We have seen a number of shifts in the dynamic of how business models function over the past few years.
Airbnb, one of the largest travel accommodation providers does not own their real estate. Uber and Lyft, two of the most powerful personal transportation companies in power today does not own their vehicles. Alibaba, a world-renowned powerhouse retailer, owns no inventory. The world’s most popular media content company, Facebook, creates none of its own content. One of the newest and most popular forms of currency, Bitcoin, arguably holds no value.
The new consensus is that companies who build the quickest bridges from the consumer to the goods or services bring enormous value into the equation. In essence, a third-party company avoids paying any of the costs of providing the goods or services, but has the opportunity to capture a small percentage of the profits by inserting themselves as the middle man. Businesses that are unable to adjust and provide the same bridge to their products lose that percentage from their bottom line and must learn how to adapt to shifting consumer preferences and expectations. Investors still see restaurant investments as a hedge against the risk of these disappearing business models because ultimately, people still need to eat. The need to consume food is not going anywhere, but how, where, and why it is consumed is seeing a shift. We’re entering an operational evolution and the restaurant industry is no different. As new delivery systems attempt to bridge the gap between consumer couches and the dinner table, everyone has been pushed off an edge and they are all simply learning how to fly again. With all these changes occurring, what kind of shifts in trends can we expect to see in 2018? Based on an article from Restaurant Business Online, here are a few changes we can expect to watch unfold in 2018:
The Evolution of the Term “Restaurant”
A restaurant is defined as a “business establishment where meals or refreshments may be purchased”, but businesses are melding, models are changing, and footprints are reshaping in a way that is demanding new definitions. By today’s definition, a restaurant could encompass the typical quick service concepts and full service dine in concepts, while also including food kiosks, food trucks, the self-serve salad bar in a Whole Foods grocery store, and carry-out meals at Wawa gas stations. Are they all restaurants? Or will the term restaurant be redefined in an industry where there seems to be 10 new terms for every five new concepts that pop up each week?
A Bursting of the Meal-Kit Bubble
The various meal-kit concepts popping up worked to bridge the gap between consumers shopping at the grocery store and sitting down to finally eat their meal. Because it was in line with where consumer preferences have been heading, it has captured a lot of buzz. The intrigue has sparked a number of companies finding success in the space, but the small profit those companies are capitalizing on acting as middle man may be phased out as consumers discover how to bridge that gap themselves. There may still be space for the Meal-Kit business model with niche consumers, but the consensus is that we can expect some consolidation in the space.
Super Food Frenzy
Consumer preferences continue to trend towards more healthy, natural, and sustainable food offerings that allow for customization. Concepts continue to work towards a customer experience that allows guests to fully customize their offering while maintaining economies of scale in preparation and operations. Offering health conscious choices to supplement preconceived base options will allow concepts to add a little more to their bottom line by charging consumers a premium for those customizable upgrades to their food offerings. Consumers, hungry for customization and the satisfaction of being health conscious, will likely continue to pay those premiums.
Indulgence Among Consumers
On the other side of the coin, consumers want to treat themselves for being so health conscious. In an effort to balance the scales, you can also expect to see consumers paying premiums for regular indulgence in the instant gratification found in those carb-heavy, sugar loaded, unique out of the box craft food offerings. Sometimes even the health-conscious consumer wants to let loose and devour a maple brown sugar loaded donut with greasy bacon on top.
Enter Italian Fast Casual
A number of pizza based fast casual concepts have had recent success, but you can expect more pasta fast casual concepts to enter the sector. As operators and innovators work to discover the best economies of scale and sustainable business models around balancing fresh pasta with food costs and quickness of service, it can be expected that one or two pasta based fast casual concepts may begin to find significant success and lead the pack.
Shift in Leading Consumer Action
The use of technology will spur a learning curve amongst consumers. Some generations will be reluctant to evolve, but eventually will be forced into submission by necessity, while younger generations may find the learning curve refreshing as they begin to see the integration of the new technology they know so well into new lifestyle environments that have never found a use for the technology. Either way, operators will focus on teaching consumers how to use these new automated tools to enhance the customer experience, streamline ordering and checkout, while also helping to crack down on quality control of food product output. With successful implementation of new technology, restaurant operators may be able to cut down on labor costs, lost costs, and quality control, while actually improving the customer experience and engagement.
Beefing up IT
With new technology implementation comes new technology support. Operators may need to find a balance between improving profits by cutting costs with implementing these new technologies and maintaining secure systems by beefing up their IT at an added cost. This shift in expenses should still prove profitable overall, however, it will take some trial and error before figuring out the perfect recipe for cost percentages in the industry. Tech support costs will not only be necessary to maintain the new technology being implemented, but also in ensuring security and safety for their guest’s personal and sensitive information in a world where hackers are digitally lurking around every cyber corner.
Reset and Settle
Like many things, the restaurant industry is cyclical. There are always going to be ups and downs. Generally, when things in the space begin to slow, concepts will reset their strategies, settle into their unit growth, and look to take a breath while they optimize their existing operations to mitigate risk of slow times in preparation for their next growth spurt. Although the economy appears to be the strongest in years, some concepts continue to see decreases in sales and are adjusting their overall strategies accordingly. Concepts like BJ Brewhouse are taking the opportunity to perfect their operations at existing locations scaling back on development until they are ready again to go full steam ahead. Other concepts are being acquired at a time when their existing operations may be having challenges, but investors are still bullish on acquisitions in the space. It is likely you will see those concepts take a step back after an acquisition to assess process, adjust business models, and settle into their new cultures before heading into more aggressive expansion.
The Experiential Revolution
Consumers everywhere, not just in the restaurant sector, are looking for richer experiences from their retail providers. Malls are evolving; large department stores are shutting their doors and being backfilled by experiential tenants looking to draw crowds. Full service dine-in cinemas are taking the outdated “Dinner and a Movie” date and allowing guests to have both at the same time. Breweries and Wineries are backfilling large spaces with their ability to attract large groups of people offering them a venue to socialize with friends and a customized craft offering for their palate. Restaurants are the perfect compliment to these venues and concepts finding themselves as outparcels to such anchors may see a spike in guest traffic. The use of technology is freeing up the on-site labor to provide more unique and personable experiences to guests as well. You can expect more and more unique experiences on the horizon for 2018.
The Restaurant Industry will continue to be focus for investors and concepts that put a priority on changing with the times will be the ones to stick around for the long haul. Both consumer preferences and technology are evolving at exponential rates and what works today may very well fail tomorrow. That is why it is more important than ever to stay on your toes in the space. People may always need to eat, but they won’t always need to eat here or there. Whether you are an investor in restaurant assets or an operator of restaurant assets, we welcome the opportunity to help you stay informed on what is happening in the restaurant sector on a regular basis. If you are looking for more specific information or data regarding the restaurant industry, restaurant real estate, or strategy around all of the above, do not hesitate to reach out to us directly.