There has not been a shortage of restaurant consumer pulse checks of late, as the macroeconomic environment seems a bit … wonky?
To be sure, things have been weird for a while now and, unfortunately, nobody really has a playbook on how to smooth out a post-pandemic business model when some parts are normalizing (e.g. supply chain), some are likely never returning to normal again (e.g. 100% dine in), and consumers are harder to read (e.g. higher wages, but higher debt). Consumers are clearly pulling back on restaurant spending in favor of groceries – unless you’re Wingstop, Chipotle, Texas Roadhouse, Taco Bell, or Chili’s, that is.
How do you make sense of it? AlixPartners tries to do just that with its latest white paper, “Restaurant resilience: Turning challenges into opportunities,” available exclusively to attendees of Prosper Forum, which just concluded in Amelia Island, Fla.
The consulting firm unpacks what is pressuring consumers, including credit concerns and loan delinquencies. A JPMorgan survey found that over 70% of low-income consumers and 67% of middle-income households are struggling because of those factors, for instance. As such, the restaurant industry’s sales have plateaued while traffic has dissipated.
Still, plenty of opportunity remains; 53% of consumers in households earning $50,000 and below have a desire to dine out more frequently, for example. IHOP’s chief marketing officer Kieren Donahue pointed to this opportunity during a recent interview at parent company Dine Brands’ headquarters in Pasadena, Calif.
“Our customer is very hypersensitive on price right now: 82% said the price of a menu item influences their decision of whether or not to order it, 77% use deals or value offers to gain access to restaurants they couldn’t normally afford, and 69% would eat out just about every day if they could afford to,” she said. “I like that last stat because it's telling us that experiences are still the most valuable thing; they just need to be able to afford it. We’re working to address that.”
The second opportunity is driven by a strong labor market. With unemployment relatively steady around 4.3%, that is creating some optimism, particularly among Millennials, the largest generational group, which is currently entering its prime spending years.
Finally, spending trends have remained unchanged despite consumers’ rising debt. The gross domestic product increased at a rate of 3% in the second quarter, faster than expected and driven largely by consumer spending.
Strategies for operators in a weird environment
Despite some signs of stability and continuing optimism, many operators know painfully well that things aren’t necessarily rosy right now, and second quarter earnings reflected as much. The consulting firm outlines four strategies to manage changing consumer behaviors that have impacted sales and traffic:
- Evolving menu offerings
- Enhancing the consumer experience
- Investing in employees
- Implementing balanced pricing
AlixPartners’ data shows that consumers support smaller menus that may alleviate operators’ inflationary pressures. Accordingly, a sharpened focus on core offerings has become a bigger priority for many concepts, including and especially McDonald’s.
As has been widely reported, chicken has also become a bigger opportunity as demand increases. According to Technomic Ignite data, the chicken category experienced a double-digit sales increase in 2023, which explains why brands like Taco Bell are leaning into the protein more.
Other menu opportunities include add-ons and select limited-time offers that can build excitement and generate traffic. These menu initiatives should be more strongly supported by digital marketing and loyalty programs, according to AlixPartners.
“Enhanced direct consumer engagement is far more important today,” the consulting firm notes.
Investing in labor is also becoming more critical, AlixPartners’ writes. Expanding the talent pool and offering support and training are ways to improve both retention and consistency. Ensuring a diverse workforce is also a way to enhance service quality, according to the report. Consumers value diversity, equity, and inclusion, despite recent pushbacks against such policies. New research from Morning Consult finds that a majority of Americans support companies engaging in efforts to promote DEI in the workplace.
Finally, variable pricing, “when applied reasonably” according to AlixPartners, is widely accepted by consumers, with 71% of Gen Z supporting the practice. Revenue management platforms and artificial intelligence are effective in providing such a solution, while communication is also critical to avoid consumer backlash.
“Additionally, leverage digital and off-premises channels for introducing dynamic pricing, as these channels show high customer buy-in and willingness to pay,” the consulting firm writes.
Still, it’s important to run pilots to assess consumer response and constantly reassess pricing structures.
“Embracing innovation and leveraging new technologies will be vital for engaging customers and reimaging labor roles,” the white paper notes. “A commitment to exceptional daily service remains crucial for long-term success. Though the future holds uncertainties, the industry’s resilience is well-proven.”
Contact Alicia Kelso at [email protected]
