Exterior of a Subway restaurant. A new report forecasts more chain closures across the industry. / Bloomberg Exterior of a Subway restaurant. A new report forecasts more chain closures across the industry. / Bloomberg

Restaurants Are Facing an ‘Evolve or Die’ Reality

What does the future hold for restaurants? More consolidation, more tech integrations, and — hopefully — a better understanding of each company’s core customer, according to a new Morningstar report predicting what the industry will look like in 2019.

The report summed up this year as “evolve or die” for operators, which is blunt, sure, but accurate: this year’s earnings calls were dominated by discussions around how each chain is addressing its own evolution on multiple fronts, from delivery, to labor management, to menu development, and restaurant redesigns.

In particular, the traffic and labor challenges that have been discussed all year will be a lot easier to weather for those who have a good handle on leveraging restaurant tech, understanding how delivery and off-premise sales fit into their concepts, and, in general, a thorough understanding of their particular customers’ expectations.

“Some restaurant operators have already put considerable effort into rethinking menu construction, operations, staffing, and technologies the past several years,” the report acknowledges. “However, we’ve seen varying degrees of success with these initiatives, which we ultimately trace back to how well a restaurant understands the consumer need it is best positioned to satisfy.”

The consumer needs increasingly break down into two areas: are they coming in to the restaurants with expectations of convenience or experience? RJ Hottovy, Morningstar’s senior restaurant analyst, cautioned that while it’s not an either-or situation, restaurants can speak to both customers, operators need to know which one to prioritize above the other. “Figure out what your priority is with each location,” Hottovy said. Once that question is answered, it’s a lot easier to know which delivery partner is right, or which digital ordering integration makes the most sense.

What’s Next

Some highlights from the report’s predictions:

    • More restaurant closures are coming. Chipotle, Starbucks, and Subway have already been cutting back this year, and we’re likely to see big quick-service and casual dining chains continue to pull back and reevaluate their footprint in the U.S.
    • Mergers and acquisitions activity will accelerate. Restaurant valuations are falling (Zoe’s Kitchen went from a share price of $44.85 in mid-2015 to $12.74 when Cava bought it in August) and more consolidation is likely. Hottovy and his team predicts that we may see another big deal close in this space before the end of this year.
    • No restaurant IPOs likely, but restaurant tech is a different story. We’re looking forward to getting a deeper look into Uber Eats business via Uber’s likely IPO next year, but they aren’t the only ones who might pull the trigger here. Is Toast ready to go public? That $1.4 billion valuation earlier this year was a nice vote of confidence.
    • Early adopters will start to see more concrete returns on their investments. Some chains are already talking about how quickly delivery and off-premise sales are growing each quarter, but there hasn’t been as much discussion of how revamped loyalty programs and labor management tech integrations are working out. Expect that to change next year.
    • Delivery, delivery, delivery. Once the dust settles in this sector, we’ll be looking back at it as “one of the most meaningful restaurant industry developments over the past two decades,” according to the report. Finding the right partner is the key to making delivery work well, although that’ll be difficult given the consolidation that’s sure to come in this area. In-house delivery solutions will work for some, Hottovy said, and the profit margins are more favorable in that scenario, but it’s too expensive and time-consuming for many operators to build out their own delivery capabilities.

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