The casual dining segment of the restaurant industry experienced steady growth in the early 2000s, with unit growth of chains like Applebee’s and Ruby Tuesday averaging more than 5% through 2007. Today, the aging of its baby boomer customers and a shift in consumer behavior in the post-recession economy has resulted in slowing CD growth, down to an average annual rate of 1.1% as the industry has struggled to evolve and remain relevant. With nearly 10 years of steadily declining traffic and growing competition, management and shareholders are looking for answers.
The pressures facing the CD segment of the industry continue to mount. Labor remains a major contributor. Hourly pay grew more than 3% in 2014 (after hovering at less than 2% for several years), due to state mandated increases, and it is continuing to accelerate. As increasing costs weigh down operations, the growth of new segments within the industry are putting additional pressure on margins as sales decline. Among chain restaurants, the increase in fast casual units like Chipotle or Boston Market has long outpaced the CD segment, and in the last three years, growth of quick serve such as McDonald’s and Burger King has surpassed CD.
Management teams guiding these CD restaurant chains need to take decisive steps to evolve their brands and aggressively plan for growing costs. Absent deliberate change, some CD concepts could fall to the barrage of headwinds in the form of increasing minimum wage, growing food cost, shift in consumer trends and ever-increasing competition.
Taking the Offense
Since 2006, the cumulative decline in CD traffic is a staggering 22%. Time is of the essence as EBITDA margins tighten, and the popularity of competing segments continues to grow. CD companies need to shift to an offensive mindset to counter the loss of market share by strategically identifying and implementing specific turnaround initiatives to position themselves for growth and sustainability. These initiatives should include steps to both evolve the brand and to return to key attributes that once made them the preferred choice. A number of CD concepts struggling with difficult turnarounds turn to CAPEX investments and new menu designs to recapture consumers and drive top line growth. These initiatives only add sustainable same store sales (SSS) growth if companies are effectively able to address core issues facing the brand. Before sponsors invest considerable capital in challenged concepts, it is essential to study the customer, understand changes in customer expectations and focus on the core issues facing the segment — brand relevance, service and stretched management.
Sponsors must be ready for a controlled yet tumultuous ride that will help concepts break away from ineffective and outdated strategies and steer them toward relevancy, market share growth and sustainability.
CD concepts were built to serve baby boomers and, in many instances, they have not evolved with changing consumer trends and preferences. Millennials are now more likely to eat at a restaurant than older generations (53% of millennials report eating out at least once a week, compared to 43% for the broader population). Companies must focus on capturing more of this demographic by building around key characteristics that resonate with its members.
Studies show that millennials value expedient service, transparency, authenticity and customization. CD concepts need to gain a thorough understanding of their consumers and brand perception and build the right team to strategically define cost-effective initiatives to tap into those specific characteristics. In evolving the brand, companies need to be sensitive to existing consumers to make sure they do not ostracize their current core consumer. This is a fine balance, and management teams need to lean on research data and experienced professionals to navigate this change carefully to avoid a costly setback.
Executive teams need to carefully monitor consumer feedback by focusing on key indicators to help guide the turnaround and to measure the success of turnaround efforts. While the ultimate measure is SSS growth, the more immediate tests to validate turnaround efforts are consumer metrics, such as net promoter scores and consumer sentiment trends measured through various online reporting tools. These metrics provide early indicators of progress and should be used to measure effectiveness and drive adjustments to any turnaround plan.
So the question becomes not, “How can we turn around our existing offering?” But rather, “How can we evolve this offering to appeal to a new generation of diners with an entirely new value set?”
Quality of Service
Service is a key differentiator. CD concepts have an opportunity to connect with guests through best-in-class service and hospitality. On average, a consumer visit to a CD restaurant is substantially longer than at fast casual or quick serve.
CD concepts need to capitalize on this time with consumers to build a relationship that will trigger return visits and increase the concept’s net promoter scores. The current approach at many CD concepts is so mechanical that the whole concept of hospitality is lost, as is the opportunity to build the business.
Front of house (FOH) personnel at CD concepts need to be thought of as sales people. Given the SSS struggles, it is important that turnaround efforts be developed to focus on in-unit culture and training to maximize FOH potential.
Managers need to be given the direction and resources to cultivate an environment that gets buy-in from FOH team members so they embody the brand’s commitment to hospitality, incentivize them to promote high margin items and to upsell tactfully. These efforts have to be carefully orchestrated and administered so that the company culture, message and training are cohesive and consistent at all organizational levels. These efforts must meet the high expectations of the millennial and Generation Z demographic, without straying away from the concept’s core consumer.
Instituting a culture change and retraining a workforce can be time consuming and arduous, but they are essential steps in building a sustainable brand. It involves tremendous dedication, aggressive recruiting efforts, interactive systems and capital. Companies need to customize their recruiting efforts to find talent that fits the concept’s strategic direction and employ systems that effectively cascade training efforts throughout the organization, measure and grade unit level employees and institute programs to retain star employees. Retaining employees is a critical piece that is often overlooked and can provide much needed consistency and stability for concepts that are in a turnaround phase.
Companies must provide themselves with sufficient runway by developing additional revenue generators and targeted initiatives to sustain EBITDA and sales, while the longer-term turnaround initiative is fully realized.
Some of the most effective and immediate initiatives that companies can evaluate are online ordering, loyalty programs, banquet and catering services, licensing and the development of dedicated local store marketing programs to better equip restaurant managers. Industry benchmarks show online ordering, banquets and catering services can increase revenues approximately 10%.
Successfully implementing a cultural change toward hospitality and dedication to service requires a combined effort between HR (recruit and retain), training (train and retrain), operations (execute and evaluate), marketing (internal and external messaging), IT (systems to measure) and executive management. Oftentimes companies don’t have the internal resources with the expertise or the band width to orchestrate such an undertaking, but it is critical to have a leader driving the process for it to succeed.
Executive teams in a turnaround situation are not equipped to singlehandedly deal with the various top line and cost headwinds facing the segment. Requiring executive teams to run the day-to-day business and to define strategies and cross-departmental plans to evolve the concept can end in failure. Executive teams are a critical component in defining the future of a concept, but they need dedicated and experienced resources to help drive the process so they can focus on daily execution and operations.
Due to the demand placed on management, turnaround situations typically see a considerably higher amount of turnover at the management level compared to performing companies. This has a domino effect on operations, service, sales and profitability. The onus is on sponsors and company leaders to set their executive teams up for success by surrounding them with the resources to help turnaround the business.
Equally important is ensuring a company has the right team in place and that it is creatively incentivized to effectively and expeditiously execute the turnaround plan. Depending on the extent of the turnaround effort, typical bonus structures may not always yield the best results.
In any turnaround effort, visibility into the operations is critical. Chief restructuring officers, advisors, sponsors and the executive teams must be able to measure and assess every aspect of the business effectively to react quickly and measure progress. Developing the processes, systems and tools to achieve this is the first step to any turnaround.
Being able to create a one-stop medium that houses all the key information and metrics helps identify stars and laggards and allows management to address weaknesses immediately.
Casual dining concepts must evolve to serve lapsed consumers better and to attract an ever-changing consumer set. With growing competition and new entrants, these concepts need to act swiftly to stabilize, regain market share and build EBITDA. Supporting management with the right resources and executing on the core turnaround initiatives will stem the bleeding and, more importantly, drive enterprise value through a robust and sustainable platform.