Five Factors Driving the Restaurant Industry’s Sustainability Crisis

The restaurant and food service industry is in crisis. Fifty-five percent of consumers believe American food production is on the wrong track. The chain restaurant business model has hit a wall of flat revenues with evaporating profit margins as these chains battle for market share through price wars. The industry’s revenue growth challenge is tied directly to the desire held by more than 80 percent of consumers for companies to sell healthy food that tastes great and fits into their budget.

A growing nexus of restaurant and food service entrepreneurs are filling this gap between chain restaurants’ product offerings and consumer expectations. These pioneering restaurants, caterers and bakeries are winning customers and maintaining profit margins by offering food that is both authentic and affordable. This is the first of a six article series profiling examples of these pioneers and their best practices.

Ford CEO Alan Mulally defines business sustainability as “...your company continues.” The restaurant and food service industry confronts a sustainability crisis defined by these five trends:

1. Increased competition plus stagnant revenues. 47,000 new restaurants were started during the last year, even as the industry confronts an almost $4 billion drop in revenues. Drug stores and convenience stores are now food service competitors. The scale of increased competition is captured by the stated business goal of Joe DePinto, President and CEO of 7-Eleven: “We’re aspiring to be more of a food company...that aligns with what the consumer now wants, which is more tasty, healthy fresh food choice.”

2. Intense price competition. The revenue growth path of offering super-sized portions of high-profit-margin fries and sodas has hit a wall. The Hudson Institute’s research found that twenty-one of the largest chain restaurants served 832 million fewer servings of higher-calorie foods from 2006 to 2011. Aggressive price promotions have been the principal competitive response by the chain restaurant industry to the stagnant revenues for their highest-margin, highest-calorie food items in a bid to take market share from competitors. This price war is having marginal revenue success for any chain restaurant but it is cutting their profit margins.

3. Higher costs. Climate change is an economic tax on the cost of food. Last year’s corn crop was impacted by drought. This year’s by flood. The use of genetically engineered seeds to reduce insect management costs is experiencing record levels of eroding performance resulting in record levels of chemical insecticide use in growing corn that is adding yet another higher cost upon industrial scale farming. Drought that has cut the country’s cattle herd to 1953 levels is driving beef costs higher. The ability of industrialized food to lower food prices has hit a wall of diminishing returns. In addition, super-size proportions have not only contributed to America’s increased waistlines but increased waste with 40 percent of food in America not being eaten. This practice is increasingly out of touch with customers and is a cost that no restaurant can financially absorb. This combination of higher food costs with higher labor costs and continued increases in energy and water prices are degrading the restaurant and food service industry’s profitability.

4. Consumer mega-shift. Consumers are re-thinking what they are eating, how much they are eating and where they buy their foods - led by the millennial generation and moms. Chain restaurants’ past success promoting foods saturated with cheese, butter, salt, sugar, bacon, chemicals and secret sauces has hit a wall of diminishing revenues as the millennial generation and moms focus on issues of obesity and diabetes. “Happy Meals” are at revenue risk with more than half of all moms now reducing purchases of snacks, sugar, processed foods, soda and carbohydrates.

Uniformity is the chain restaurant business model for defining quality. Moms and the millennial generation are shifting their definition of quality away from the chain restaurant’s definition. These key consumers are increasingly defining quality based upon the farmer’s, chef’s, brewer’s or baker’s craft integrity. Tied to this consumer trend is the growing consumer behavior of buying food at farmers markets and preparing their own meals. This potentially healthier and more affordable consumer trend is a mega-threat to the food service industry’s revenues.

5. SoLoMo displacing mass media advertising's influence. Consumer decision making is shifting away from the influence generated through the chain restaurants’ mass advertising. Social media postings of actual customer experiences now drive consumer purchases. Consumers are also increasingly associating local with authentic. Finally, they are accessing information in real time and on-location through their smart phones. The combination of Social + Local + Mobil (SoLoMo) now defines the path to customer for the restaurant and food service industry.

Pioneers in rethinking the restaurant industry

There are entrepreneurs who are experiencing business success by breaking from the business model of selling industrially-sourced foods in super-sized proportions at promotional prices. These pioneers are winning loyal customers among the millennial generation and moms by offering local, fresh food at affordable prices. Their profit margins are attractively high for the food service industry because they are focused upon reducing food waste and energy/water inefficiency. Authenticity built upon serving the well-being of their customers and community provides them with branding leadership that blunts the chain restaurants’ price war threats and mass advertising. Examples of such entrepreneurs and business leaders that will be profiled in subsequent articles include:

Libby Auld, Owner of Elote in Tulsa, Oklahoma. Libby has pioneered a farm-to-fork-to-farm system for supplying her restaurant with local, fresh food that is winning loyal customers. She is also a leader in the redevelopment of Tulsa’s downtown through the repurposing of existing buildings.

Debbie Pfisterer, Owner of Blue Heron Catering in Oakland, California. Debbie’s award-winning focus on authenticity has generated 300 percent sales growth for her catering business.

Jorge Saldana, Owner of Cancun Sabor Mexicano Restaurant in Berkeley, California. Jorge farms his own fresh produce and lists them daily on a chalkboard above his restaurant’s customer-serving line. His brand messaging is, “We farm our own organic vegetables.”

Mike Williams, General Manager of Crogan’s in Montclair, California. Mike re-lamped his restaurant with LEDs to eliminate his frustration over restaurant lightbulbs burning out during dining hours. Since making this investment two years ago, not a single LED light has burned out. His investment is reducing his electricity costs, reducing his bulb replacement costs and is providing his diners with a superior dining environment.

Dan Holzer, Quality Assurance Manager of SemiFreddi’s, a bakery in Alameda, California. Dan’s management of the waste stream for this significantly-sized bakery has resulted in a 75 percent recycling level, plus the generation of a new source of revenues from selling the bakery’s day-old bread.

Carolina Miranda, Alameda County Green Business Program. Alameda County’s Green Business Program may have certified more green businesses than any other government agency. Their certified green restaurants program is helping restaurants and food service companies win new customers, improve profit margins and reduce their environmental footprint.

Perry Patel, Owner, and Greg Mauldin, General Manager for the Hotel Shattuck Plaza along with Banks White, Executive Chef, in their hotel restaurant, FIVE. The Hotel Shattuck Plaza is located in Berkeley, California, and provides an enterprise-scale case study on repurposing an existing building to generate a superior hotel and restaurant guest experience through sustainable best practices.

Bill Roth is an economist and the Founder of Earth 2017. He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues. Follow him on Twitter: @earth2017

Related posts:

Five Factors Driving the Restaurant Industry’s Sustainability Crisis

Cancun Sabor Mexicano: Affordable Authenticity

SemiFreddi's and Crogan's Green-Certified Food Service Business

Consumer "Search for Authenticity" Driving Food Sales Crisis

Enterprise-Scale Strategies for Growing Sustainable Restaurant Revenues