NEW YORK, Nov. 24, 2014 (GLOBE NEWSWIRE) -- With only a little over a month remaining in 2014, profit-margin pressures remain on the front burner for restaurants. Despite stable, perhaps even improving, macroeconomic and consumer indicators, a tougher cost landscape has emerged for North American restaurants thus elevating cost management to the top of the priorities list for the remainder of the year and into 2015. That's according to a new study of the North American restaurant and foodservice industry from AlixPartners, the global business advisory firm.
The AlixPartners North American Restaurant & Foodservice Review examined the financial performance and fiscal health of more than 85 restaurants and foodservice companies representing approximately $225 billion in annual revenues. The comprehensive study also included a survey of more than 1,000 consumers gauging their anticipated dining behavior and the drivers of dining choice across the core restaurant segments – Fast Food, Fast Casual, Casual, Fine Dining and Convenience Stores.
"As we close out the final months of 2014, our research shows that the North American restaurant industry remains in a healthy state – despite navigating significant cost pressures," said Adam Werner, managing director at AlixPartners and co-lead of the firm's Restaurant and Foodservice Practice. "Although multiple factors are affecting margins, we see significant opportunity for those players best able to react quickly to emerging trends and consumer preferences."
State of the Industry
Restaurants are entering the back half of 2014 with healthier balance sheets overall. With debt levels having come down, distress levels of major public companies in the industry have fallen to a record low of 15% as measured by the Altman Z-score, which assesses the probability that a company will fall into bankruptcy within about two years. And, according to AlixPartners' consumer survey, people have been dining out and purchasing ready-to-eat meals outside of the home more in the past 12 months across all categories. This is with the exception of Fast Food where consumers surveyed reported dining at Fast Food restaurants 5.3 times (per month) on average in the past year, down from 5.8 as reported in a similar AlixPartners survey released in Q1 2013. However, overall, consumers reported eating out more at Fast Food restaurants in the past 12 months than any other type of restaurant. Consumers averaged 3.7 visits to Fast Casual restaurants (up from 3 in Q1 2013), 3.5 visits to Casual restaurants (up from 2.8) and 2 visits to Fine Dining restaurant (up from 1.5).
Despite these positives, evidence mounts on the continued encroachment of convenience stores and grocery stores on restaurants' territory. Consumers surveyed by AlixPartners reported increases in purchasing ready-to-eat meals from convenience stores and grocery stores, with grocery stores seeing a significant jump from an average of 3.3 purchases per month in the past 12 months as reported in the Q1 2013 survey to an average of 4.1 purchases.
AlixPartners' research also found that performance of industry players within each segment is decidedly mixed when it comes to earnings before interest, taxes, depreciation and amortization (EBITDA) and compound annual growth rate (CAGR). At the same time, the study showed that increased spending on investments in growth such as point-of-sale (POS) technologies and analytics has contributed to a rise in selling, general, and administrative (SG &A) expenses as a percentage of revenue, which now exceeds pre-recession levels.
Furthermore, the industry is facing significant cost headwinds likely due to a number of factors including volatile commodity prices and increased labor costs. Although the prices for wheat, rice and corn have dropped 14%, 20% and 27%, respectively, the prices for other essentials have increased (the cost of beef has increased by 39%). Causes for concern within the industry also arise from several regulatory and policy changes, including minimum wage increases as well as legislation defining large-party tips as taxable wages, both of which are very likely to increase pressure on margins.
"Despite healthier balance sheets, the industry at large is facing a serious cost problem" said Eric Dzwonczyk, managing director at AlixPartners and co-lead of the firm's Restaurant and Foodservice Practice. "Restaurants did a good job of cutting costs during the recession, but they've crept back in recently and need to be dealt with."
Consumers Likely to Dine Out More and Spend More
Against this industry performance backdrop, AlixPartners' consumer survey found that consumers seem to be feeling somewhat better about their financial situations and, as a result, expect to dine out more in the next 12 months. Overall, 76% of consumers surveyed said they plan to dine out the same or more over the course of the next year, compared to 73% and 71% who said the same in the Q1 2013 and Q1 2012 surveys respectively.
When it comes to spending on dining out, 77% of consumers surveyed said they plan to spend the same or more in the next year. Notably, only 23% of consumers said they plan to spend less on dining out, versus 33% who said the same in the Q1 2013 survey. Of consumers who said they plan to spend less on dining out, the top reasons for doing so included current finances / a need to cut back (reported by 50% and up from 44% in a Q1 2014 survey), a desire to eat healthier (reported by 49%), restaurant meals being too expensive (reported by 39%) and concern over their future financial situation (reported by 26%).
Diners Still Looking for Value, But in Different Ways
While a majority of consumers surveyed plan to spend the same or more on dining out in the next 12 months, and while the survey showed a noticeable decline in consumers planning to spend less on dining out, the AlixPartners survey also showed that consumers plan on spending about the same amount per meal in the next year as they did in the previous year. Consumers surveyed said they plan to spend an average of $15.19 per meal in the next 12 months, a slight decline from their reported average spend of $15.30 per meal in the previous year.
Though spending per meal, as reported by the consumers surveyed, is expected to remain relatively flat, the study found that value is still top-of-mind for consumers when it comes to dining out. For example, the survey found that the under-$5 price point (aka "the meal deal") continues to resonate, with 7% of consumers surveyed saying they expect to spend an average of $5 or less per meal per person in the next 12 months, up from 4% the previous 12 months. Meanwhile, consumers reported expectations of spending less in the $5.01 to $10 and $10.01 to $20 ranges in the next 12 months as compared to the previous 12 months, which suggests a "trade down" mentality is continuing.
Of note, there appears to be a shift in the ways in which diners plan to reduce their spending at restaurants and seek value. According to the survey, just 48% of consumers said they plan to use coupons, promotions and discounts to reduce their restaurant spend, versus 56% who said the same in the Q1 2013 survey. At the same time, the survey shows that 20% of value-seeking customers who are planning to reduce the amount they spend on dining out in the next 12 months will purchase read-to-eat meals, up from 14% who said the same in the Q1 2013 survey.
"Grocery and convenience stores are upping their ready-to-eat game by offering higher quality and better tasting ready-to-eat options, and we're seeing the results as value-conscious consumers are increasingly seeing ready-to-eat meals as a preferable option as they seek to reduce their dining out spend," said Dzwonczyk. "Traditional restaurants can no longer afford to ignore or underestimate the ready-to-eat, convenience and grocery store threats. We've seen a blurring of the lines between these segments and traditional restaurants, particularly Fast Food, over the past several years and we expect this to continue if traditional restaurants do not take note and find ways to win back this 'share of stomach.'"
What Matters: Healthy Menu Options and Reducing Menu Complexity
Unsurprisingly, given the unrelenting demand for health and healthier-for-you food in the broader food and beverage industry, healthy menu options have become table stakes in the restaurant industry; 83% of consumers surveyed consider healthy menu options at least somewhat important when determining where to dine out. Of note, among consumers for which healthy menu options were at least somewhat important in deciding where to dine out, the ways in which they determined whether a restaurant is healthy was unexpected, with the top factor (chosen by 61% of consumers surveyed) being whether a restaurant has a "variety of selected menu options," followed by whether a restaurant provides nutritional information on menus (chosen by 48%) and portion size (chosen by 34%).
At the same time that menu variety is impacting the restaurant choices of health-conscious consumers, a majority of all consumers surveyed prefer moderately sized menus. For example, when it comes to breakfast, 59% of consumers surveyed prefer moderately sized menus with several sections, 18% prefer large, diverse menus with many choices, and 8% prefer small, limited menus with only a few choices.
Restaurants have taken to heart the desire for reduced menu complexity among consumers and over the past several years have reduced menu size and reaped rewards from doing so, including improved execution and simplified operations, and ultimately cost cutting. As restaurants continue to reduce menu complexity, they must do so with an eye toward rising trends in drivers of restaurant choice among consumers. Furthermore, based on the study, AlixPartners contends that restaurants must be nimble as they capitalize on such trends, paying careful attention to nuances. For example, in the health food space, almond milk is quickly gaining in popularity with consumption growing at an average annual rate of 66% since 2010, while, on the other hand, organic menu options seem to be declining in importance.
"Restaurants must be smart in their strategies for reducing menu complexity, including taking into account trends in consumer preference and taking deeper dive looks into those trends to make sure that they are placing the right bets on which items to keep on their menus and which to cut," said Werner.
With significant cost headwinds on the horizon and a more confident, but still value-driven, consumer to contend with, AlixPartners finds that as restaurants plan for 2015, they must remain vigilant on costs while also finding ways to create value and differentiate as a means of growing their "share of stomach." Controlling costs means focusing on optimizing SG &A, product- and pricing-profitability maximization, supply chain productivity and marketing productivity, among other areas. AlixPartners also contends that a key to creating value for restaurants will be to make sure that as they pursue growth they change with the customer by making the right bets and making them early.
"The battle for market – or stomach – share in the restaurant industry is as fierce as ever. The winners will be those who pursue the right paths to growth and value creation, while reigning in costs," concluded Dzwonczyk.
About the Study
The AlixPartners North American Restaurant & Foodservice Review included an online poll of 1,018 U.S. consumers conducted in September 2014. The questions focused on a number of areas, including current and planned frequency of dining occasions, expected spending on meals outside the home, preferred restaurant types, and key criteria for restaurant selection. The data are weighted to reflect the demographic composition of the adult population.
AlixPartners is a leading global business-advisory firm of results-oriented professionals who specialize in creating value and restoring performance at every stage of the business lifecycle. We thrive on our ability to make a difference in high-impact situations and deliver sustainable, bottom-line results. The firm's expertise covers a wide range of businesses and industries whether they are healthy, challenged or distressed. Since 1981, we have taken a unique, small-team, action-oriented approach to helping corporate boards and management, law firms, investment banks and investors respond to critical business issues. For more information, visit www.alixpartners.com.
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