Really, Why are Restaurants Failing?

Really, Why are Restaurants Failing?

James Sandrini 3rd March 2018

“Serves them right, they over-expanded,” said some. “They lost their way; why didn’t they stick to their values?” lamented others.

Here’s what we know: 20 Byrons are due to close. 11 Stradas bit the dust. 12 Jamies are saying ciao. 100 – yes 100 – Prezzo owned outlets are joining them. And a platter of EATs are not far behind. This isn’t churn. This is an outbreak.

984 restaurants closed in 2017, up 20% on the previous year. January and February depict a graver 2018. One question. Why?

Structural

Rates. Rent. Payroll. Food prices. They’re all going up. An industry that operates on tight margins is under siege from rising costs.

These ‘structural’ changes are challenging, and in many cases unexpected. Even those that have planned – as they should – for regulatory & supplier shifts have been hit. Hard.

EAT are profitable. Their like-for-likes were up 5% according to June 2017 accounts. And yet they’re likely to close a series of stores, which suggests that investor confidence is waning, and the landscape deteriorating.

Social

The pace and power of social change have been even greater:

We’re eating out more than ever, but we have less expendable cash to spend when we do. Breakfast and brunch, periods of lower spend, have long-since replaced traditional lunchtime trade. Add in the sheer level of competition, and many restaurants are forced to offer more, for less.

Much of the competition is being compelled by outside investment. Not necessarily a negative, but this influx of cash often comes with aggressive growth targets that, under strain, can stretch an operation – and with it the customer experience – to breaking point.

"This isn't churn. This is an outbreak"

A new wave of competitors come in subversive form: Meal kits, street food stalls and grab & go alternatives are stealing guests away before they even consider eating at a restaurant. Expectations are up too. Guests expect regular menu changes, a host of specials and memorable serves, in search of a unique experience. All this comes at a precipitous cost.

The greatest shift in the industry however, has been born of a technological shift. Delivery platforms now control distribution and search aggregators marshal discovery; there have never been more middle-men between you and your customer.

And these platforms can expend fortunes to acquire new customers and sponsor their loyalty, without any need to balance the books (Deliveroo might not turn a profit for half a decade). Broad and unremitting, these structural and social changes have transformed the industry. But success or failure is still defined by strategy.

Strategic

First-mover advantage – so vital in platform models that rely on network effects – rarely applies to bricks & mortar operations, especially when venturing into a new territory. And yet restaurant groups frantically race to open sites at a rapid, incoherent pace.

A pace that requires strict, operational efficiency, in favour of dexterity and investigation. A pace that relies on templated design and ideas, rather than regular review; ‘what we always did’ instead of ‘what we could do.’

Companies launch new sites in locations they do not understand or care to adapt to. They overlap an offer built for one region in another. They take for granted many of the reasons that their restaurants were so loved in the first place.

"Delivery platforms now control distribution and search aggregators marshal discovery; there have never been more middle-men between you and your customer"

Competitive advantage is often confused for a transient, departing trend: Just because everyone loves your concept today, it doesn’t mean that it will retain any equity once the seas shift. And the seas always shift. The restaurant industry is not the only one to struggle with scale, of course.

Repeating an operation across multiple venues isn’t without difficulty, but it is a familiar concept. Scaling HR and recruitment, however, are not.

There is nothing more expensive than manning a venue with untrained or unmotivated team members. If the business doesn’t retain, foster and develop talent as it grows, then future openings simply will not measure up. Unfortunately for food & drink, there has never been more viable alternatives to working in the industry. And the trade has been slow to match the pay, benefits and career opportunities being provided beyond its walls.

Technology, the transformative force of our times, has been treated as an enemy. This antipathy is – at best – a strategic error. Despite a bevy of data, few restaurant groups personalise their communications; fewer still react to the information they are presented.

There have never been more restaurants. And there have never been more reasons to fear for their future.
Some will prosper, defined by a strategy that embraces and adapts to structural and social change. But the outbreak isn’t over.

This article was originally posted on Propel.