewed shareholder pressures—might not be just a blip but rather a sign of structural changes besetting the industry, and that the industry right now faces a defining moment. The study, which includes an in-depth survey of more than 1,000 US consumers, examines a wide array of challenges and opportunities that, if properly addressed, might allow industry players to stay ahead of the big changes fundamentally altering the industry. The areas of the challenge and opportunity include technology, delivery, labor costs and growth.
The study finds that 57% of consumers polled plan to dine out the same number of times in the next 12 months as in the previous 12, the same percentage who said that in a similar AlixPartners survey of a year ago. In addition, the average spending per meal reported by consumers in the survey for the past 12 months, $15.38, was the highest in AlixPartners' nine-year history of conducting such surveys and, moreover, those surveyed said that over the next 12 months they plan to spend even a bit more, $15.43 per meal.
However, this year's survey also uncovered big anticipated cutbacks, including among higher-frequency diners, the kind most coveted by the industry. For example, diners who patronized fast-food and fast-casual establishments at least twice weekly intend to cut back their visits by 8% and 13%, respectively, over the next 12 months, according to the survey. At a more granular level, those polled said they plan to cut back their fast-food meals to 4.11 per year, down from 4.37 reported for the prior 12 month; their fast-casual meals to 2.93, vs. 3.01; their convenience-store meals to 3.65, vs. 3.71; and their ready-to-eat meals from grocery stores to 2.98, vs. 3.16.
Meanwhile, among those who said they plan to dine out less in the coming 12 months, the most-cited reason, chosen by 50% as one of their choices (of 16 available), was "saving money." (That compares with 44% who cited "want to eat healthier" as one of their reasons to cut back on dining out.) And among those planning to dine out less in order to save money, the most-cited use for that saved money was "travel experiences," picked as a reason by 32% of respondents. In addition, and perhaps unsurprisingly, the type of non-restaurant establishment chosen by consumers in the survey as most in need of dining upgrades was hotels, picked as a choice by 24%.
The survey also found big differences between what Millennials and Baby Boomers plan to do with the money they save by dining out less often. While the largest percentage of Baby Boomers, 47%, said they intend to put that money toward their retirement, that largest percentage of Millennials, 46%, cited "personal services," which was defined to include things like hair and nail services, dry cleaning, housekeeping, etc. (For Baby Boomers, the comparable number was just 29%.) In addition, 26% of Millennials cited "education" as the intended use for that money, which, says the study, could well be taken to include the burden of paying off already-incurred student loans.
Adam Werner, managing director at AlixPartners and co-head of the firm's restaurant, hospitality and leisure practice, said, "While lower fuel prices have helped operators by putting more money in consumers' pockets, that's become a two-edged sword as cheap gas and the lowest air fares we've seen since the recession seem to be enticing consumers to allocate at least some of their restaurant spending on travel and other experiences. Meanwhile, the all-important Millennial consumer, enabled the most by social media and other technologies that allow them to stay in close touch with friends even when they're traveling, is the cohort most fundamentally shifting spending to experiences. Clearly, the challenge for the industry is to reinvent the ‘restaurant experience' in order to compete with all the other experiences out there today."
Technology: A "Mixed Bag"
When it comes to technologies in and around the restaurant and foodservice industry, the AlixPartners study finds that not all high-tech is either created equal or is of equal value to all consumers. For instance, more than twice as many Millennials as Baby Boomers in the survey, 42% vs. 18%, said they find technologies "very" or "extremely" influential to their decision to dine out. By the same token, though, mobile technologies appear to be slow to catch on, as 42% of respondents reported that they've never used mobile technology for dining-out. In fact, according to the survey online ordering and free Wi-Fi inside the eatery still remain the top-two technological influencers for diners, chosen as being "very" or "extremely" influential by 40% and 35% of respondents, respectively.
A similar story can be told for loyalty programs, digital and otherwise, where there is apparent slow consumer adoption as well. Only 19% of consumers in the survey said loyalty programs are "very" or "extremely" influential in their decision where to dine out. (However, that does represent a 5-percentage-point increase over the results in AlixPartners survey last year.) Meanwhile, 40% of consumers in this year's survey said they haven't joined a loyalty program, about even with the 42% in last year's survey. However, those who are loyalists appear to be using more programs regularly, with 36% of respondents saying they are using two or more programs regularly, up 5 percentage points from last year's survey results.
"Technology continues to be a mixed bag in the restaurant industry," said Eric Dzwonczyk, managing director at AlixPartners and co-head of the firm's restaurant, hospitality, and leisure practice. "There still doesn't appear to be a lot of consumer ‘pull' for many technologies, as food quality and price trump everything else. On the other hand, though, Millennials generally crave new technologies, so going forward the challenge may be how to balance diverse technologies preferences across consumer groups, without compromising service and operations along the way."
Delivery: A Holistic Approach Is Best
A technological divide between Boomers and Millennials is apparent as well in meal delivery, says the AlixPartners report. Fifty percent of Millennials in the survey said they're most interested in the availability of call-in-advance delivery; by comparison, 46% of Baby Boomers said they prefer traditional, "in-the-moment" delivery. The study further suggests other dichotomies in consumers' attitudes towards delivery.
For instance, nearly three-quarters (74%) of consumers in the survey said they order delivery from the same eating establishment routinely, with more than half (53%) of that number citing as the reason "lack of good delivery options near me." Plus, the survey finds consumers saying that they'd like to see more delivery options across multiple restaurant segments, with 38% of respondents picking as an option that they'd like more offerings from traditional casual-dining outlets, 37% saying so about fast-casual outlets and 34% saying it about fast-food outlets. However, says the study, companies responding to this demand by partnering with third-party providers should proceed carefully. Among those surveyed who order delivery, 71% said they prefer to get delivery directly from the restaurant, while only 8% said they prefer it through a third-party intermediary.
Meanwhile, according to the survey, the top two factors affecting the decision to order delivery from a restaurant are food quality, picked as a top influencer by 63% of those surveyed, and price of the food, chosen by 57%. Both, notes the study, are very much restaurant-controlled factors.
The study also notes that consumers seem to be quite aware of the price gap between restaurants and meals from grocery or convenience stores, emphasizing the importance of price-competitiveness in delivery. In the survey, 56% of respondents who choose ready-to-eat meals from convenience or grocery stores over restaurants said their No. 1 reason is because the latter meals are cheaper. Their own convenience came in second, picked by 22% of respondents.
"All the companies today putting investments into the third-party and other delivery programs might want to step back a bit and look at their operations holistically, with an eye on packaging and available technologies as well as delivery," said Kurt Schnaubelt, managing director at AlixPartners and co-head of the firm's restaurant, hospitality, and hospitality practice. "The challenge is to thoroughly understand how well your food ‘travels,' and to maintain as much control as possible over the entire process."
Higher Wages: Consumers Sympathize, But Don't Necessarily Want to Pay
With more states adopting a higher minimum wage and other wage-increase movements afoot in the country, the AlixPartners study also sought to gauge consumers' opinions today on the topic. In this year's survey, 58% said they agreed with the movement for higher worker wages, up from 50% in last year's survey. However, those saying they're not willing to pay more at the restaurant to support the movement rose to 16%, up from 13% in last year's survey.
Growth: "Zealously Exploit the Opportunities That Do Exist"
In general, the AlixPartners study describes an industry whose growth prospects today appear not to be as strong as in recent years, and that coming off a 2016 in which same-store sales were down for all major restaurant segments except quick service, while menu prices remained flat and labor as a percentage of revenue spiked upward
However, despite that, the report pinpoints areas of potential growth going forward. For example, despite same-store-sales growth of only 0.8% in the casual-dining segment in 2016, what AlixPartners calls the traditional casual-dining segment (restaurants like Applebee's, Chili's, Olive Garden and Red Lobster) was the top vote-getter among restaurant types of which consumers would like to see more locations opened in the US, with 37% of those polled picking that segment as one of their choices. That was followed by what AlixPartners calls the traditional family-dining segment (restaurants like Bob Evans and Cracker Barrel), which was chosen by 34%, and the fast–casual segment (restaurants like Chipotle and Panera), chosen by 34%. Interestingly, notes the study, these results come on the heels of reports of significant over-capacity in the casual-dining segment.
"These findings beg the question of whether casual-dining and other players have put too much focus on bringing down prices, offering lunch, flooding the menu with healthy options, etc., in their efforts to compete with fast casual, eroding the opportunity for their own ‘special-occasion' dining experience," said Werner. "Clearly, there is still room for indulgences by diners at almost every segment level. The challenge for operators is to zealously find and exploit the opportunities that do exist."
The report also uncovers an intended uptick in visits toward full-service establishments. In the survey, consumers visiting fine-dining establishments two to four times monthly said they expect to increase visits in the next 12 months by 20%--which, says the study, could be signs of both a growth opportunity for fine dining and of the aspirational intent of diners at all levels . In addition, the survey shows that when it comes to a desire for an expansion in locations, Millennials prefer fast casual over traditional casual dining (41% for fast casual vs. 33% for traditional casual dining). And for what AlixPartners calls specialty fast-casual concepts (restaurants like Shake Shack, Freshii and Blaze Pizza), which have seen significant growth over the past few years, the gourmet-burger concept was the No. 1 restaurant type consumers said they would like to see expand, chosen among the top three picks by 35% of those polled.
The AlixPartners survey also found that a modern or renovated look for a restaurant was near the bottom of attributes consumers said they cared about when ordering delivery, with only 9% picking it as one of their important items. This, notes the study, perhaps suggests another opportunity for chains, specifically those looking to squeeze incremental profit from dated establishments.
Additionally, the AlixPartners report explores such things as regional and generational cuisine preferences, health-and-wellness issues and business issues such as industry profitability, stock-price performance and M&A outlook.
About the Study: The AlixPartners study included a survey taken Feb. 14-16 of 1,008 adults over age 18 from all major regions across the United States.
About AlixPartners: In today's fast paced global market timing is everything. You want to protect, grow or transform your business. To meet these challenges we offer clients small teams of highly qualified experts with profound sector and operational insight. Our clients include corporate boards and management, law firms, investment banks, investors and others who appreciate the candor, dedication and transformative expertise of our teams. We'll ensure insight drives action at that exact moment that is critical for success. When it really matters.