On the Margin
Small restaurant chain executives are optimistic on year ahead

Small restaurant chain executives are optimistic on year ahead

This post is part of the On the Margin blog.

Growth chain executives expect to have a good year in 2016 thanks to new unit development and same-store sales improvement — but that growth is fostering a competitive environment that makes it more difficult to find good sites and get good help.

That at least is the big takeaway from the first ever restaurant company survey from the consulting firm RSM International.

“Smaller, growing companies appear to be very, very optimistic,” said John Nicolopoulos, a Boston-based partner and national retail and restaurant sector leader for RSM.

The survey targeted executives from smaller concepts in the hopes of getting more growth-focused chains. So nearly 80 percent of the companies represented have fewer than 25 units. And three quarters of the respondents have revenues of less than $150 million.

It is also a small survey, with interviews from 150 executives, 50 apiece from quick-service, fast-casual and casual-dining restaurants. But it does provide some interesting insight into the views of those executives and the challenges they face.

Most of the executives surveyed expect growth this year, with 69 percent saying that top-line revenue should grow in 2016. Only 4 percent are expecting a decline, and 27 percent expect revenues to be flat.

Interestingly, casual-dining chain executives were the most optimistic, expecting median growth of 12 percent. By contrast, fast-casual executives expect 5.9-percent growth. Quick-service concepts expect 9.8-percent growth.

Executives in every sector are expecting more growth to come from improving same-store sales than from new unit development, but in each case the executives expect a fair amount of both.

They’re also expecting to borrow money from banks and get investment from private-equity groups to fund that growth. Nearly three quarters of executives expect to get bank financing, while 47 percent expect to get private-equity investment. About a quarter of respondents said they would try an IPO or sell other forms of equity in their business, while 24 percent expect to get sale-leaseback financing.

Nicolopoulos said that more private-equity groups RSM works with are targeting smaller growth concepts. “Private equity is looking at concepts much sooner in their life cycle,” he said. “If they see a concept that’s hot and has legs, they’ll invest.”

All of the growth in the restaurant industry is having an impact on the broader market, intensifying competition for customers, employees and real estate.

Consider that among several listed barriers to growth, the biggest were competition-related.

“Increased competitive activity” was listed as a barrier by 87 percent of respondents. “Availability of desirable locations” was next, with 77 percent of respondents listing that as a challenge, and 75 percent said that “availability of skilled workers” was a challenge.

“Competition for good general managers is incredible,” Nicolopoulos said. “They keep opening units. So quality general managers are in high demand. Turnover at the general manager level is very high. They have tremendous opportunities to job hop and upgrade their salaries.”

That said, the biggest impact on labor costs at this point is not competition, but the minimum wage.

According to the survey, 80 percent of respondents said that a higher minimum wage was the biggest contribution to labor cost increases. Health care inflation was next, at 58 percent. Competition for talent was listed only by 30 percent of respondents.

One other interesting point about these growth chains: They’re not blowing their technology budgets on the latest app.

Most, in fact, are spending it on dull technologies that help them make more profits or improve customer service. All concepts were somewhat more likely to invest in technology that is “sustaining” rather than “transformational.”

Most respondents by far said they would invest in inventory control — 78 percent — while 58 percent plan to invest in budgeting and forecasting systems.

“You read so much about mobile apps, which are so in vogue, that my expectation is that most of that spend would be in mobile apps and mobile payment,” Nicolopoulos said. “In reality, a lot are spending on more operational-type technology like labor management, food management and inventory control. They’re looking to enhance customer experience through better operations as opposed to mobile apps.”

Still, plenty of concepts, 63 percent, are investing in mobile apps, while 58 percent are investing in new payment methods, and 42 percent are investing in tabletop tablets. And 60 percent are investing in loyalty tracking programs, while 56 percent are investing in store location or traffic analysis.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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