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Jen Henry
The restaurant industry has always faced challenges, but lately there’s a sense that the knocks keep coming. First, pandemic shutdowns closed some restaurants’ doors. Then, both the pandemic and the war in Ukraine caused supply chain disruptions and cost increases. And now, restaurants are being slammed by the same general inflation that consumers are seeing elsewhere—which is, in turn, causing consumers to rethink their restaurant spending.Because consumers expect inflation to slow, they think restaurants’ price increases should also start to slow. But the actual costs for restaurants keep rising. The result is that restaurants are getting squeezed on both sides. I think there will be margin pressure for a while, stemming from higher commodity costs, labor shortages, and limits on what stressed consumers are willing to pay.On the commodities side, it’s the same thing you see at the grocery store: higher prices and barer shelves. This has been highlighted by recent jokes about the cost of eggs and people raising chickens in their backyards, but the real problem is the whole global food supply chain—the entire basket of goods. It’s one of the few times in recent history when nearly all restaurant input costs have increased simultaneously. Costs for some proteins have gone up 20 to 80 percent. Some items aren’t reliably available. And you’ve seen chain restaurants take things off menus.On the labor side, it’s been tough to find workers. After the industry largely shut down during the pandemic, which was of course horrible for the livelihoods of individual employees, only a portion of the workforce came back. There are debates over why, but one factor is that it’s in-person work, which is inherently less flexible than hybrid jobs in an age when many workers expect more flexibility. This industry has always been labor-intensive, but now it takes more to get employees in the door—better pay, better benefits, and better working conditions. There were minimum-wage increases in 26 American states in the past year. Half of restaurant operators said last year that their biggest challenge was recruiting and retaining employees.Restaurants are taking action. Many are using sophisticated pricing techniques and cutting-edge digital marketing to improve their bottom lines. But there are indications that to survive and thrive, restaurants might need to fundamentally transform their operating models. This includes a continued “unbundling” of the restaurant experience, in which preparing the food, serving the food on-premises, and delivering the food to homes all become discrete operations. The way this plays out will be different across the spectrum of restaurant types.
Fast-food and fast-casual restaurant companies are thinking about what they can automate. Their consumers tend to care more about speed, convenience, and price-to-value than about the sit-down service experience. So you’re seeing experiments with virtual cashiers and burger-flipping robots. Automation can be a way to deal with labor shortages and redeploy employees into higher-value roles. But it requires up-front capital expenditures, which favor companies with scale.There’s also been more interest in virtual brands and “ghost kitchens” that aren’t tied to physical stores with in-person dining, thus requiring fewer employees and less real estate. They can be a way to nimbly maximize assets and minimize costs, as when a chicken wings restaurant manages food waste by launching a virtual brand around, say, chicken thighs. Or there might be a way to jump on short-lived fads—if, say, meatballs became a trend, you could imagine pop-up, virtual meatball brands that quickly connect a new menu and logo to existing infrastructure. On the other end of the spectrum, with full-service restaurants, you’ll see the service experience continue to matter even as it evolves to manage cost pressures. Because what is the impetus to go to a restaurant in the age of delivery apps? With fine dining, the experience can be a differentiator, but the question is, how do you deliver that high-end experience in a way that’s sustainable for the employees and the restaurateur? Maybe you sell prepaid tickets, perhaps on a subscription model, for people to enter the restaurant at specific times. Maybe you’re only open during days of the week or dayparts when revenues and tips are stronger, and at other times you maximize your assets—meaning your kitchen and employees—by essentially making gourmet take-home food. The pandemic shutdown reset consumers’ expectations about what restaurants should provide. We went from “going out to eat is how I engage with the restaurant industry” to “I expect food to meet me wherever I am at any time of day.” It’s analogous to what has happened in retail, where the expectation became that a consumer could get anything delivered to their doorstep in a day or two. The silver lining is that disruption creates opportunities. If you find new ways to engage with the consumer—where you’re not just asking them to sit down in your restaurant—you can unlock different times of day and new kinds of occasions. It could create a broader role for restaurants.
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Jen Henry is a partner in McKinsey’s Charlotte office.
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