5 reasons restaurants are facing a 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.