For many restaurant operators, the main procurement goal over the past year was to secure suitable substitutes and ensure supply certainty. That frequently meant paying more and deprioritizing value-creation efforts.
This strategy proved acceptable last year, when margin pressure was offset by operators being able to raise menu prices. However, tactics will need to be adjusted this year as it gets more challenging to rely solely on pricing to solve margin problems. Operational challenges that made last year difficult have not faded with the end of 2021. Supply chain hiccups and staffing shortages have not improved, while government regulations related to service worker hours and vaccine mandates continue to add pressure across the industry. Commodity price volatility is accelerating, and inflation is at a 40-year high.
Most operators simply cannot afford to wait until “things get back to normal” to reprioritize continuous improvement and will need to turn their focus back on creating value. For many, any growth last year was heavily correlated to average check increases instead of improved traffic, putting many at risk if inflation reaches a tipping point for consumers and/ or higher-income earners retreat on their increased use of limited service.
AlixPartners research suggests that consumers have an increased interest in looking for more value, a trend that may accelerate as 2022 progresses. There is already proof that consumers are reacting to price increases. According to the Yelp Economic Index, review mentions of price increases—including comments like “used to be cheaper” and “more expensive”—have grown 29% from the fourth quarter of 2020 to the fourth quarter of 2021.
However, traditional cost-reduction methods of past may not be as effective in today’s environment. Instead, a multifaceted and nuanced approach to procurement improvement can help create significant value. Here are five core procurement and supply chain strategies to confront current pricing headwinds:
1. LEAN INTO STRATEGIC PARTNERSHIPS
Foodservice vendors are facing the same headwinds—manufacturing labor shortages, ingredient supply issues, rising component costs, and driver shortages and other transportation challenges—as their restaurant partners. But ultimately, end-customer restaurant profitability drives performance longevity for both.
At this challenging time, there are significant opportunities for operators and suppliers to partner more closely and strategically for mutual benefit. However, many supplier-restaurant relationships are not clearly defined to drive these efficiencies. In some cases, restaurant companies need to push more accountability upstream. In others, they need to become better customers. For example, legacy contract arrangements may inhibit a supplier’s willingness to invest in automation that can eventually reduce manufacturing labor costs. Other areas of improvement that need to be better explored at this time include more robust should-cost modeling, SKU rationalization, and more defined lead times for change. Additionally, many operators are now facing capital expenditure hurdles and challenges around securing equipment and material, especially when opening new locations.
In many scenarios, a blank-canvas approach to resetting the relationship can unbundle hidden costs, devise cutting-edge commodity strategies, and jointly drive sales growth incentives. Creatively rethinking traditional financial guardrails to meet growth agendas can lead to improved results for both.
It is also vital for companies to acknowledge that the best-in-class vendor of yesterday may not be the strategic supplier of today or tomorrow. Over the past 18 months, rapidly changing consumer dynamics have forced many businesses to reevaluate their desired positions across sectors, particularly vendors that straddle consumer products and foodservice. Many longstanding suppliers have retreated on their traditionally aggressive pursuit of new business and, in some cases, even in their willingness to bend to maintain existing business. At the same time, several newer and better positioned players eager to expand their footprint in foodservice have emerged. Restaurant operators must understand this realignment and be open to establishing new partnerships.
2. TAKE ADVANTAGE OF CONSUMER BEHAVIOR DISRUPTION
The pandemic has changed consumers forever—in our latest global research, 36% of U.S. consumers say their buying habits are permanently altered. Of all consumer sectors, changes are most dramatic in restaurants, with 50% of disrupted consumers saying their dining-out habits have changed. And consumers expect companies to change to accommodate these new behaviors.
Forced to temporarily pause longstanding purchase patterns, consumers reevaluated priorities and became more deliberate and intentional in buying habits, including where to eat, what to eat, and how much to spend on it. But this disruption offers restaurant operators opportunities to retest the importance of longstanding “sacred cows.” During the pandemic, many companies reduced menus and made item substitutions to accommodate shortages. These were often implemented with a lot less consumer angst than anticipated. This is the right time for companies to take a fresh look at menu engineering, ensuring that star menu items are properly flagged, and any promotional strategy aligns with menu profitability (Figure 1). But it is imperative to incorporate latest sales data, fresh cost inputs, and changed consumer dynamics in this analysis.
3. CAPITALIZE ON RISING SUSTAINABILITY DEMAND
Consumer focus on sustainability has accelerated due to the pandemic. In 2021, we polled U.S. consumers twice about environmental awareness in light of the pandemic. Consistently, more than 70% consumers said they now had increased environmental awareness, with 28% saying this affected their buying decisions. Ecofriendly brand attributes that consumers previously considered a bonus are now expected and increasingly influence purchase decision-making. And consumers will progressively want to hear more and more about what their beloved brands are doing in this space.
Going forward, any best-in-class procurement program must prioritize sustainability. While ecofriendly procurement and lower cost may not go together in every scenario, there are ample opportunities to create value with sustainability in mind. Examples include demand management and challenging excessive packaging specifications. Brands have lately been more successful than before at challenging poor store-level ordering practices to reduce excessive deliveries of produce, linen, seafood, smallwares, etc. And because larger players are able to completely reset their packaging portfolio with a lens toward sustainability, this increased demand may drive opportunities for others.
4. IMPROVE STORE-LEVEL FORECASTING
COVID-19 has put a spotlight on the fundamental need for restaurant operators to get better at forecasting, particularly at the local level. This is true of many multiunit companies but is particularly important for heavily franchised concepts. While recent stock shortages have been primarily driven by manufacturing and transportation challenges, in many cases they have been be further exacerbated by store-level hoarding. While store-level operators are rightfully prioritizing needs for their business, a stock shortage at one restaurant can have ripple effects across the brand. There is significant room for increased technology implementation as well as adjustments in both communication and standard operating procedures that can improve both visibility and alignment across the network. But in many cases, companies are still struggling to develop real-time insights they can act on from data that already exists.
5. EMBED MORE AGILITY INTO SUPPLY CHAIN ORGANIZATIONS
Over the last two years, the pace of change has been rapid, and companies must get set up to respond adequately. Often, procurement opportunities can vanish if not secured in record time. Additionally, complex deals will demand more organizational agility. The current competitive procurement environment means companies must tackle complex, and often hidden, cost opportunities and requires more responsive cross-functional teams. Today’s procurement and supply chain decisions necessitate increased input and ownership from a wider set of stakeholders, particularly from finance and operations teams. Many companies need to revisit their organizational and workflow models, especially as remote working and fluctuating office closures pose additional challenges.
CONCLUSION
Companies rightly prioritized putting out fires in 2021, but they must now also focus on strategically solving inflation-sparked challenges. While it remains a tough operational environment, there are opportunities to make changes that will not only decrease pressure on pricing to solve all of the sector’s problems, but also provide a growth runway. Embedding agility in processes now will help operators better respond to procurement demands of the future and improve performance in the long run.
