By Geoff Wilson
While I was in high school, my father, a high school principal, asked me: “What do you want to study in university?” I responded, “Chemistry or hospitality.” His quick, sage reply was, “Study hospitality. People will always have to eat.”
He was right. Canada’s foodservice industry continues to grow, but like many industries, it is experiencing changes that are profoundly affecting business operations. Such changes, their opportunities and challenges, and potential operator responses may be examined in three specific areas – revenues, product costs and labour. As we will see, these issues are interrelated.
Restaurant traffic and sales are more or less flat in Canada. In fsSTRATEGY’s 2015 C-Suite Survey, 52 per cent of 34 participating CEOs and CFOs in Canada’s chain restaurant industry indicated that they expect 2015 revenues to grow between 0.1 per cent and 2.5 per cent. Restaurants Canada indicates commercial foodservice sales will grow by 4.3 per cent in 2015 and 3.8 per cent in 2016. With menu inflation predicted at 2.8 per cent and 2.5 per cent respectively, real (inflation adjusted) growth is expected to be just 1.4 per cent in 2015 and 1.3 per cent in 2016.
Thirty-five per cent of the CEOs and CFOs surveyed indicated that they thought restaurant traffic would remain flat in 2015 compared to 2014. NPD Group Canada estimated that 2015 restaurant meal occasions in Canada would be down 4.8 per cent over 2014.
Restaurant sales tend to track closely with changes in consumer disposable include and Gross Domestic Product, mirroring the mood of consumers and the economic climate. While Canada experienced a technical recession in the first half of 2015, Scotiabank expects real GDP growth to end up at 1.1 per cent in 2015 and reach 1.8 per cent in 2016. “Canadian growth is on the mend and should remain intact for the (third) quarter as a whole even if the monthly tallies risk ending the quarter on a soft note.” Still, the depressed price of oil is having an effect on employment and, therefore, foodservice industry sales, in particular in Alberta and Saskatchewan.
The following chart demonstrates the change in sales growth in Canada, Alberta and Saskatchewan for Quick-Service and Full-Service Restaurants between 2014 and 2015.
Source: Restaurants Canada and Statistics Canada
Consumers in Alberta and Saskatchewan appear to be reducing the pace of the growth of their restaurant expenditures and trading down from full-service to quick-service restaurants.
In 2013, the average restaurant in Canada generated net profit of just 4.3 per cent of revenues. Over the years, increasing use of further processed foods to defray in-unit labour costs, minimizing labour schedules and scrimping on training have been used to control costs. In some cases, Canadian restaurant food and service quality has seemed unimpressive when compared to the United States and Europe. In recent years, Canadian restaurant quality levels have begun to improve. Certain players have implemented significantly differentiated menu offerings, greater in-house food production, scheduling at a lower ratio of guests to servers and heavy emphasis on staff training. The results in some chains have been stunning. These chains have been able to leverage higher revenues by creating better perceived value and memorable experiences.
Most restaurant owners are no doubt witnessing the changing demographics and behaviours of restaurant consumers. NPD Canada reports that in 2014/15, for the first time, Millennials have captured a greater share of commercial restaurant sales (28 per cent) than Baby Boomers (27 per cent). In years past, Baby Boomers funded the growth of casual dining in Canada, seeking out restaurants offering menu variety, cleanliness and good service. Millennials, the new generation of restaurant spenders, demand atmosphere and “craveability.” These young diners seek out restaurant concepts that they can recommend (or have been recommended by others) through social media. They are highly food literate, tech savvy and know what they want. They look for authenticity; the ability to customize and the ability to eat when, where and how they want.
Key strategies to address revenue issues include:
- Differentiate your concept to steal market share from your competitors.
- Understand your customer demographics and make sure your offer meets their needs. If you aren’t positioning your establishment to accommodate the needs of your target market, you are bound to lose market share.
- Retool menus to adjust to consumer preferences. Consumers may be prepared to pay more for higher quality but, in the current economic climate, they may not visit your restaurant as frequently. Nevertheless, offering a great value proposition is critical and your menu is the place to make this happen. Adopt a systematic approach to optimizing your menu.
- Examine your restaurant’s capacity to produce and serve the number of meals necessary to generate the revenues necessary to be profitable. Make sure what your offer optimizes the use of your restaurant’s capacity.
- Train your employees to offer distinctive, professional and personalized service. Define your service DNA and make sure that it pervades every restaurant visit.
Food costs continue to rise, in many cases, beyond the rate of inflation. From 2013 to 2014, the Consumer Price Index for meat, fish and seafood and vegetables all experienced increases greater than the average for all food categories. It’s becoming more expensive to put an entrée on the table. At the same time, consumers are becoming more demanding. Diners are looking for healthier and more locally-sourced food products adding, in some cases, additional cost pressures. CEOs and CFOs responding to fsSTRATEGY’s 2015 C-Suite Survey ranked Cost of Goods Sold as a challenge equal to Labour Costs and Productivity, whereas in the previous two years, Cost of Goods Sold was ranked below Labour in terms of importance.
Key strategies to address product cost issues include:
- Leverage purchasing power through group buying programs.
- Explore how consolidating purchases through one prime vendor can possibly reduce product prices and minimize the costs associated with receiving orders from multiple vendors.
- As previously mentioned, retool your menus using a systematic approach to optimizing revenues and margins. Food cost percentages indicate efficiency but gross margin analysis by menu item, by menu category and for the overall menu is necessary to optimize the profit operators take to the bank.
The rise of the Millennial generation also presents opportunities and challenges to restaurant operators in terms of labour. This generation, ranging in age from 18 to 34, is most likely the current greatest source of employees for your establishment. Millennials’ expectations of employment are different than what was important to many owners and managers when they first entered the industry.
Secondly, the rising cost and availability of skilled labour is a continuing challenge. The shift toward greater in-house production flies in the face of skilled labour shortages and the need to manage labour costs. Public and private college education programs excel at teaching classic cooking skills suited to hotels and fine dining but a gap has historically existed in terms of training for the foodservice segments with the greatest market share (i.e., casual dining and quick-service restaurants). Television and on-line entertainment glorifies chefs and food but what is presented is not always a true representation of the mainstream employment opportunities in our industry.
Finally, the media has recently reported on several high-profile North American foodservice operators that have opted to eliminate optional tipping and charge an automatic service/administration fee on restaurant tabs. These operators include Danny Meyer of Union Square Hospitality Group in New York, David Jones, the owner of British Columbia’s Smoke ‘N Water, and Bobby Fry, owner of Bar Marco in Pittsburgh. Service and administration fees of somewhere between 12 and 20 per cent of restaurant tabs have been cited. These operators are using this incremental revenue to pay greater wages to their employees in the hopes of enhancing employee retention and engagement. They have also found it necessary to adjust their recipes and menus to ensure that this new business model works. In the case of David Jones, consumers reacted negatively to the automatic fixed service fee. He has since returned to a traditional tipping model. The other operators are highly optimistic about the outcome of their new business model.
Key strategies to address labour issues include:
- Reassess approaches to recruiting, training and working with employees using research that exists on what motivates Millennials at work.
- Consider exploring ways to pay employees a living wage (e.g., no tipping models), but be sure to conduct a thorough business case analysis and research with customers to ensure that the model will be accepted by your employees and customers.
- Promote the foodservice industry as a career opportunity, not just a stepping stone to employment in other industries while being educated.
- Offer employee experiences that include pride of preparation, opportunities to progress, work/life balance, constant feedback on how employees are performing and conditions that make restaurants great places in which to work.
- Collaborate and get involved with your local educational institutions to ensure they are focusing on the skills and knowledge employees need to work in your establishment. They may be training your next employees.
It’s a brave new world in Canada’s foodservice industry. Opportunities and challenges abound and continue to change. Your ability to clearly understand your key business issues and implement strategic initiatives to proactively address them is an essential ingredient for success.
About the author:
Geoff Wilson is a principal with fsSTRATEGY Inc., a consulting firm specializing in assisting all levels of the foodservice industry with the optimization of revenues and return on investment. For more information, visit www.fsSTRATEGY.com.