Faced with a shaky business climate and a rat-a-tat of bad economic news, operators focus on value to lure guests and trim operating expenses to stay solvent.
This article first appeared in the 1 January 2009 issue of Restaurants & Institutions (R&I).
R&I is the USA's leading source of food and business-trend information and exclusive research on operators and restaurant patrons. Editorial coverage spans the entire foodservice industry, including chains, independent restaurants, hotels and institutions. Visit the R&I website to find out more about the magazine or to search its recipe database.
By Kate Leahy, Senior Associate Editor
"Our guests are choosing how to spend their dollars more prudently than ever," Welty says. "A lot of people have moved away. The ones that have lost their jobs are coming in less. People are choosing how often they treat themselves."
As a result, buying a specialty coffee drink, once a daily ritual for many, has turned into something of an occasion.
Welty's situation rings familiar to operators across the country, many of whom are grappling with significant drops in consumer spending. The causes are many: rising unemployment, credit woes, depressed wages and a deep sense of financial insecurity.
- It's practically assured that more struggles lie ahead. In December, the Labor Department announced that employers cut 533,000 jobs in November-the largest monthly cut in 34 years. Total job cuts for the year are expected to be at more than two million. Even in foodservice, where for most of the last decade it has been a challenge to find enough workers to fill job openings, there are layoffs and job losses. According to the U.S. Bureau of Labor Statistics, November marked the fifth straight month of job contraction in eating and drinking establishments, the longest such stretch since 1990. Since the industry's peak employment in June 2008, more than 66,000 foodservice jobs have been eliminated.
With economic woes dominating the news, it's hardly a surprise that consumer confidence mostly is tanking. According to a study released in November by Columbus, Ohio-based BIGresearch, 48.5% of Americans feel the nation is edging toward another Great Depression. But some consumers, ever-optimistic, are finding bright spots. Lower gas prices were one reason for the unexpected bump in the University of Michigan's Consumer Confidence Index in December.
Even with the uptick, confidence levels remain at lows not seen since the 1980s. Significant changes in consumer patterns are being seen throughout the industry; whether they are transitory or permanent isn't a prediction anyone is willing to make.
"People are changing their habits," says John Grady, president of Woburn, Mass.-based The Ninety Nine Restaurants. "There is a hunker-down mentality, especially in New England." This is the chain's first down year since it was purchased by Nashville, Tenn.-based O'Charley's in 2002. O'Charley's third-quarter same-store sales in 2008 were off 4%.
Grady isn't dwelling on doom-and-gloom statistics, choosing instead to be positive. "If you're down 5%, 95% of your guests are still coming in to see you," he says. Along with operators across the country, Grady and Welty are trying to buck the downward trend, offering value-centered promotions to draw customers. Meanwhile, they are scrutinizing operating expenses to identify ways to shave off stubborn pennies from profit-and-loss statements.
Offering more value on the menu is operators' lead response to the slumping economic environment, according to the 2009 Industry Forecast survey from R&I sister publication Foodservice Equipment & Supplies. Of the operators surveyed, 74.4% said they are adjusting their menus to include value items.
Although many foodservice managers remain wary of discounting menu items, the tactic resonates with consumers looking to extend their dining dollars.
At Panama Red, Welty created a coupon for a free specialty coffee beverage. Carrying the headline "Amazing local coffee company takes drastic measures in tough economic times," the coupon, mailed to 10,000 homes in Welty's markets, initially had a low capture rate. But it soon caught attention on neighborhood networking Websites and garnered coverage from local media outlets. Some coupon-carrying guests were former regular customers who delighted in treating themselves again. Others were first-timers.
"We're not a coupon-driven company," Welty says. "But we will give away a free anything to compel a new guest to come in."
Future offers are less likely to include free coffee and more likely to promote value-added incentives, including a free bottle of branded Panama Red water with every purchase of a full-priced coffee beverage.
"Instead of discounting, I want to add value," Welty says. "It's adding to what they would be buying anyway."
Good food at fair prices has long been part of The Ninety Nine Restaurants' brand identity. Even so, "We are doing more discounting than we have ever done before," Grady says.
The chain offers dinner specials to early diners and serves half-price appetizers at the bar after 8:30 p.m. Value-oriented specials, such as a $9.99 combination plate of 8 ounces of sirloin tips with 5 ounces of chicken tenders, were added in January. And in September and October, kids ate free the day after a Boston Red Sox win.
Yet like Welty, Grady is careful not to let discounts take over The Ninety Nine Restaurants' brand. "We're offering discounts, but at the same time we're coming out with limited-time offers and premium beverages," Grady explains. If a company turns to discounts too often, he says, "it starts to break your brand, and it's hard to get it back." The combination of higher-and lower-priced items also protects against sliding check averages.
Fine-dining restaurants also have found ways to deliver more bang for the buck. "We've noticed that people are more interested in value," says Ryan C. Groeschel, general manager and sommelier of the six-month-old Four Moons Restaurant & Bar in Orangeburg, S.C.
While the median entrée price is $26 in Four Moons' upscale dining room, a less-expensive tapas menu, with prices ranging from $5 (for cumin-and-truffle popcorn) to $18 (for butter-poached lobster tail with orzo), is on offer at the bar. These offerings complement the restaurant's beverage promotions, which include beer- and wine-tasting events and a weekly business professionals' night, in which guests exchange business cards to get drink specials.
Furthermore, lower-priced items have been added to the dining room's main menu. Among the new options: a pasta dish of penne tossed with basil and a tomato cream sauce for $16. "[Guests] are looking to get a great product made with quality ingredients, but they're also looking for something that they're comfortable with," Groeschel says.
Aside from finding new ways to encourage customers to visit, operators are relying on an extra dose of discipline to help rein in expenditures.
Controlling runaway food costs was the first task Chef Nicholas Stefanelli tackled after taking over the kitchen at Washington, D.C.'s upscale Mio five months ago. Prior to his arrival, the food-cost percentage hovered around 40%. In the last two months, however, it has closed out at a far more palatable 25%. What's more, he says, food quality has improved.
His strategies are many. "We do a lot of whole-animal butchering," Stefanelli explains. Whole fish, hogs and sides of beef are brought into the kitchen, butchered in-house, and used throughout the lunch and dinner menus. Instead of buying lamb racks for $12 a pound, for example, Stefanelli buys the whole lamb at $5 a pound and then relies on skill and creativity to work each cut into lunch and dinner recipes.
Other strategies pay off, too. Onion and carrot trimmings go into stocks. Inexpensive ingredients such as dried legumes become stars of soups and sides. All the while, Stefanelli stresses the importance of "first in, first out" food rotation.
"When you're not looking, someone might receive an order and put the new onions on top of the old," he says. "You get to the bottom of the onion box, and some onions have gone bad."
Simple fixes like consistent product rotation can have a significant impact on food-cost percentages and bottom lines, says Chef de Cuisine Marc Dunham of The Ranchers Club, an upscale restaurant on the campus of Oklahoma State University (OSU), Stillwater. "I'm a firm believer that there are more [food-cost] percentages lost in waste, or in over- or underpurchasing, than there are in reducing [menu prices]."
To encourage kitchen staffers-some of whom are students enrolled in OSU's school of hotel and restaurant administration-to avoid wasting food, he shares profit-and-loss data with them. When employees understand the true costs of goods, Dunham explains, they police themselves to avoid waste.
Perhaps the biggest challenge during a down economy is keeping customer counts up, or at the very least flat. Dunham and the other operators know all too well that controlling costs and creating value items represent only part of the equation. A relentless focus on service and guest satisfaction remains the top charge. "Listen to customers, even if it's not something you want to hear," Dunham says. "You can't afford to be an idealist in this market."
Products on grocery-store shelves don't get there by chance. More often than not, food companies pay grocery stores display fees to carve out premium positions for their products.
David Galbraith, director of food services at the University of Arizona, Tucson, employs this technique on campus.
The school has a 10-year contract with the company that supplies most of its beverages, but it reserves 15% of refrigerator space for other beverage brands. Convinced that the remaining retail space could be valuable for brands looking to build loyalty among students, Galbraith began seeking free product in exchange for premium positioning. He drew diagrams of every refrigerator unit and then offered available positions to vendors in exchange for $50 worth of beverages.
Available positions were snatched up quickly. Some vendors even recommended increasing the exchange rate to $100 in product. In one semester, Galbraith received $15,000 worth of product-at no cost. "It was like finding a pot of gold," he says. "I dropped $15,000 from the bottom line. That's how I looked at it."