The restaurant business didn’t fare too badly in 2022 – it was a bounceback year in many ways.
What’s in store for 2023 and beyond for the restaurant industry?
- Demand for Dine In Returns
- #GhostKitchens Part II?
- Ingredient Costs Price Volatility
- The Restaurant ‘Wholesale Channel’
- Focus on The Customer, Capitalize on Loyalty
- Top 3 – Learn More
Demand for Dine In Returns
In line with a return of foot traffic for many retail businesses and department stores in 2022, restaurants saw a big resurgence for dine-in, especially in the 1st half of the year.
So far, consumers are only dining out 10% less than they were in 2019Restaurant Dive
Restaurants – Returning Customers by Category
As inflation started to take hold, many consumers began ‘re-allocating’ their expenses, and as we would expect, casual dining (ie. eating out) slowed down. That makes the outlook a little bit shaky going into 2023 and beyond.
Not that 2023 is expected to be a redux of 2020, but there were several ‘experiments’ conducted by many independent restaurants worldwide that proved to be useful for survival. We analyzed this as part of a look at the Restaurant 2.0 Business Model Canvas.
When foot traffic collapsed in 2020 in the pandemic years, many restaurateurs were forced to begin experimenting just to save their business. These ‘experiments’ included:
- Subscription Meals
- Meal Kits
- Grocery Items
Nothing could ever replace the in-person dining experience, but some of these experiments were very successful for certain independent restaurateurs:
- One restaurateur in Saint Paul, Minnesota started a successful $99 subscription plan in 2020 #Subscription
- Many restaurants converted part of their space into ‘grocery staples‘ in the early part of 2020 #Grocery
- Austin-based Epiceríe started selling ‘Epic Survival Kits‘ (Meal Kits) in early 2020 for $100 #MealKits
Thus when we look at the business model of a restaurant – plus trends in other markets such as retail – we can see that the major strategy is to diversify revenue streams (ie. referred to as omnichannel in retail).
The problem for most restaurants that engage in anything to do with food delivery is the fees associated with delivery apps, which generally range from 30 – 35%.
However, the biggest problem for the average restaurateur from a business model perspective is the arguably the lease cost. That’s why there is some speculation Ghost Kitchens will make a comeback in 2023.
#GhostKitchens Part II?
Ghost Kitchens were majorly hyped in 2020 as the ‘next restaurant trend.’ Euromonitor estimated a $1 Trillion TAM (Total Addressable Market) for Ghost Kitchens and associated categories, and everyone was getting into it – and then getting out of it.
Demand quickly fizzled out in 2021 and beyond as the massive surge in delivery demand returned to equilibrium as lockdowns eased.
The major logic behind Ghost Kitchens was not, however, lockdowns. It was a hedge against the lease cost of running a restaurant, a place to experiment with new culinary ideas without taking on a full lease. Thus Ghost Kitchens still remain relevant as a ‘new idea‘ in the restaurant space.
There are some who see 2023 as the death knell for the pandemic-inspired Ghost Kitchen era.
Ghost kitchens, for example, may struggle amid slowing delivery demand and food quality struggles, said Rishi Nigam, CEO of Franklin Junction. In 2022, some prominent platforms in the ghost kitchen space began to see restaurant deals fall through despite the ongoing success of Kitchen United, one of the first players in the game.Restaurant Dive
Ghost Kitchens V2 Business Model
There are others whoever who have been sitting back and watching the market evolve, and decided to remix the strategy from the early entrants of 2020.
Rather than pay into the marketing rabbit hole, Pineyro and his cofounders instead decided to build their Digital Kitchen in a high-density urban-residential area in the middle of the hustle and bustle of downtown Dallas.QSRMagazine
The latter addresses a fundamental problem in the original Ghost Kitchen business model – the thought that lower real-estate costs would still result in equal or greater sales. Thus many jettisoned expensive leases only to see sales collapse, or equally, see mediocre sales that were low or even negative margin due to delivery fees.
This is very similar to the problem we are seeing in the DTC-eCommerce retail space, where high CAC (Customer Acquisition Costs) have forced many emergent brands in food, fashion, apparel, beauty, etc. to refocus on the wholesale channel due to rapidly-rising CAC costs on digital channels.
We’re also focused on providing customers with the shortest delivery times possible to enhance the quality of our product and the entire customer experience, something our V1 ghost kitchen predecessors grossly overlookedQSRMagazine
With a series of changes to the V1 Ghost Kitchen model, it seems like V2 of the model has much higher chances to succeed in certain markets. In any respect, it is too early to write off the Ghost Kitchen business model off as a whole.
Ingredient Costs Price Volatility
As inflation has continued to tick-up in 2022 and into 2023, the cost pressure for restaurateurs on the back-end of supply chain and sourcing has forced them to adjust some menu item pricing.
Whether or not inflation has yet peaked is open for debate, but in the food services market many companies have already responded with innovations of their own.
Wholesale Retailers in the U.S. Market
We have seen a surge in demand for the ‘wholesale retailer‘ where restaurateurs can enter a warehouse and purchase ingredients in bulk. In the case of Restaurant Depot in the U.S., for example, their ‘cash & carry’ warehouse model requires a (free) membership like a Buyer’s Club. Those restaurateurs who live in close-enough proximity to a physical location can purchase a variety of ingredients and save money compared to delivery or local grocery options.
Publicly-traded US Foods (Ticker: USFD), on the other hand, offers both delivery and in-store pickup options through their new retail initiative called the ‘Chef’s Store’ across many regions in America.
Restaurant Wholesaler Business Model Canvas (mockup)
Food Services companies like US Foods and Chef’s Warehouse (Ticker: CHEF) were some of the best performers in public markets in 2022, with their share prices basically flat on the year. Their proximity to the supply chain exposes them to certain risks in the market, but in the current phase of the cycle, their customers need to save money to survive.
Thus amid the challenges faced in sourcing ingredients and pricing menu items for restaurateurs worldwide, innovation at the supply-chain level is rising to match the trend. This should continue into 2023 and beyond, with new offerings and an expanded presence coming to market to help independent and chains of restaurants alike.
The Restaurant ‘Wholesale Channel’
Finally, there are all the adjacent players in the restaurant industry who can be leveraged as add-ons to certain ‘restaurants experiences,’ potential partners, or supplemental cashflow for restaurateurs in line with Restaurant 2.0 business model.
The entire food supply chain – from producers, to suppliers, to food services businesses, through grocery channels, and restaurants – can be tapped via new partnership models when business model innovation (BMi) is required to survive.
When looking at the Business Model Canvas, the Channels component is an area for significant ‘experimentation’ that is relatively low-risk and low-cost relative to other initiatives.
When looking at the Retail Business Model Outlook for 2023, we saw how DTC Meal Kit company Freshly had shuttered its DTC-eCommerce operations in favor of shifting towards the wholesale channel via grocery stores.
CPGs, Meal Kits, and More
Because of the importance of foot traffic and having a retail presence for many consumer brands as a whole, there may be opportunities into 2023 and beyond for restaurateurs to optimize their physical space for CPGs (Consumer Packaged Goods), Meal Kits, and other adjacent items that are on brand.
Nobody really thinks of restaurants as supermarkets, yet many independent supermarkets themselves have restaurants in them. The value chain supports different product mixes, and independent restaurateurs and bigger chains alike sometimes export their own ‘creations’ into CPGs that they sell in supermarkets.
Thus, in line with trends in other retail markets, restaurants may become an increasingly important wholesale channel for certain types of niche products, ones that either struggle to enter major supermarket chains or are not optimized to sell there.
Focus on The Customer, Capitalize on Loyalty
Amid all the up-and-downs, twists and turns, and bumps in the road for restaurateurs, it is easy to lose focus about how to really make the model tick in the end.
Similar to retail, the idea is to keep CAC down, drive margin through high-quality ‘dining experiences,’ and retain that customer over the mid to long-term.
Ask any successful restaurant veteran what the secret of success is for any profitable and long-standing brand, and they’ll all say the same thing—consistency, and a focus on the customer.QSR Magazine
It sounds cliché to say ‘focus on the customer’ when customers themselves are stretched and reducing expenditures on discretionary spending such as eating out. But we know, through history, that even in times of turmoil and economic contraction that high-quality businesses can still thrive. Restaurants are no exception.
Looking at the average menu, we can see that sometimes consumers are overwhelmed with choices and unsure of what they want. Streamlining the decision-making process, optimizing the customer experience, and incentivizing customers to come back can go a long way towards making the business model tick when times are tough.
The risk of focusing too heavily on ‘managing costs’ is that customers come once and never want to come back. Through various Business Model Analytics and internal data points, savvy restaurateurs can spot patterns and trends that can be exploited in order to improve unit economics, retention, and customer satisfaction.
With all the moving pieces in the global economy, it is difficult to predict when macro trends such as inflation will reverse and when new cycles of economic expansion will begin. In the meantime, the business model has to be analyzed and optimized to try and make the best with what’s there. After a decent year in 2022, 2023 and beyond looks to be a bit topsy-turvy for the restaurant industry as a whole.
Nevertheless, once-in-a-generation opportunities present themselves in cyclical downturns and it is unlikely this current economic phase we are in will prove to be an exception.
Top 3 – Learn More
Business Model Canvas – Restaurant 2.0
Ghost Kitchens – Business Model Innovation