Too Many Restaurants
Restaurants in major markets across the country are struggling to adjust to labor shortages, pay increased health care costs, absorb rising food costs and steep rents, and deal with the expectations of today’s consumers. Some are downsizing, and Others are turning to delivery apps to grow revenue. Some are just shutting their doors.
Consumer interest in visiting restaurants on a regular basis does not encourage aggressive growth plans for restaurant operators. This sense of holding back and even cutting back on unit expansion is reflected in ReCount data. Their latest count of U.S. commercial restaurants is 660,755. Reviewing ReCount Spring 2018 unit counts versus Spring 2017 reveals a 1% drop in units, translating into 4,330 fewer units than a year ago. This decline hardly puts a damper on an already overbuilt situation. Simply put, we have more restaurants than we have bodies to fill them. It’s an uphill battle for full service and quick serve independents—through spring of 2018, they were down 3,296 and 2,423 units, respectively versus a year ago.
While there was a slight increase in chain units, the increase did not have a meaningful impact. There was little to no increase in QSR units. On the other hand, full service chain units grew by 2%.
Fast casual unit expansion slows dramatically
After unit expansion of 8%-9% year-after-year, fast casual unit expansion slowed, rising 2% in Spring 2018. This growth amounted to an additional 514 units in the segment, bringing the total to 25,431.
Why restaurants fail
There are numerous reasons why restaurants fail and they vary based on the segment. Historically, location topped the list, however, in today’s market, the labor situation has become a key barrier to success. The high cost of labor, labor shortages and immigration laws have contributed to operators having to hire inexperienced help. Lack of experience impacts both the front and back of the house.
Consumers visit a restaurant for more than the food. They come for an experience and when both are inadequate, the value received is null especially considering the price paid for the meal. Poor service has the greatest impact on overall customer satisfaction and a reputation for bad service spreads like wildfire, much faster than days of old with the presence of social media.
While labor issues and location top the list for many as to why restaurants fail, many other reasons come into play:
Ineffective marketing and advertising
Brand image – failure to establish a brand
Food safety issues
Lack of attention to details, mostly cleanliness
• Lack of consistency
• Lack of dedication and time commitment on behalf of the owner
• Poor inventory management—managing food costs
• Insufficient market analysis
• Themed restaurants do not have the repeat visit rate warranted to drive growth
• Lack of creativity— no competitive point of difference • Atmosphere—lighting, music, seating, etc.
All is not “doom and gloom”
While nationally there have been more closures than openings, there are markets where unit growth is occurring. The purpose of this review was to understand what occurred in these growth markets that encouraged and enabled restaurant operators to continue to build more stores. Could we uncover lessons that could help operators understand market dynamics and prevent additional closings?
What’s unique? How these markets are weathering the storm
Analyzing several of the strongest markets in terms of unit expansion, we find that gains are attributable to population growth, business friendly markets, strong community involvement, and unique food and beverage offerings.
Phoenix – One of the fastest-growing cities in the country, a population of over four million people, this city is an easier place than most to conduct business.
Las Vegas – There is a popularity of celebrity restaurants and growth in the number and variety of food options available for tourists and residents.
Austin, Texas – It’s grown in size and sophistication, and in the process, the restaurant scene has exploded. Austin gets a lot of national and international press from South by Southwest and the city’s food festivals, and it’s really helped drive a lot of the restaurant growth.
Oklahoma City – The downtown dining scene is an example of the city’s growth as a foodie hub and the continued movement toward locally sourced foods and higher quality.
Traverse City – Bon Appetit magazine cites Traverse City as one of the “Top Five Foodie Towns” across the U.S.
Do your homework – careful analysis is required
To expand or contract units is a calculated decision on the part of restaurant operators. Expanding a concept to a broader segment of consumers can be a means to drive traffic, but only if a full analysis of the advantages to a given location has been considered. These include the level of unit density per area population, presence of target customers in the trade area, concentration of competition in the market, and general consumer market dynamics.