Can the restaurant model reinvent itself?

The restaurant industry has taken a beating because of the pandemic. As a result of the physical restrictions and additional uncertainty around lockdowns, the core business model of restaurants is itself threatened.

That’s why in this post we look at the Business Model Canvas for Restaurants 2.0.

Restaurant 2.0 Business Model

How do Restaurants 2.0 make money?
Community-Centric or Commercial Partner Strategy?
Fundraising and Valuation
Restaurant 2.0 Business Model Canvas
- Restaurant 2.0 Value Proposition
More Restaurant Posts

Restaurant and bar sales dropped 19.2% in 2020 in the US. The industry finished 2020 with ~$659 Billion in sales, well below the forecasted $899 Billion in sales prior to the pandemic.

Full-service Restaurants were down 34%, while Fast Food/Limited Service were only down 7% on average. That is why not only did delivery-driven concepts weather the storm in 2020, but they are expected to lead the recovery as well.

But that recovery will be led by limited-service restaurants, and especially fast-food concepts, that have thrived on takeout, drive-thru service and delivery during the pandemic.
Restaurant Business Online

The question is what can full-service, sit-down restaurants do to bounce back and fortify their business models to withstand any future shockwaves?

We look at the idea of the Restaurant 2.0 where new revenue streams emerge, yet the core concept of the restaurant remains the same.

**How do Restaurants 2.0 make money?**

The typical sit-down restaurant will generate a profit margin of around 10%. The range of that profit margin can be 5 – 20% generally, with the end result depending on many factors related to the volume of customers, cost base (rent, labor, etc.) and mix of food vs. alcohol sold.

That was pre-Covid.

Post-Covid, restaurants had to adapt their menu, service delivery, and as we are soon going to see, even their business model(s). In terms of the adaptation, the obvious pivot was towards delivery.

Food Delivery Business Model

The problem, fundamentally, is that the average commission on Delivery Apps is around 30%, meaning that many full-service restaurants will run at an operating loss if their core business model shifts towards delivery.

Depending on the size and location of a given full-service restaurant, delivery means adapting to both the additional preparation requirements (ie. modified menu, packaging, etc) and the operational requirements (ie. space to prep, new equipment to process orders, etc).

Full-service restaurants vs. Limited-service restaurants/Fast Food are two completely different business models, which is why hybridizing the model is not a long-term solution for many full-service restaurants.

Consumer preferences, however, have changed; and that may ultimately be the major factor driving the inception of the Restaurant 2.0 model for full-service restaurants.

Takeout and delivery have become a part of people’s routines with 68% of consumers more likely to purchase takeout from a restaurant than before the pandemic and 53% of consumers that say takeout and delivery is essential to the way they live.
QSR Magazine

What new revenue streams have emerged for restaurants?

– Meal Kits –

Meal Kits include a set of packaged ingredients and a recipe, allowing consumers to purchase the Meal Kit and cook it in their own home(s). Meal Kits emerged as a category a few years ago, but have failed to take hold in many markets largely because lack of variety. Restaurants are uniquely positioned to expand the Meal Kits category because of the creative, chef-driven options that they can create.

The Wall Street Journal reported that fewer than 10% of new meal kit users in the U.S. are around after two years.
Grocery Dive

– Subscription Menus –

Subscription Menus give restaurants a recurring revenue stream. Customers sign-up for a daily/weekly/monthly ‘subscription,’ which they then go pick-up from a given restaurant on a frequent basis. The range of potential ‘Sub. Products’ includes everything from alcohol to coffee to full menu items, and everything in-between.

Industry experts, restaurant owners and entrepreneurs are bullish on restaurant subscriptions—a business model where, for a fee ranging from a few bucks a month to over $1,000 for the year, customers receive discounted or unlimited menu items.
The Counter

The strategy between full-service restaurants and limited-service restaurants/chains will be different, but the results can be profound just the same.

In January, Matty O’Reilly, a restaurateur in Saint Paul, Minnesota, started a $99-per-month subscription plan that entitled patrons to a daily menu item at any of his four restaurants. The average subscriber spent over $300 per meal (factoring in whoever the subscriber brought with them to eat). During the pandemic, when change is the only constant, he says subscriptions are stable revenue streams.
The Counter

– Grocery –

Many restaurants started selling grocery items on the side during the pandemic, and have continued to optimize the significant amount of shelf/physical space that they have to sell grocery items that would have traditionally only been available in super markets.

Grocery is traditionally a low-margin business, yet restaurants have the advantage of having expertise in sourcing the inventory (and thus better controlling margins) and the ability to cross-sell products with their other offerings, meaning they are not beholden to operating a high-volume, low-margin model. Rather, they are able to upsell items at the Point-of-Sale (PoS) and increase their margins per customer.

The Adaptive, Restaurant 2.0 Business Model

Any full-service restaurant could combine any one of the above revenue streams to create an Adaptive Business Model that allows them to adjust to the constant uncertainty created by the pandemic. Part of what makes this model works is the pull to the physical space, rather than the push to require delivery, which eats into margins.

For each of the above-mentioned revenue streams is a new technology platform to help restaurants manage these initiatives. Tock (Meal Kits), Table 22 (Subscription Menus), Spud (Canadian eGrocery platform), Good Eggs (California eGrocery platform) and a host of other platforms have emerged to help full-service restaurants transition from their 1.0 Dine-In Model to the 2.0 Adaptive Model.

Naturally, each platform will take a fee, generally in the range of 3 – 10%; however, these platforms also help to reach new customers, which can partially offset the costs.

Community-Centric or Commercial Partner Strategy?

Popular restaurants always have a community vibe. This is part of the huge challenge that full-service restaurants face, as so much of their charm and appeal lies in the customer experience of in-person dining.

Interestingly, some data linked to the above trends shows that customers will go out of their way just to support the restaurants they love.

A recent survey showed over 55 percent of New Yorkers would consider subscribing to a favorite restaurant, some just to help them stay in business.
The Counter

Creating incentives to enable customer participation is part of the strategy, as the more that customers feel a part of the journey to help their favourite restaurants survive (and hopefully thrive again) the more likely they are to sign-up for a new initiative, no matter how experimental it may be.

There are many creative ways that restaurants are seeking to capitalize on the social capital that they have with their customers in local communities. Loyalty programs, gift cards, and merchandise are long-established ways that restaurants seek to increase the revenue that they are generating per customer (ie. ARPU) and create new customers.

If we apply the principles of the Customer-Based Corporate Valuations, however, we can see that programs like Subscription Meals & Meal Kits help to monetize the social capital between restaurants and their customer bases.

“Converting someone into a guest is harder than ever,” said O’Reilly. “But we’ve converted a certain number of people into regular customers, and now we can engage with them in a number of ways.”
Restaurant Hospitality

This community-centric strategy helps buffer demand in locations where restrictions and other measure reduce or eliminate the ability to have in-person diners. It also increases retention and other metrics around LTV (Lifetime Value) to ensure that the effort to continue to acquire and retain customers during the pandemic are rewarded financially.

Finally, it opens the door for targeted Customer Acquisition strategies at a time when other restaurants may be limiting any and all marketing expenses for survival purposes.

Fundraising and Valuation

Restaurants are typically valued in line at some kind of multiple relative to valuation standards set in a given region. With lockdown and other measures dramatically affecting restaurants ability to operate in one region vs. another, it would be hard to standardize those multiples without going into significant depth. The multiplier can be on EBITDA or Revenues – depending on who is doing the valuation.

In the US, 7 out of 10 restaurants are single-unit operations. As the vast majority of full-service restaurants lease space (vs. buy), the lease payment can get amortized under Depreciation, which is why EBITDA (Earning before Interest, Tax, Amortization, Depreciation) is commonly used as the best way to measure the financial performance of a restaurant based on operations at a standalone location.

As the majority of full-service restaurants are owner-operated, these restaurants will also assign a large expenditure to Owner Salary, which is why Revenues may sometimes be a better indicator of the potential value of a restaurant for new investors who may be interested in expanding the concept.

The importance of valuation in the context of this Business Model Canvas may relate to raising some kind of equity capital to survive. Looking at the Restaurant 2.0 Business Model, we can see that one of the achievements is to help create more recurring revenue using either Subscription Meals or Meal Kits, while at the same time increasing ARPU (Average Revenue per User) by upselling Grocery items.

The net effect of more recurring revenue and better margins per customer may increase valuation and help some restaurants thrive in the short-term, despite the fact the industry is not expected to recover in full to 2025 in the US.