There’s been no shortage of checks on the restaurant consumer’s pulse lately, as the macroeconomic environment seems a little…wobbly?
To be sure, things have been strange for a while, and unfortunately, no one really knows how to smooth out the post-pandemic business model when some parts are returning to normal (e.g., supply chains), some parts may never return to normal (e.g., 100% dine-in), and consumers are having a harder time understanding (e.g., wages are up, but debt is up). Consumers are clearly spending less at restaurants and more on groceries—unless you’re Wingstop, Chipotle, Texas Roadhouse, Taco Bell, or Chili’s.
How do you make sense of that? AlixPartners attempts to do just that with its new white paper, Restaurant Resilience: Turning Challenges into Opportunities, available exclusively to attendees of the Prosper Forum that just concluded in Amelia Island, Florida.
The consulting firm revealed the stress consumers are facing, including credit problems and loan delinquencies. A JPMorgan Chase survey found that more than 70% of low-income consumers and 67% of middle-income households are struggling due to these factors. As a result, restaurant sales have stagnated and customer traffic has decreased.
Still, opportunities exist; for example, 53% of consumers with household incomes of $50,000 or less want to dine out more often. IHOP Chief Marketing Officer Kieren Donahue pointed out this opportunity in a recent interview at the Pasadena, Calif., headquarters of parent company Dine Brands.
“Our customers are now extremely price-sensitive: 82% say the price of something on the menu influences their decision whether to order it, 77% use specials or deals to get into a restaurant they normally couldn’t afford, and 69% dine out almost every day if they could,” she said. “I love that last stat because it tells us that experiences are still the most valuable; they just have to be affordable. We’re working on that.”
The second opportunity is a strong labor market. The unemployment rate is relatively stable at around 4.3%, which has provided some optimism, especially among millennials, the largest generational cohort who are entering their prime spending years.
Finally, despite rising consumer debt, spending trends remain intact. Second-quarter GDP growth was faster than expected at 3%, driven primarily by consumer spending.
Operator strategies in unfamiliar environments
Despite some signs of stability and continued optimism, many operators are well aware that the current situation is not necessarily rosy, and second-quarter earnings reflect this. The consulting firm outlined four strategies to manage the changing consumer behaviors that are affecting sales and foot traffic:
- An evolving menu
- Enhanced consumer experience
- Investing in employees
- Implementing balanced pricing
Consumers support smaller menus because they may reduce inflationary pressures on operators, according to AlixPartners. As a result, a greater focus on core offerings has become a priority for many concepts, including McDonald’s.
Chicken has also been widely reported to be a bigger opportunity as demand increases. According to Technomic Ignite, the chicken category is seeing double-digit sales growth through 2023, which explains why brands like Taco Bell are leaning more towards the protein.
Other menu opportunities include add-ons and select limited-time offers that can spark customer interest and drive traffic. These menu initiatives should be supported by digital marketing and loyalty programs, AlixPartners said.
“Increasing direct consumer engagement has never been more important,” the consultancy noted.
Investing in the workforce is also becoming more important, AlixPartners wrote. Expanding the talent pool and providing support and training are ways to improve retention and consistency. Ensuring a diverse workforce is also a way to improve service quality, the report said. Despite recent pushback against these policies, consumers continue to value diversity, equity, and inclusion. New research from Morning Consult found that a majority of Americans support companies promoting DEI in the workplace.
Finally, according to AlixPartners, variable pricing is widely accepted by consumers “if applied appropriately,” with 71% of Gen Z supporting the practice. Revenue management platforms and AI can effectively deliver such solutions, and communication is critical to avoid a consumer backlash.
“Also, leverage digital and off-premises channels to introduce dynamic pricing as these channels demonstrate high customer buy-in and willingness to pay,” the consultancy wrote.
Still, it’s important to run pilots to gauge consumer response and continually re-evaluate pricing structures.
“Embracing innovation and leveraging new technologies are critical to engaging customers and reinventing workforce roles. A commitment to excellence in everyday service remains essential for long-term success. Despite the uncertainty of the future, the industry’s resilience has been well demonstrated,” the white paper states.
Contact Alicia Kelso [email protected]