Hospitality Market Report 2012: Slow and Steady


Written By: Carol Neshevich 

“Not bad.” Those two words, along with other ones such as “fairly good” and “reasonably decent,” succinctly describe how many foodservice operators and industry analysts feel about 2012. Some modest sales increases have been noted — stronger in some geographic areas and dining segments, weaker in others — but, on average, sales aren’t quite booming for the industry. However, in light of the “slow-growth economy” of 2012 and the yet-to-bounce-back consumer confidence, most operators seem relatively pleased with the modest sales growth.

Consider the economy: on a year-over-year basis from August 2011 to August 2012, employment increased by one per cent (about 177,000 jobs), with most of the gains occurring in the spring of 2012. “Job creation has been there, but it hasn’t been fantastic,” says Michael Burt, director of Industrial Economic Trends at the Ottawa-based Conference Board of Canada. “And then you have things like higher food prices, higher gas prices, and a lot of gloom in the news about what’s going on in Europe, and the end result is that consumer confidence — which was recovering pretty nicely at the beginning of 2011 — weakened starting in the summer of last year.”

That said, NPD Group statistics show overall traffic to Canadian restaurants is actually up four per cent. Compared to the previous year when traffic declined slightly, this is a fairly impressive jump. Sales growth is also up 4.4 per cent from the year-ending May 2011 to the year-ending May 2012 (rising from $46.3 billion in 2011 to $48.4 billion in 2012), although when you factor in menu inflation — which is approximately 2.5 per cent — sales growth ends up being only 1.9 per cent. “So we’re seeing that generally consumers are managing their spend more effectively,” says Robert Carter, executive director of Foodservice at NPD Group Inc. in Toronto.

In other words, traffic may be up in the form of more people using restaurants more often, but customers may just be grabbing a coffee in the morning or a pastry in the afternoon. “In Canada, the share of the population that uses restaurants every day is over 47 per cent, which is a high penetration rate — it’s the second highest in the global marketplace. A lot of that may just be going out and having that coffee; but the point is, in Canada, we love using restaurants,” says Carter. We just don’t necessarily want to spend a ton of money at them.

For quick-service operations, with their lower price point, this is great news. Quick-service sales rose five per cent from May 2011 to May 2012 (2.5 per cent with menu inflation). And it seems Canadian QSRs have taken the ball and run with it; they’re noticing consumers want innovative dining choices and cheaper prices. “In Canada, we really are motivated by innovation,” says Carter. “And quick-service operators are leading the innovation platform.”

Carter cites McDonald’s and Tim Hortons as QSR innovation leaders, with McDonald’s recent innovation, including premium chicken sandwiches such as the Swiss Mushroom Melt and Southwest Chicken, as well as specialty coffees and fruit smoothies; while Tim Hortons has introduced new specialty coffees, panini and gourmet bagels such as the Jalapeño Asiago Mozzarella or the Maple Cinnamon French Toast bagel. “Innovation really resonates with Canadian consumers,” reiterates Carter.

Alex Rechichi, president and CEO of Mississauga, Ont.-based Extreme Brandz, says 2012 has “gone fairly well” for his company. For Extreme’s more established quick-service brand, Extreme Pita (founded in the late 1990s), same-store sales are shooting at around one- to two-per-cent growth, and Rechichi predicts that will end up closer to two to three per cent by year’s end. But Extreme’s newer fast-casual chain, Mucho Burrito (first opened in 2006), is on its way to experiencing double-digit sales growth (around 10 per cent). Rechichi attributes this partly to the fact that the brand is newer and still garnering awareness this year with the opening of approximately 20 new Mucho Burrito locations, bringing the total to 67, whereas Extreme Pita currently has 290 units.

Still, the impressive sales growth at Mucho Burrito undoubtedly reflects trends in current consumer desires. “The brand is certainly resonating with the consumer today,” acknowledges Rechichi. Innovative Mexican flavours, fresh ingredients and the ability to choose toppings at a reasonable price (the average check hovers a little over $13) are evidently in high demand. Rechichi believes that with the Food Network, celebrity chefs and overall rising popularity of “food culture,” today’s consumers know their stuff and are generally looking for more from all foodservice occasions. “Their expectation in terms of culinary experience, the quality of ingredients and the origin of ingredients is high,” he says.

In the full-service dining segments, the market has continued to be a bit more challenging. “Full-service dining has struggled over the last couple of years,” says Carter, adding this has, however, been improving in 2012. NPD research shows the family/midscale segment sales grew 2.7 per cent (0.2 per cent with menu inflation) while the total casual market grew by 5.4 per cent (2.9 per cent with menu inflation) and fine-dining sales grew by 2.2 per cent (a slight decline when accounting for menu inflation).

For the Old Spaghetti Factory, a Vancouver-based family/casual chain with 14 locations across the country, 2012 “has been a bit of a turnaround year,” according to Chris Kanuka, vice-president of Operations for the chain. “We’re seeing single-digit sales growth, led by our Alberta stores.” Success at upscale-casual chain Earls Kitchen & Bar has varied by region as well. “Ontario is up nine per cent.… B.C. has seen a very slight decrease, just under one per cent, and the Manitoba/Saskatchewan region is down three per cent,” explains Mo Jessa, vice-president of Operations for Earls. “[Overall] if we take sales across our regions, and compare that to the same number of restaurants last year, sales have been flat — remaining at 2011 numbers.”

Earls’ director of Culinary Development, chef Reuben Major, says one of the challenges in the casual sector is the competition. “Probably the biggest trend we’ve seen is that the majority of [full-service] restaurants are competing in the same category. Many fine-dining restaurants have eased off on the fanciness and are becoming more casual. Prices are far more even across the board, and consumers don’t seem to want to go out and spend on big-ticket experiences as often as they would have even a couple of years ago,” says Major. “This makes the competitive level in our segment that much more challenging.”

Michael Bonacini, co-owner of Oliver & Bonacini Restaurants (see Q&A on p. 24) agrees. “Casual dining has seen far more competitiveness,” he says, noting that while this makes things more challenging for his company’s more casual Oliver & Bonacini Café Grills, it’s good news for the company’s fine-dining restaurants, particularly Auberge du Pommier and Canoe. “Folks who are opening new restaurants are not doing it at that high-end,” he says. “The competitive aspect is lesser in that very thin upper end, and that’s been one of the positive outcomes for us [in the fine-dining sector].” Overall, sales have been relatively flat for Oliver & Bonacini this year, but Bonacini says that’s to be expected considering the economic climate. It’s why he calls 2012 a “reasonably decent year” for Oliver & Bonacini.

Bonacini notes that the company is doing a number of things to try to encourage restaurant patronage on the lower traffic days of the week, which are typically Mondays through Wednesdays. At the Café Grills, they’ve implemented a Tuesday night Pizza-and-Pasta promotion. For $12.95, customers can choose from five pastas and three pizzas and add a salad for $2.50. “It’s the kind of meal mom, dad and the three kids can have,” he says. “It’s not so gastro-driven; it’s straightforward and value-driven.”

In addition to increasing sales, it’s also important to keep operations as efficient as possible to continue to reap profit even when sales aren’t skyrocketing. “This is going to be a prolonged slow-growth economy, so we need to gear up for that,” Bonacini explains. “Efficiency” is a buzzword that’s been echoing throughout his organization over the past couple of years as the team continually searches for ways to keep costs down.

The Canadian Restaurant and Foodservices Association’s president and CEO, Garth Whyte, is witnessing a belt-tightening attitude across the industry, particularly among operations that opened in the last five years or so. “If you start up during a recession, you have a higher probability of doing well during good times, because you know how to manage your expenditures,” he says. In general, “Those that make it through a recession are stronger than ever.”

As far as food trends go, Whyte says the local-food movement is here to stay, as are trends involving sustainability, simplicity and nutrition. Concerns over allergies and gluten still loom large, and wise restaurateurs are starting to consider people who have food allergies or gluten sensitivities when designing their menus. For example, The Old Spaghetti Factory began offering gluten-free items on its menu three years ago. “It’s been so well-received by so many people,” says Kanuka.

Breakfast, snacks and specialty coffees continue to be big sellers in 2012. And, in general, non-alcoholic beverages are hot-selling items. “Smoothies, non-carbonated beverages, like lemonade, and energy drinks are all growing,” says NPD Group’s Carter.

Comfort food and a “back-to-basics” mentality are also still resonating with people who want to spend their money on familiar dishes that offer good value, says Whyte. Kanuka agrees, noting that the Old Spaghetti Factory recently introduced a chicken parmigiana special (which includes sourdough bread, minestrone soup or green salad, side spaghetti with tomato sauce, spumoni ice-cream and coffee or tea). It instantly became the restaurant’s bestselling item. “That doesn’t happen with specials very often,” he says, guessing the appeal is the “comfort-food” quality and the value aspect of the dish ($14.50 to $14.95, depending on the province) that’s spurring people to order it in such large numbers.

Also related to comfort food is the resurgence of the burger. The hamburger is currently creating a splash, with countless premium burger restaurants such as The Works, Hero Certified Burgers and the like opening units across the country. Chef Major at Earls says his chain hasn’t ignored the impact of the burger, and it’s paid off: “With the North American rebirth of the burger culture beginning two or three years ago, we focused on that trend beginning with making our burger buns from scratch in our restaurants as well as launching a signature Bronx Burger, and our burger section has shown the strongest growth on the menu this year and last.”

So the good news is Canadians love to eat out, and they’re eating out often — even if that just means a bagel on the way to work. They adore innovation and trying new things. They are, however, cautious in their spending, because they don’t quite trust the economy. “Canada’s economic growth is OK, but not fantastic, which means we’re more sensitive to things beyond our control,” says the Conference Board’s Burt. “We really think it’s going to be 2014 when things start to accelerate again.” In light of that, for Canadian foodservice operators, it seems the next year or so is going to be about offering innovative menu items to attract customers, providing good value for the money, keeping margins tight in terms of food costs and operational efficiencies and giving customers what they want in terms of fresh, local, healthy options as well as a healthy dose of comfort food.

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