CHAPTER SIX: CONSUMERS AND THE NEW VALUE EQUATION

Industry Outlook

Challenging times require the keenest minds, so to shine a light on the road ahead, we sought the opinions of three individuals who have spent their careers fielding and analyzing data. All are uniquely qualified to speak about the outlook for the restaurant industry.

Their perspectives and advice:

J. WALKER SMITH: EXECUTIVE VICE CHAIRMAN, THE FUTURES COMPANY – A GLOBAL TRENDS AND FUTURES RESEARCH AND CONSULTANCY BUSINESS

“Businesses should make an effort to sustain and even build a presence with consumers, not retrench and disappear. Government spending will most likely stimulate a recovery and marketers must begin now to step up their marketing, not reduce it because of recent bad economic news. As competitors do pull back and leave the field wide open, there is no better opportunity to strengthen marketplace leadership. It is also imperative to find ways to keep consumers in the game. People want realistic solutions – smart, practical ideas that provide value. Show them ways to cope that fit their current financial circumstances so they don’t think retreat is their only option, and don’t stop short by only pushing cheap prices and hoping for the best. Pitch value messages as savvy ways of working around challenges, not desperate measures. The consumer future is not just about frugality – cheap and less with nothing more. It’s about thrift, which is more than just pinching pennies. Consumers are actively looking for ways to shop and buy that are cheap in price and rich with quality and experiences – with as little sacrifice as possible. The slowing economy is forcing consumers to reinvent how they satisfy their interests and needs. They are making tradeoffs, replacing one thing with another, meaning that some areas will decline, others will show growth. Businesses which adapt will be better able to weather the downturn, perhaps even growing. For example, restaurants might focus on dining at home. People are trading off eating out, but they still want celebrations, special occasions, breaks from the routine, nights with no dishes to wash, and something new and interesting. Restaurants are ideal in all of these ways – just not in a home-dining setting. So the opportunity is to redeploy skills and expertise in cooking, service, and experience to the home environment. Few restaurants, though, are skilled at delivery, so perhaps one solution is to partner with delivery, party-planning, or catering companies. They are also looking for ways to adapt to better match consumer tradeoffs. Restaurants might object that this approach is too far afield to undertake. But that is exactly what makes it smart. No restaurant is going to stand out with the typical recession fare of discounts, specials, and promotions. All are doing these things, and these strategies are designed to make traditional use of infrastructure, not adapt it to stand out in unique ways.

Nothing is more important nowadays than nurturing and cultivating customers. There is no doubt that American consumers are economizing and thinking hard about spending less money. But even so, their inimitable optimism and hopefulness endures. People are looking forward to, and have hopeful expectations of, a turnaround in the economy. Businesses must not lose sight of this by panicking over bad news and abandoning the core principles of customer service in a mad rush to cut costs at any price. Most are responding to the pressures of the current marketplace by slashing prices, simultaneously cutting back on value and service. Even worse, many are forgetting about the first principles of customer care in a rush to maximize sales at any cost. But there is an opportunity to seize an enduring competitive advantage for those who are willing to step up their commitment to customers, to invest more in cultivating customer satisfaction, and to put customers first – no matter what the cost. Particularly in a slow economy, the best customers must receive the very best service and care. There has never been a better time to differentiate and carve out a stronger position on the basis of customer service.”

HUDSON RIEHLE: SENIOR VP, RESEARCH AND INFORMATION SERVICES, THE NATIONAL RESTAURANT ASSOCIATION

“It’s clear that 2008 will end up being the most challenging environment in several decades and that 2009 will definitely be a weaker than usual sales environment…but I don’t think as bad as 2008. Surveys show quite clearly that the higher the average check per person, the more challenged the establishment is in this environment. Consumer patronage patterns are shifting across the spectrum, and consumers are changing ordering patterns within establishments.

In response, it’s really a twofold approach for operators: control costs and maintain, even build, sales. The industry is still extremely competitive and people will vote with their feet. Operators are naturally inclined to cut back on marketing and advertising, but in this environment it is even more important to stay top of mind with consumers.

The objective is to not necessarily discount price points but rather for operators to work on their value propositions – basically providing lots of choice and options; coming up with incentives, such as two for one; promoting traffic on less busy nights; presenting a viable gift card program, etc.

Overall, the focus should be on getting loyal customers in again. Our research confirms the importance of repeat customers to tableservice restaurants – in family dining, they account for 75% of sales; in fine dining for 60% of sales. Good loyalty/frequent diner programs have never been more important.

“The savvy operators, the ones who have gone through downturns before, understand that they can’t be shortsighted about controlling costs, by cutting service and letting food quality slip.” – HUDSON RIEHLE

Menu price inflation has been increasing at higher rates than historical norms, but still below overall inflation, and a full two points behind grocery store price inflation, which is running at 6%. On the subject of grocery stores, we asked consumers if they enjoy going to grocery stores and/or enjoy going to restaurants. Obviously, they most enjoy having restaurants as part of their lifestyle – it’s a better use of their time, provides social opportunities, etc. Consumers want to continue to use the restaurant industry in a way that they did in prior lifestyles. Once the economic situation improves – in the second half of 2009 – we’ll see them back in restaurants. That said, this economy has caused fundamental, lasting changes in consumers’ attitudes – they are more risk averse and more prone to saving – and they will not return exactly to their previous behavior and spending patterns in restaurants. Savvy operators are already adapting to what is emerging as their new demographic and are developing different strategies to appeal to them.

The hallmark of the restaurant industry has always been extreme flexibility and adaptability, which has served it well. There’s no reason to expect that this won’t be the case during and after the recovery. This economic environment is certainly unprecedented and the severity of the downturn can’t be understated. But this too shall pass.”

HARRY BALZER: VICE PRESIDENT AND CHIEF RESTAURANT INDUSTRY ANALYST, NPD GROUP – A GLOBAL MARKET AND RESEARCH COMPANY

“The restaurant industry has benefited from means and need. For 50 years, its pillar of growth has been an increase in the number of women working, which hit a peak at the turn of this century. Women in the workplace are why the use of restaurants and the number of take-out meals (the reason for overall sales growth in the last few decades) has increased. Now there are declining rates of employment – in particular, an increase in stay-at-home moms. The economy is certainly not helping, but this trend in female employment is resulting in fewer dinners in restaurants.

“The current economic climate is simply exposing the industry’s weaknesses, particularly at a time dinnertime, which restaurants have been facing for years.” – Harry Blazer

That said, the need for food is an important part of our lives. It’s not that we aren’t eating out and won’t eat out – people will continue to use restaurants. It’s just that we’re not eating out with the increasing frequency that we have in the past. Regardless of the economy, when surveyed, people always tend to say they are eating out less as opposed to eating out more – that they prefer home-cooked meals – which might give you worry. But this would mean that they would have to cook more and they’re just not going to do it.

The growth in 2009 will be from market share. Even if the average number of meals that Americans eat out annually is down – from 207 in 2007 to 205 in 2008 – it’s about getting a share of those 205 meals. People aren’t cutting out eating, and there are 800 or so other meals in a year that are prepared at home. As a result, the potential market for foodservice is nowhere near saturation.

Money will be made in selling food as fuel – a means to an end – and supermarkets are probably in the best competitive position. They will likely further extend their food offerings; also, in the future, Americans will be looking for packaged meals, not just packaged foods. In the competition for the food dollar, quickservice also provides good quality, inexpensive food, and an easy way to obtain it. On the other end of the spectrum, I’d say to fine dining operators to continue doing what they’re doing – fine dining is about art and social interaction, not about food as fuel.

There will be no recession in eating; there will just be winners and losers. My belief is that Americans are looking for ways to moderate food costs so they don’t rise faster than their income…without cooking more. No matter where they are in the spectrum, the restaurants that deliver value and make it easy to get food cheaper without cooking more, in new and compelling ways, will win. (“Newness” is important, but value is of greater concern now, even beyond the price pressures we see today.)

Ultimately, to be competitive, every restaurant should ask itself how it could make the lives of its customers easier. You’ll win if you can do that.”