Restaurant Lessons from a Recession (Part One)
History is a teacher. The lessons we learn are supposed to help us be more prepared, avoid mistakes and correct our paths into the future to lessen the chance of a repeat historical calamity. Hopefully, we won’t see this financial crisis, dubbed a recession, again, but if we do, here are some notes to remember.
The Start of a Recession – When does a recession start? What are the signs? If we knew the full answer to that, recessions would be easier to get out of with actions implemented in the early stages. Few people labeled this economic period a “recession” until late last year. By that time the restaurant industry had already started its freefall. We were faced with unprecedented price increases, lower consumer discretionary spending and a general business climate that saw a whirlwind of corporate belt tightening that included layoffs, less travel, fewer meetings and conventions. Perhaps the most damaging for the restaurant industry was the consumer’s outlook for the future. As the world was looking for solutions, dining out became a luxury that was eliminated from the budgets of many people.
The best estimate most economists have agreed upon is about October last year we could officially call ourselves in a recession, even though the term and the measuring sticks financial wizards use weren’t confirmed until much later. The key we have to remember is that jobless claims, home sales, consumer spending, corporate earnings, commodity pricing trends and other indicators are reported well after they occur. In other words, hindsight is too late.
Our industry needs better forecasting and leading numbers rather than following numbers.
The Consumer Mindset – Of all the lessons we need to remember is the mental stages of our guests. As the stock market took a tumble, the banks became insecure and negative publicity ruled the news, the average Joe changed. He became fearful of his future, his income, ability to survive and his long term prognosis for security. The impact was a general belt tightening that included the rich, the middle class and the poor. Many of our old guests changed their eating habits without regard to their personal financial prosperity. Eating out became a perceived extravagance that should be curtailed, whether financially necessary for any individual guest or not. People who are continuing to eat out as frequently at restaurants are eating differently. The diner is paying attention to value, pricing and portions.
As habits changed the restaurant industry responded poorly at first. It took many months for us to change our menus, advertising and marketing to keep our guests. In many cases it was too little far too late. The upscale, trendy, expensive segment of the hospitality business is seeing double digit declines in sales and the casual market is reeling from less dramatic declines, but still in a small margin business, 3% to 10% sales declines is the entire profit structure.
The industry has to recognize that small margins leave no room for cash reserves. In a recession there is no way to raise capital for survival. It is too late.
The Chains Become Predatory – It should have been predictable that the chains would take drastic actions and use their ability to work on shareholder money to compete for every last penny of the consumer dollar. The chains are;
- Feeding on each other. It is the old “monkey see”, “monkey do” game. Each tries to beat the other with lower priced offerings. From 99¢ specials it went to 89¢ and then 79¢. “Two-fers” went competitively from $25 down to $10 at major brands of the casual restaurant segment. Only history will tell us if the consumer will return to these hyped up discounters as wallets open again. The food quality and presentation is so poor some of the offerings are barely edible. The rush to get butts back into seats may leave permanent scars as the chains battle each other.
- Feeding on franchisees. After months of low-priced, and in many cases loss-leader, promotions the franchisees are becoming very vocal. Remember, most restaurant chains earn a percentage of each sales dollar a franchise brings in whether the franchisee is profitable or not. So while the chain’s corporate numbers are acceptable the store owners take a bath.
- Feeding on themselves. Corporate executives know the only thing that keeps them in their jobs is the shareholder. The value of each share of stock is what fuels the fires of the future. If profits (and stock price) go down, shareholders aren’t happy. However, rather than take the temporary earnings hit, corporations are selling off their stores to keep earnings respectable. That will work for a few quarters, but eventually it catches up. As assets dwindle, so do the prospects for future financial leveraging.
In the long term, the consumer will decide the fate of the chains’ marketing ploys. It will be interesting to see if the bargain basement perception works as the economy revives. The consumer may not be so apt to re-visit places that will be remembered for cheap junk food as an acceptable place to eat in the future. Permanent damage can only be assessed over time.
For the independent restaurants and smaller venues, the lesson is recognizing the customer’s need for reassurance and that we can be aware of their fears and changing habits. We have to find better ways to communicate with guests and adapt quickly.
Survival of the Fittest and Quickest – Thousands of restaurants have closed and are closing. Those that were barely surviving before 2008 left the scene first. The restaurants short on cash went second and the ones who did little or nothing to respond to the conditions above went third. Some restaurants didn’t respond well but exist as a result of deep pockets they are willing to reach into.
Chains are not shy about closing non-performing properties. The most notorious to date is probably the reported 900 stores Starbucks has shed. Across the whole spectrum, all parts of the restaurant industry have lost seats. As we emerge from this onslaught of bad news, many restaurants will be stronger. Others will continue to struggle for long periods of time as they made marketing moves that will permanently harm their brand.
The lesson is finding ways to better understand our guests and creatively keep adapting to the perception of value. Marketing becomes a daily requirement and not a knee-jerk excuse for advertising more of the same old thing.
Part two of this series will deal with lessons in marketing a restaurant during the recession.
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