Channel Strategies: Restaurant wars
Restaurant and foodservice operators are caught between the proverbial rock and a hard place in 2008, with higher prices on everything from ingredients to energy, and a sluggish economy that is causing customers to make fewer visits and spend less per visit.
Overall, the foodservice industry saw 3.8 percent nominal growth in 2007, according to Chicago-based Technomic. But much of that growth was due to increased pricing, and economic concerns leave little room for further increases this year, as consumers already are scaling back on dining out. Technomic expects 2.2 percent nominal growth this year and a 1.7 percent drop in real growth, or growth factored without price inflation.
Full-service restaurants, in particular casual dining outlets, have taken the biggest hit, with an expected 1 percent increase in nominal growth and a 2.9 percent drop in real growth. Limited-service, or fast food, restaurants have fared slightly better, and Technomic expects to see a 3 percent increase in nominal growth and a 1 percent dip in real growth this year. On-premise bars and taverns can expect a 2.8 percent nominal sales gain, and a decline of 1.2 percent in real growth.
“What we’re seeing is a lot of softening,” says David Henkes, vice president at Technomic. “We were expecting 2008 to be a slower year, but as we look at the first four months in terms of same-store numbers, revenue numbers for all of the major chains, the industry is performing even worse than we expected.”
The outlook for the rest of the year does not look much better, he says. Most surveys indicate IRS economic stimulus checks will go toward paying off debt and other necessities rather than restaurants and more discretionary items.
“Maybe there will be an extra meal on the rebate check, but it’s certainly not all going to be spent in the foodservice channel,” Henkes says.
Trading up while trading down
As consumers spend less in the casual dining sector, many are trading down to upscale fast food outlets such as Panera Bread, Chipotle and Corner Bakery. While such chains are not free from economic woes, they are an alternative for consumers who have become accustomed to upscale products, says Michael Schaefer, consumer foodservice industry analyst at Euromonitor, Chicago.
“People are trying to save money, but in the past 10 to 15 years in the United States we’ve seen a much greater emphasis on quality, on getting a high-quality product for your money,” he says. “The key is to try to strike that balance. People do want to save money, but they’re still looking for something of good quality, even if they’re trading down.”
For beverage companies, these outlets also offer opportunities that traditional fast food chains do not, Schaefer says. They often feature a range of bottled beverages, juices and fresh-brewed teas in addition to fountain drinks.
A recent report on the “fast casual” segment indicates those choices may, in fact, be a key to the success of those restaurants. “…Trendiness and novelty continue to be a requirement for chains to thrive within the fast casual space,” Mintel International says in its “Fast Casual Restaurants – U.S.” report.
These restaurants also are perceived as offering healthier menu options, Mintel says. According to its research, 61 percent of respondents said fast casual restaurants have healthier food than traditional fast food outlets.
“With its tilt toward a higher-income consumer, fast casual may be more insulated from a downturn than QSR, especially since higher-income consumers who choose to trade down from casual or fine dining would positively weigh fast casual’s more positive health perceptions and more sophisticated décor,” it said in the report.
When it comes to beverages, Mintel found fast casual consumers are more likely to experiment with varieties tea, drink only premium coffee, exhibit bottled water brand preferences, and choose espresso-based drinks over coffee.
Traditional fast food outlets are catching on to these expanded beverage offerings, and are starting to compete by offering more bottled beverages and premium coffees. McDonald’s, for example, is rolling out its new McCafe concept, which features hot and cold espresso-based beverages, and soon will offer bottled beverages and smoothies in its restaurants. Dunkin’ Donuts, too has made premium coffee a highlight of its lineup.
“I think we’re going to see more of that going forward and more chains looking to expand their beverage selections by offering bottled beverages and more non-carbonated products in an attempt to differentiate themselves and get more consumer traffic,” Schaefer says.
For several years now, the trend in alcohol beverages has been to trade up, and Technomic’s Henkes says that’s still the case, however consumers are ordering drinks less often.
“You’re seeing fewer visits that include an alcohol drink,” he says. “But when they do order alcohol, it seems that consumers are still maintaining what they normally drink. So they’re not trading down from a premium cocktail to a well cocktail, or trading down from a $10 glass of wine to a $3 glass of wine.”
Full-service restaurants are emphasizing their alcohol menus, Schaeffer adds, to draw in consumers who are willing to spend more. “They attract a certain type of consumer who is generally younger, perhaps more willing to spend money on entertainment,” he says.
Non-alcohol “mocktails,” frozen beverages and other non-alcohol specialty beverages also are getting more popular in full-service restaurants, Henkes says. “You have operators who continue to experiment with specialty non-alcohol beverages,” Henkes says. “Those, relative to everything else, continue to do ok.”
The value proposition
Premium beverages may be attractive to consumers in the full-service and fast-casual segments, but value is what many consumers are looking for in other outlets. A number of fast food retailers have undertaken what Henkes refers to as a “barbell strategy,” in which they offer both premium and value menus.
“On the one end, you’ve got a big focus on value … really focusing on those consumers that are squeezed, that still want to eat out but only have a couple bucks,” he says. “On the other hand, most of the major fast food chains are doing some kind of premium menu offering.”
The search for value also has led foodservice operations in supermarkets and convenience stores to pick up some of the sales that restaurants are losing. Technomic forecasts supermarket foodservice sales to be up 2.9 percent in “real growth” in 2008, and convenience store foodservice to be down a slight 0.5 percent.
“You can go in there and get two hot dogs for a buck and a fountain drink for 79 cents,” Henkes says. “There is a value component to what consumers spend in convenience stores.”
“There’s less and less of a retail/foodservice split and more of a single ‘impulse’ market, where operators of all kinds are trying to reach that market for single-serve products that can be consumed on the go,” Schaefer adds. “There’s also an opportunity here since restaurant chains can no longer afford to just have the standard fountain offering â€” they really need to look more at the entire soft drinks category, from RTD teas and coffees to juices and energy beverages, and beverage companies that can help them do that will really stand to benefit.”
Have it your way
Another way beverage companies can work with foodservice operators to boost sales is to customize their product offerings and promotions to each restaurant chain. That can range from custom drink offerings to chain-specific point-of-sale materials and in-store promotions that are built around the theme of the restaurant.
“We’ve heard from a lot of restaurants that the generic POS doesn’t work anymore,” Henkes says. “It’s got to be targeted to that customer and the occasions that the customers within that restaurant are using that restaurant for.
“We’ve become big proponents of occasion-based marketing,” he says. “If suppliers don’t understand why consumers are using their customers’ restaurants, they’re really missing the boat.”
The ability to let restaurant patrons customize their own drinks also is proving to be a profitable strategy. Some restaurant chains such as Sonic offer fountain beverages with flavor options. The chain has branded a program called “Your Ultimate Drink Stop” with 16 flavor add-ins ranging from Vanilla and Chocolate to Watermelon and Blue Coconut, which can be added to anything from a fountain soda to a hot beverage. Starbucks, a chain that was built on making drinks to its customers’ specifications introduced a new energy shot concept that allows consumers to turn any hand-made beverage into an energy drink by adding a shot of B vitamins, guarana and ginseng. “Overall, for companies looking to do more in the restaurant space, the key is variety â€” new flavors, new products,” Schaefer says. “…I think we’re going to see more of that going forward, more ways to customize your beverages.”
While most consumers do not choose a restaurant based on its drink menu, beverages are important as high-margin, relatively low-cost offerings, experts say. “If you’re able to get that first drink or even that second drink, most of that is incremental revenue right to the bottom line,” Henkes says. “In a situation or an economy like we’re in now … beverage is something that should take on added importance to most operators, just given the profitability elements of beverage.”