Past Present and Future: Food Service

The restaurant industry in the US has always been touted as being one of the most difficult to succeed in — with nearly 60% of new restaurants failing in the first year, and up to 80% closing their doors within five years (1). That was before the COVID-19 pandemic ravaged small businesses, forcing over 110,000 restaurants and bars across the country to permanently shutter their doors (2). The competitive landscape for the foodservice industry is crowded and complex, making it difficult for small businesses to operate let alone succeed. What follows is an analysis of the competitive landscape before and during shelter-in-place, as well as thoughts on how it might manifest itself in the future.

Competitive History

The landscape is stratified into quick-service, family/casual full-service, and fine dining with establishments ranging from large international chains to single family-owned and operated restaurants. The barriers to entry are relatively low compared to other major industries, making it an attractive option for those with an entrepreneurial spirit and strong work ethic. According to a study by the National Restaurant Association, the industry was projected to be worth $863 billion in 2019, up 3.6% from the previous year (3). Though 99% of businesses in the sector are family-owned with less than 50 employees (4), the 10 largest restaurant groups in the industry (Starbucks Corp., McDonalds Corp., Yum! Brands Inc., etc.) make up 13.5% of the industry’s revenue (5).

Leading up to 2020, starting a restaurant was no easy task, but keeping one open was a herculean endeavour. The landscape in which restaurants sit was packed with established competitors, substitutes, and a steady flow of new entrants, all vying for consumer attention. Up until the introduction of the internet, restaurants operated much like they had for decades — offering sit-down dining, providing take-out, or in some cases delivering to the consumer’s home. Operators played a delicate balancing act of keeping prices low enough to be competitive, yet high enough to cover costs and be profitable. With the advent of the gig economy, delivery apps like UberEats, Postmates, and Grubhub/Caviar made it possible for any restaurant to deliver food directly to their customers’ doors — for a steep fee of 15-40% of the final bill, eating drastically into already tight margins.

Effects of the Covid-19 Pandemic

The Covid-19 global pandemic and consequential shelter-in-place orders impacted the foodservice industry more than others, as businesses were forced to halt operations and traffic ceased overnight. Restaurants were eventually able to reopen for takeout and delivery, but savings had been decimated, and many were forced to close their doors. In most cases, large chain restaurants had larger safety nets and were able to maneuver through the early days of shelter-in-place, with the majority of the impact falling squarely on family-owned establishments. The sector’s pre-pandemic sales projections of $899 billion took a 26.6% hit, ending 2020 with $659 billion in revenue (6).

Though in spite of mass closures, demand for food delivery services skyrocketed — with the most popular delivery apps more than doubling their revenue between April and September 2020 compared to the same time frame last year (7). As the pandemic persisted past the initially speculated period, some restaurateurs pivoted, innovating within the constraints of shelter-in-place. Recognizing the high costs associated with the space necessary for sit-down dining, ghost kitchens — shared commercial kitchens used for takeout and delivery only — have created opportunities for decreased operating costs and higher rates of profitability during the pandemic. As restaurant and consumer comfort with delivery-only restaurants increases, a study from Euromonitor projected that ghost kitchens could become a $1 trillion industry in the next decade (8).

For restaurants with brick and mortar spaces, innovation came in the form of take-home DIY meal kits, and ingredient boxes. Tapping into the success of Blue Apron and Hello Fresh, many restaurants created meal boxes with par or uncooked ingredients and instructions for consumers to take home and make themselves. This strategy allowed restaurants to create a secondary revenue stream free from predatory delivery fees, and created opportunities for consumers to support local establishments and create restaurant quality meals at home.

Future Recipes for Success

The mass restaurant closures due to the pandemic have forced the industry to fundamentally alter how business is done. As the shelter-in-place orders begin to lift, we will undoubtedly see some return to pre-pandemic normalcy; however, in order to maintain a competitive advantage restaurants will have to differentiate their positioning, institutionalize operational efficiencies and continue to innovate on the dining experience.

Agile operations are necessary to compete in the VUCA world we now find ourselves so well acquainted with. By building delivery costs into the cost structure of the business, implementing repeatable processes into the workflow, as well as developing secondary revenue streams, businesses will have a greater ability to financially withstand a volatile market. Similarly, taking a resource based approach and spreading the cost of operations across multiple restaurants — as is done with ghost kitchens/shared commercial kitchens — restaurants can potentially achieve higher margins than their traditional sit-down counterparts.

As with all consumer facing businesses, how a restaurant differentiates itself amidst a crowded competitive landscape — across channels and platforms — will make a substantial difference in its potential lasting success. What is lost in the delivery-centric method is the holistic experience that comes with sit-down dining. In order to create a strategic advantage, restaurants should position themselves wisely — paying close attention to other competitors in their niche markets and developing methods for creating unique at-home dining experiences.

Conclusion

Food and connection to community are two of the most basic human needs, restaurants have served as spaces where the two meet and as such have become inextricably linked to American culture and a bedrock of the US economy. There is no future without restaurants, but the underlying industry is at an inflection point, only those who are willing to reexamine and redesign business-as-usual will succeed.

Sources

Laura OgleMay 18, 2021

WIP