A new study released by AlixPartners, a New York-based 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. The study, which includes an in-depth survey of more than 1,000 U.S. consumers, examines a wide array of challenges and opportunities in 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 from 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’ 9-year history of conducting such surveys. Moreover, those surveyed said that over the next 12 months they plan to spend even a bit more, $15.43 per meal.
This year’s survey also uncovered big anticipated cutbacks, including among higher-frequency diners. 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.
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, the type of non-restaurant establishment chosen by consumers 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.
“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 airfares 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,” says Adam Werner, managing director and co-head of the firm’s restaurant, hospitality and leisure practice. “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 2 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,” says Eric Dzwonczyk, managing director 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 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 toward delivery. For instance, nearly three-quarters (74%) of consumers 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 saying 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, 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 2 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%.
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,” says Kurt Schnaubelt, managing director and co-head of the firm’s restaurant, hospitality and leisure 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 don’t 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 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: Exploit the opportunities that exist
In general, the study describes an industry whose growth prospects 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, the traditional casual-dining segment (Applebee’s, Chili’s, Olive Garden and Red Lobster) was the top vote-getter (37%) among restaurant types of which consumers would like to see more locations opened. That was followed by the traditional family-dining segment (Bob Evans and Cracker Barrel), which was chosen by 34%, and the fast-casual segment (Chipotle and Panera), chosen by 34%.
“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,” says 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 2-4 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, the specialty fast-casual concepts (Shake Shack, Freshii and Blaze Pizza), which have seen significant growth over the past few years, was the No. 1 restaurant type consumers said they would like to see expand.
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.
The report also 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.
The AlixPartners study included a survey of 1,008 adults over age 18 from all major regions across the United States, taken Feb. 14-16.