Viewpoint: Dining’s two silver linings: Efficiency and resilience

Paul Westra

For the restaurant industry, the COVID-19 pandemic was a tipping point. Establishments were forced to close their doors as customers stayed home. Many were mandated to abide by ever-evolving social distancing and health requirements, complicating operations and raising new challenges like increased costs and division of labor. But the pandemic also set the stage for constructive change – in many cases accelerating existing trends. The restaurants that successfully managed through the pandemic and its aftermath learned important lessons in how to rebalance their businesses and rebuild their profitability in a more efficient and resilient way.

Photo: FM guest columnist Paul Westra is Co-Head of Restaurant Investments at Capital One. Prior to that, Westra was an equity research analyst on Wall Street, a restaurateur (he co-founded Phoebe’s and Dylan’s Prime in NYC) and also spent time as VP of business development at Food.com, an outsourced information tech company for restaurants.

Reestablishing the customer connection

When dining out came to a screeching halt, third-party delivery apps kept many restaurants afloat, offering many businesses a lifeline to reach customers, navigate delivery and buoy sales. Before the pandemic, delivery accounted for an average of 5% of sales overall. During the pandemic, it jumped to roughly 20% of the mix. 

But this revenue stream came at a cost. Restaurants with full dining rooms could absorb the incremental packaging expenses, kitchen disruption and technology investments that partnering with delivery companies required. However, those with deserted dining rooms were forced to trade higher margin sales for lower margin ones while losing ownership of the customer relationship.

Chain restaurants that already had their own apps and a strong delivery presence were much better positioned to respond compared to independent owners. Chains leveraged their apps to retain the relationship with their customers and fuel loyalty programs, even when partnering with third-party providers for last-mile delivery.  

Since independents usually lack the economies of scale to successfully launch their own apps, many are focusing their efforts on new ways to attract and retain customers. Investing in online reservation technology is now a must. Independents, as well as chains, are beefing up their social media presence—going beyond Facebook to Instagram and TikTok, two channels that are particularly influential with Millennial diners. And they are making the most of seasonal promotions and menus, family-style catering meals and fundraisers on behalf of local charities to attract more traffic. 

Prioritizing efficiencies to rebalancing costs and revenue

Post-pandemic, many restaurants have emerged stronger than they were before – a result of doing more with less at a faster pace.   

Many restaurants streamlined and simplified their menus during the pandemic, cutting items that were low performers, time-consuming to prepare or relied on difficult-to-source ingredients. This effort took on added urgency when the prices of everything from eggs to energy rose sharply as did the availability and cost of labor. 

Once commodities began to fall and supply chain challenges eased, restaurateurs looked to their suppliers and distributors for relief. Many achieved sizable savings through material price negotiations and optimized freight routes.

Going forward, restaurants have the potential to shore up their margins even further by applying this mindset of efficiency more broadly – for instance, looking more carefully at food waste. Here, AI and tracking software innovations are helping restaurants go beyond rough approximations to provide real-time analytics of foods customers love; information that can be applied to inform menu offerings and labor schedules. Others are taking a “nose-to-tail” approach, making more efficient use of the ingredients they do use and purchasing fewer expensive items, like alternative cuts of meat. 

Although most restaurants refrained from raising prices during the pandemic for fear of losing customers, others believed that stay-at-home diners might shrug off price increases. They reasoned that many consumers had more disposable income as they were spending less. This hypothesis proved to be the case, positioning these risk-takers early on to better weather the pandemic and its aftermath. 

Those who remained on the sidelines are now beginning to take steps to recover all or part of their lost margins. Consumers have shown themselves, at least so far, willing to absorb reasonable price increases. 

The way forward

During the next 12 months, restaurants will have ample opportunity to strike a new balance, thanks to economic forces now in play. They endured 18 months of sequentially increasing costs—where input-cost inflation ran 500 bps higher than menu price increases during this period—but since May, inflation in the restaurant business ran just 3.5% and is likely to stay low as supply chain shortages dissipate and more people rejoin the labor market.

These changes make now a great time for restaurants to focus on their resiliency and recalibrate their operations for the new, post-pandemic normal. Although delivery no longer represents such a dominant percentage of sales, restaurants should continue to experiment to find the right mix, as well as invest in technology and gradually build out their menus and labor needs based on the hard data they collect.

Although many in the industry are preparing for economic uncertainty, there is no sign yet that consumer spending—that critical engine of our economy—is slowing. Restaurants themselves have proven to be a reliable indicator of consumer activity up to a year into the future, and restaurant sales have been trending briskly upward in recent weeks. 

While restaurateurs continue to navigate an evolving environment, there are signs of optimism for the industry as inflation normalizes, consumer spending holds steady and restaurant sales continue to climb.