Nine months into 2013, the restaurant industry, overall, is finding itself in stable waters as margins appear to have steadied, spending has returned to pre-recession levels, and a record low number of restaurants are facing financial distress. Looking ahead to 2014, however, traffic and spending concerns loom as consumers plan to dine out less frequently in the coming year (primarily due to a desire to eat healthier), as well as spend less per meal when dining out. That’s according to a new study of the North American restaurant and foodservice industry from AlixPartners, the global business advisory firm.
The AlixPartners North American Restaurant Consumer Sentiment Review examined the financial performance and fiscal health of more than 80 restaurants and seven foodservice companies representing approximately $230 billion in annual revenues. The comprehensive study also included a consumer survey gauging consumers’ anticipated dining behavior and the drivers of dining choice across the core restaurant segments – Quick Service (QSR), Fast Casual, Casual, Fine Dining and Convenience Stores.
“While the restaurant industry, overall, is in a good position entering the final quarter of 2013, shifting consumer preferences will likely make for a challenging 2014,” said Adam Werner, managing director at AlixPartners and co-lead of the firm’s Restaurant and Foodservice Practice. “To compete in and ‘win’ the battle for share of stomach, restaurants will have to be more nimble than ever to quickly capitalize on emerging consumer trends.”
State of the Industry
The restaurant industry overall is seeing relatively healthy frequency and spending per person compared to the same period in 2012, but, according to the AlixPartners study, the situation varies among segments. While other segments, in particular, fine dining and fast casual have seen moderate same-store sales performance, the casual dining segment is struggling with declining same-store sales growth and guest counts. As a result, AlixPartners finds that restaurant operators cannot bank on continued steady traffic as the firm’s consumer survey indicates that consumers plan on dining out less in the coming year.
Combined with looming traffic concerns, restaurant operators are also facing uncertainties when it comes to costs due largely to the potential impact of the Patient Protection and Affordable Care Act, as well as growing controversy around wage fairness, particularly in the QSR segment.
“Though restaurant operators are facing potential traffic and cost headwinds, we find that they are in a better financial position to deal with forthcoming challenges as relatively benign food-price inflation, favorable interest rates and stronger equity markets have enabled many operators to deleverage,” said Eric Dzwonczyk, managing director at AlixPartners and co-lead of the firm’s Restaurant and Foodservice Practice. “In fact, the overall industry distress level is at a historic low of 19% compared with levels of more than 50% in 2010 and 2011.”
More Consumers Dining out Less, Desire to Eat Healthier is Primary Reason
According to the AlixPartners consumer survey, consumers are dining out less now than in early 2013 as dining frequency dropped from an average of 5.8 meals out per month in Q1 2013 to only 3.8 meals out per month in Q3 2013.
“The primary driver behind the notable decline in meals out versus earlier this year, is that people who had been dining out multiple times per week are dining out less frequently – we’re seeing an overall shift toward dining out only once per week,” observed Werner.
Amidst already declining dining-out frequency, consumers surveyed by AlixPartners also reported that they plan to dine out even less in the coming year, especially at quick-service restaurants. However, in marked contrast from five previous diner surveys (taken between Q1 2009 and Q1 2013) where consumers cited financial concerns as the primary factor preventing them from eating out, AlixPartners’ Q3 2013 survey finds that the primary reason consumers plan to eat out less in the coming year is because of a desire to eat healthier.
Despite the increasing importance of health to diners, the top three drivers in choosing where to eat remain food quality (which consumers judge largely on the criteria of taste and freshness), price and value. According to the AlixPartners survey, consumers are planning on spending an average of 4.5% less per meal in the coming year than they have in the past 12 months. Furthermore, while the survey finds that the availability of healthy menu items has a significant impact on restaurant choice – 51% of consumers rated healthy menu options as “important,” “very important” or “extremely important” in choosing where to dine out – consumers indicated they are unwilling to pay extra for “healthy” or “quality” menu options.
“While the desire to eat healthy is having a greater impact on consumers’ dining decisions, price is clearly still top-of-mind and cannot be ignored,” said Dzwonczyk.
Tactics diners plan on using to lower their restaurant spend include taking advantage of coupons and promotions, eating at less expensive restaurants, and ordering fewer items per restaurant visit.
“The challenge for restaurant operators in 2014 will be finding a way to balance what consumers say they want versus what they are willing to pay for and what’s actually going to get them in the door – and that’s going to take some creativity,” continued Werner.
Innovation and Loyalty Programs Help Attract Diners, Digital Media Has Little Impact
One way restaurants can lure in diners, finds AlixPartners, is through “innovation,” which consumers surveyed defined primarily in terms of regular menu updates and availability of seasonal items.
Loyalty programs are also having a big impact on dining decisions. According to the AlixPartners survey, 59% of consumers rate loyalty programs as “slightly influential” to “somewhat influential” and 10% rate them as “very influential” to “extremely influential” in their choice of where to dine out.
“Making smart investments in innovation and loyalty programs appears to be paying off, and the restaurants seeing the most success are those keeping a close eye on consumer preferences and quickly capitalizing on shifts and emerging trends,” said Dzwonczyk.
Despite increased investments in digital media (restaurant websites and e-mail marketing, social networking sites, mobile platforms, online reservation sites and daily deal services), however, AlixPartners finds that digital media is not impacting consumers’ dining decisions as much as restaurant operators had expected or hoped with consumers saying digital-media tactics are having between “no influence” to “some influence” on their dining-out decisions.
Restaurants See Growing Threat from Grocery and Convenience Stores
As the battle for “share of stomach” heats up among restaurant segments, the overall industry is seeing fiercer competition from grocery and convenience stores as these retailers have expanded their foodservice offerings in tandem with consumers expressing a greater desire for speed-of-service and overall convenience.
“Grocery and convenience stores present a real threat to the traditional restaurant segments as more and more consumers are purchasing prepared meals at these stores,” said Werner.
Of the consumers surveyed by AlixPartners, 27% reported going to grocery stores with the sole intent to buy a meal, and 24% reported the same for convenience stores. Accessibility is also having a significant impact on meal purchases at these types of stores with 73% of consumers surveyed saying they usually purchase a prepared meal at grocery stores because they’re already there, and 76% saying the same for convenience stores.
Outlook for 2014
While AlixPartners anticipates trends such as consumers’ interest in innovation and convenience will remain strong, the firm also sees other trends emerging that are likely to create challenges for restaurant operators in 2014. Emerging trends AlixPartners expects to impact traffic and market-share include a sharpening of consumers’ price sensitivity and focus on value; a further fragmentation of consumer segments based on demographic shifts; an increase in technology’s impact on dining decisions and brand loyalty; and stiffer competition from convenience and grocery stores, as well as regional restaurant rivals.
“Just how restaurant operators will address the key trends emerging in 2014 remains to be seen, but the primary focus should be on maintaining their existing piece of the pie by increasing perceptions of value through non-traditional tactics, such as offering customization options,” concluded Dzwonczyk.
Other paths to growth, according to AlixPartners, include targeting new customers and increasing traffic by capitalizing on new day-parts (particularly breakfast), and tailoring concepts to meet the needs and preferences of increasingly influential demographic groups such as millennials and Hispanics.
About the Study
The AlixPartners North American Restaurant Consumer Sentiment Review included an online poll of 1,046 U.S. consumers conducted in September 2013. The questions focused on a number of areas, including current and planned frequency of dining occasions, expected spending on meals outside the home, preferred restaurant types, and key criteria for restaurant selection. The data are weighted to reflect the demographic composition of the adult population.