Takeaways From the 2019 Restaurant Finance and Development Conference

November 20, 2019Articles The Legal Intelligencer

The 2019 Restaurant Finance and Development Conference had the best and the brightest economists, chief financial officers and digital technologists talk about restaurant growth and finance. Because of the economy, wage increases, consumer demands for better, faster, quicker meals, and technology, the mom and pop restaurant needs to technology up to survive, and learn the benefits of off-premises dining.

Delivery, Technology and Labor

Restaurant growth today requires investment in promoting off-premises dining, which includes digital delivery models and take-out delivery. Restaurant technology continues to evolve and customers drive the need for technology. Mobile electronic technology, together with lifestyle changes, is causing unprecedented growth in the industry. Couple the need for delivery with the lowest rates of home ownership in the past 50 years among customers under 34 years old shows that convenience outweighs conventional wisdom.

Deliveries are growing three times faster than on-premises sales. Demand for delivery has necessitated different restaurant layouts for production, delivery and customer pick-up. These changes are more than just dedicated pick-up spots in the parking lot. Expect to see more space in the restaurant dedicated to pick-up customers.

Virtual Restaurants

Virtual restaurants are central kitchens with no customer-facing experience and are intended to fulfill customer ordering of branded foods. The three approaches are Ghost Kitchens, Virtual Kitchens and Ghost Facilities. They provide state-of-the-art kitchen equipment and help to brands for fulfillment of customer demands. They are operated by regional or national food service organizations, with high-tech equipment and may handle several different brands at the same time. They tend to locate in delivery-rich environments, which allow lower real estate costs because they are not in retail space. Their space is outfitted to be set up for high volume fulfillment during peak hours, and may have loading docks and other accommodations for delivery companies.

For restaurant operators, virtual kitchens provide several solutions. Restaurant operators need not invest in the infrastructure that speeds their processing of orders. Many labor expenses and issues are handed off by the operators. The virtual kitchens are designed for high volume takeout, delivery and catering, allowing operators to fast track off-premises expansion. In turn, the restaurant operator pays the virtual kitchen to perform these services, sometimes on a per-product basis and sometimes with a royalty. Locating a virtual restaurant in less expensive real estate with higher efficiencies can reduce costs and delivery times and provide a real competitive edge if used effectively.

Improving Delivery Models

Digital delivery providers are cannibalizing themselves in competition, yet the cost of having delivery is higher than acceptable to restaurant owners and consumers. You will see different advertising, costs and deal meals for name brand items on the delivery provider’s website, or on the restaurant operator’s website. Ordering will continue to be by telephone, by app or by Siri, but expect ordering through Google Now to increase.

Your order is routed to the virtual restaurant. The high-efficiency kitchen fulfills your order during peak hours. The order is packaged and kept warm at the loading bay, dock or pick-up area. This has taken less than two minutes. Payment is arranged through Paypal, a subscription agreement with your delivery provider, or some other digitized format. The entire customer experience and fulfillment has been optimized and automated to the fullest extent possible.

In delivery-rich environments, car delivery is replaced by motorcycles, bicycles, robots and automated vehicles. Yes drone delivery is viable in some environments, automated vehicles and robots have been shown to be more reliable and less costly. Automated vehicles are basically driverless cars that pull up in front of your residence. You will walk up to the vehicle that will announce its arrival by text, or a robot will carry your food from the vehicle and deliver it to your door. Studies show that robots that have faces like robots are perceived less threatening than robots with human faces. Their robots are so sophisticated that they will ring your door bell and can respond to basic questions. The mechanical delivery systems are in use now in planned communities in suburban environments where the demand exists and the population has demonstrated acceptance of automated vehicles and robotics.

Labor Costs Drive Automation

Increases in the minimum wage is driving automation, which replaces labor. Minimum wage increases will impact employees, restaurants, owners and consumers in different ways. Restaurants operate with thin margins. Commodity price increases alone may erode those margins. Increased labor costs will likely eliminate profitability unless operations become more efficient. Without profitability, owners may decide to close or downsize operations and lenders will not lend for improvements to increase profitability. For these reasons, the labor-saving efforts should be implemented before wages spiral up. Owners should focus on staff retention through training and culture, smart-pricing strategies and inventory management software solutions.

Restaurants will combat labor costs by concentrating on pricing, automation in the kitchen production as ordering, redesigning menus for efficiency and reducing service levels. Consider narrowing the menu to increase speed of service. Look for increased technology spending for point-of-sale systems, rising data analytics, reduced operating hours and increasing deliveries.

Employees will be affected by reduced hiring, hours worked, overtime and salary compression. To combat these rising costs, you may see minimum wage surcharges on the restaurant bill. Consumers will see price increases, reduced service levels, reduced number of restaurants and compressed operating hours, with some closing during less profitable hours.

For franchised businesses, expect to see less franchisor-operated locations where the margins are pinched and those locations will be re-franchised to franchisees. Franchisors are less affected by wage increases, and to a certain extent benefit from them. The benefit is that as wages increase, food costs will rise and that will generate additional royalties. Long term that will prevent additional locations by franchisees who have narrowed margins, but those franchisees will be in the same boat as their competitors and may benefit from the technology changes imposed by their franchisor.

The Consensus From the Conference

The clear consensus is that a recession is expected in 2020 and there is little the federal bank can do about it. The consensus cites to the unprecedented debt levels in all industries, including the restaurant industry, and unprecedented student loan debt and default rates. Added to that is that home ownership among those under 34 years old is at a very low rate, demonstrating that they are debt saturated. Moreover, the federal bank has few tools to employ to rescue business in this low interest rate environment. Look for restaurants to combat the recession by reducing debt levels, growing through technology, automation and off-premises sales.

Reprinted with permission from the November 20 issue of The Legal Intelligencer. (c) 2019 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.