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2010: A Year of Challenges for Restaurants

Thriving in Another Tumultuous Year

By Michael Lukianoff
February 2010

While a clear economic outlook
for 2010 is still highly uncertain, one thing is for sure – restaurateurs aren’t out of the woods yet. Even economists who believe that the overall economy is on track for solid recovery in 2010 agree that businesses that depend on healthy consumer spending still have a tough row to hoe in 2010.

Just like politics, the restaurant business is local. Whether you believe forecasts for continued industry contraction in 2010 or foresee a rosier outlook, the fact is that your economic outlook depends on your local area economics. And in a zero growth environment, your gain is your competitor’s loss. That means that you need to do everything you can to improve your situation versus the competition. The long-term health of your business depends on your ability to manage your costs while simultaneously improving the total guest experience. When your competition manages the difficult times by cutting too deeply in areas that are important to your customers it creates an opportunity for you to capture more market share.

Here are some of the key challenges that businesses will face in 2010, with some thoughts on how managing each one to your best advantage can help you to emerge from crisis stronger than ever. 

The Challenge: Unemployment

Fewer people making money means fewer people spending. If unemployment in 2010 backs off from the current double-digit levels, it will still remain at historically high levels. What’s more, the duration of unemployment (the length of time people remain unemployed) hit 29 weeks in December 2009, which is the longest unemployment duration the nation has seen since the government began tracking it in 1948. This means that for the jobless, unemployment insurance is quickly running out and peoples’ emergency funds are dwindling or non-existent. This will continue to put pressure on restaurant sales as many consumers are forced to further tighten their belts. Many people are taking part-time and full-time jobs they wouldn’t consider during boom times.

The Opportunity: Upgraded Labor Pool

Despite how the 24-hour news cycle makes it feel, most people actually still have jobs, and even those who don't have jobs still require food. In fact, even the gloomiest unemployment estimates incorporating people who have given up looking or are working part-time, indicate that more than 80% of Americans are gainfully employed. That's not a good number, but it's also not Armageddon. For restaurants planning to be around for more prosperous times, high unemployment means a broader labor pool and an opportunity to improve service standards. While the competition is cutting back on service, take market share from them by upgrading your service standards with more effective, professional and attentive staff. As consumers cut back on their restaurant visits, you'll need a compelling reason for them to choose you over your competition — a poor service experience is the surest way to push them away.

The Challenge: Troubled Commercial Real Estate

As commercial real estate markets continue to be challenged by high vacancy rates and lower lease prices, many analysts are still predicting another leg down when the government programs that have been propping them up begin to wind down.

The Opportunity: Renegotiate Your Lease

Lease prices are down 40% from their 2007 peak and predicted to fall further in 2010. Many over-priced leases were signed during the boom times, and with vacancy rates continuing to rise, many landlords are more willing than ever to renegotiate to ensure they keep the vacancies under control. Before you enter the negotiation, make sure you do your homework and be prepared with comparable leases that have been signed recently. In many cases, it's well worth the investment to hire a professional to handle the renegotiating for you.

The Challenge: Price/Cost Instability

The saving grace of 2009 for many restaurateurs was the decrease they saw in many commodity costs. After several years of rapidly escalating food and energy costs, decreasing costs were a welcome reprieve that made sales declines easier to accept. 2010 is less likely to be so kind to us on the cost side, and consumer weakness will make it very difficult to pass on cost increases.

The Opportunity: Manage Your Prices and Costs Better

The two biggest mistakes restaurateurs make when pricing their menus are overdoing discounting in attempting to attract customers, and increasing prices across the board to offset cost increases.

Most restaurants engage in
price discounting without even calculating their breakeven on the discount. When you lower prices to attract more customers, you also need to know how much money you're risking if the discount fails to generate sufficient incremental traffic to cover the discount that was extended to customers who would have paid full price anyway, or who trade out of profitable purchases. Discounting is an investment and should be quantified in the same way that you quantify other marketing expenditures. In the current economic environment consumers are responding strongly to discounts, but if the discount is too low or on the wrong items it could result in less money in your pocket, even if you are bringing more people in the door.

Price Increases
Many restaurateurs will try to pass on every dollar of cost increases to the customer through across the board price increases. Others will keep prices where they are or lower them in fear of consumer backlash. Neither is a winning strategy. Price changes which target menu items least likely to result in any negative guest reaction will help you manage increased costs. Traditional menu engineering techniques are a great place to start to improve profit with better menu layout and is often well worth the investment in expert advice in this area.

Cost Management
Start by making sure you know
the plate cost of every item on your menu. Next, review your vendor statements and identify the items with the highest price volatility, then make sure your recipe costs are not designed around optimistically low costs. Isolate the least profitable items and either re-work the recipe to yield more profit, or if they are low sellers eliminate them altogether.

The Challenge: Mega-Chain Competitor Advertising

Chain restaurants with the largest advertising budgets have been pounding the airwaves with discounted food messages in an effort to drum up business. Smaller operators don’t have the financial wherewithal to either compete with large media budgets, or to go head to head on price discounting.

The Opportunity: Leverage New Media

There has been plenty of buzz about the power of social media, and while I tend to be skeptical of anything that has been as hyped as Facebook and Twitter, the truth is that social media is the most important development in product marketing since the advent of television advertising. Social media can have the strength and sincerity of word-of-mouth advertising, but with the ability to amplify an authentic sentiment as loudly as television advertising. It allows businesses to talk with their customers (and potential customers), not just at them. Smart businesses are not only learning how to get their messages out to potential customers, but are learning to listen to and act on feedback they receive. Engaging in an ongoing dialogue with customers in an industry that is inherently social is powerful, and smaller businesses can deliver this with a much deeper level of sincerity than the big chains. Effective use of this medium has the potential to level the playing field with the big budgets of the large chains.

While 2010 promises to be another challenging time for the restaurant industry, it will also be rife with opportunity for restaurateurs who are able to break out of their traditional operating paradigms. At the risk of sounding too Darwinian, well managed, well located, well capitalized restaurants which are able to meet the demands of constantly evolving consumer needs will survive turbulent times. The industry will emerge better and more in-tune with consumer needs as time brings us through the same boom and bust cycle again down the road. 

Mr. Lukianoff, a Member of Cayuga Hospitality Advisors, has more than twenty years of hospitality industry experience and a Masters Degree from Cornell’s School of Hotel Administration. His experience includes a decade of consulting to dozens of the world’s largest chain restaurant companies, and more than a decade of foodservice operations. As President of Revenue Management Solutions North America, he oversaw the company’s domestic Revenue Management & Pricing consultancy and developed new approaches to restaurant site selection and promotional analysis. He is currently the President of Czar Capital Inc., an investment and advisory company specializing in leveraging cutting edge technology and consumer research in the services industry to enhance executive decisions.

Reprinted with permission from Cayuga Hospitality Review.  All rights reserved.


Cayuga Hospitality Advisors

Also See: Make Sure the Right Contingency Plans Are in Place; Secrets of a Hotel Asset Manager / Jim Burr / October 2009

Update on Adoption of International Financial Reporting Standards (IFRS) for the U.S. Hospitality Industry / October 2009

Do You Think Like a Leader or a Manager? / William P. Fisher. Ph.D. / October 2009

A Wake Up Call, The Shadow of 9/11: Terrorism and Premises Liability for Hotels / Carroll Dubuc / September 2009

You Need to Reset Your Exit Strategy / Jim Burr / September 2009

The Electronic Guestroom / Jules A. Sieburgh / September 2009

LEADERSHIP: The Basis for Management / William P. Fisher Ph.D. / September 2009

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