Limp Fries: Restaurants Join Brick-and-Mortar Retailing in Facing Economic Challenges

Press reports about the state of the retail industry have focused quite naturally on the travails of the retail segment, chronicling high-profile bankruptcies (most recently hhgregg) along with store closings by such big names as Macy’s, Sears, and even Target.

Less covered, but just as challenging, is the restaurant environment, where a number of high-profile chains have suffered over the past year, along with a general malaise experienced by the industry across-the-board.

This has now been quantified in a benchmarking report issued last month by accounting and business consulting firm BDO USA covering the operating results of publicly traded restaurants in 2016.

The BDO report found that same-store sales were flat overall, with many restaurants facing lower traffic counts.

The “fast casual” segment, which had experienced robust growth in 2015, experienced the largest loss of any restaurant segment in same-store sales in 2016 (nearly 1.5%), along with the highest cost of sales (nearly 31%).

Chipotle’s poor showing, thanks to persistent food contamination problems, didn’t help the category at all, but those results were counterbalanced by several other establishments which beat the category averages significantly (Shake Shack, Wingstop and Panera Bread).

The “casual dining” segment didn’t perform much better, with same-store sales declining nearly 1% over the year. By contrast, “upscale casual” restaurants reported an ever-so-slight same-store sales gain of 0.2%.

Better sales increases were charted at quick serve (fast food) restaurants, with same-store increases of nearly 1%. Even better results were experienced at pizza restaurants, where same-store sales were up nearly 5%.  This category was led by Domino’s with over 10% same-store sales growth, thanks in part to its Tweet-To-Order rollout and other digital innovations.  Well more than half of the Domino’s orders now come through digital channels.

What are some of the broader currents contributing to the mediocre performance of restaurant chains? Unlike retailing, where it’s easy to see how purchasing practices are migrating online from physical stores, people can hardly eat digitally.  And with “time” at an all-time premium in an economy that’s no longer in recession, it would seem that preparing meals at home hasn’t suddenly becoming easier.

The BDO analysis contends that the convenience economy and the continued attractive savings offered by dining at home combine to slow restaurant foot traffic: “To remain afloat, restaurants will need to drive sales by leveraging the very trends that are shaping this evolving consumer behaviors.”

Tactics cited by BDO as lucrative steps for restaurants include expanding delivery options, and embracing digital channels in a major way.  BDO reports that in 2016, digital food ordering accounted for nearly 2 billion restaurant transactions, and this figure is expected to continue to rise significantly.

Speaking personally, I think there is a glut of dining options presented to consumers across the various segments of the restaurant trade. One local example:  In one stretch of highway on the outskirts of a county seat just 20 miles from where I live (population ~20,000), no fewer than six national chain restaurant locations have opened up in the past 24 months strung out along the main highway, joining several others in a string of options like exhibit booths at a trade show

There’s no way that market demand can satisfy the new restaurant capacity in that town.  Something’s gotta give.

What are your thoughts about which chains are doing things right in the highly competitive restaurant environment today – and which ones are stumbling?

Doing Well by Doing Good: The Panera Bread Experience

Panera Cares

It was an idea that seemed pretty novel back in 2009 – and it was introduced with more than a little fanfare.

Panera Bread, the fast-casual bakery-café chain long known for its corporate citizenship, opened a series of stores in urban areas that touted a “pay what you can” pricing model.

The company’s charitable foundation opened these “Panera Cares” community cafés in five locations:  metro St. Louis, Chicago, Detroit, Boston and Portland, OR.

It was the next logical step for a company that had already set up its Operation Dough-Nation initiative in the 1990s.  Those activities included operating Community Breadbox cash collection boxes and donating unsold bread and baked goods to local hunger relief charities – to the tune of $100 million+ in retail value each year.

As for Panera Cares, the difference between these outlets and other Panera stores is that they operate only on suggested prices with donation boxes.  Each outlet serves approximately 3,500 people weekly.

What’s been the experience of these locations?

Interestingly, Panera chose to open them in thriving urban zones rather than in inner city districts with borderline neighborhoods.

For example, the Lakeview (Chicago) location sits amongst million-dollar townhomes along with people on the street, meaning that there are customers who can help support the café as well as those who can benefit from having a free meal.

SAME Cafe Denver
SAME Café, Denver, Colorado

The idea of Panera’s foundation was to deliver an experience that was profoundly different from a community soup kitchen or similar locations, which can have an institutional feel (as well as serving institutional-type food).

In this regard, the company’s chairman, Ron Shaich, got the idea from viewing an NBC News profile of SAME Café in Denver, CO, a restaurant founded in 2006 that also operates on a “pay what you can” model.

To make the concept work, consumers who have extra funds are asked to donate them … those who are short of funds can pay less … and those who can’t pay anything can volunteer for an hour and eat for no charge.

One way for the business model to work is operating the stores under the Panera Bread Foundation – a tax-exempt operation.  That enables the business model to be successful even though these stores bring in only about 70% of a conventional Panera outlet’s typical revenue.

Panera Bread logoBut Panera’s attempt to expand the concept beyond its five community cafés and into its regular stores wasn’t as successful.

In 2013, Panera pulled the plug on an experimental “pay what you want” turkey chili menu offering at around 50 St. Louis-area stores.  Customers could pay the $5.89 “suggested” price … they could pay more … pay less … or pay nothing.

The company reported that after an initial burst of publicity and interest, customers stopped realizing the option existed — hence the program’s termination.

But there may be a bit more to it than that.  Ayelet Gneezy, a marketing and behavioral sciences professor at the University of California San Diego, has studied the “psychological dynamics” of offering “pay what you want” systems and finds that consumer behaviors are different depending on the way the offers are communicated.

Ayelet Gneezy
Ayelet Gneezy

Here’s what Dr. Gneezy has found in her research:

●     When people can pay what they want and they also know that half of the price is going to charity, payments and donations rise well beyond what is collected if just one of these two options is offered.

●     It helps to offer a suggested price that is close to what consumers think is fair in relation to the inherent value.  Too far off that mark means that consumer reluctance – and participation – are liable to kick in. 

●     When people are asked to think about how much they wish to pay before doing so … they tend to pay less. 

●     Asking people to pay at least something is more likely to generate sustainable revenues, because laziness tends to win out over a sense of responsibility. 

The bottom line on pay-what-you-want systems appears to be this:  It’s probably not a good idea to adopt the program if you can’t afford to risk losing a good deal of money.  It is possible to minimize or manage the risk, but a lot can go wrong, too.

Fortunately for Panera Bread, its overall organization is large enough and financially strong enough to be able to absorb any misfires regarding its initiatives.

Plus, they’re able to display their social consciously bona fides in the process.

I haven’t encountered “pay-what-you-want” pricing personally.  I wonder if any readers have – and if so, how you responded.  Please share your experiences with other readers.