Reading The Signs


The recession may be over, but to successfully navigate future bumps in the road, operators must be cautious and commit to a well-defined strategy

Anyone who has seen the mind-numbing, albeit, entertaining CBS reality show Big Brother will likely be familiar with the show’s ubiquitous motto: ‘expect the unexpected.’ The contestants quickly learn that they’re never safe, and the same can be said for foodservice operators, especially in 2008 when the recession hit — as bad news on the reality soap — like a rude slap in the face.

But make no mistake, things were grim. Unemployment reached 30-year highs in Ontario, for instance, as the auto industry and manufacturing sectors floundered. The situation wasn’t too much better across the country — even the robust resource sector out west took a hit. U.S. investment banks collapsed and stock markets tumbled in New York and Toronto, helping temper the practice of long lunches and dinners with clients. Tourism also suffered significant losses, with businesses cutting back on corporate travel and American families taking holiday trips a lot closer to home. In almost the blink of an eye, the world had shifted considerably.

Industry performance // Shocking as it was, perhaps more surprising is news of Canada’s foodservice performance over the past year. “Dollar growth for the total market was up four per cent, 12 months ending May 2009, versus the previous 12 months,” explains Robert Carter, senior account manager for the Toronto-based NPD Group. “Dollar growth also outpaced traffic growth, and it came right across the segments, from QSR, to family mid-scale to casual. When I present that, most people find it surprising; they were expecting downturns,” he confesses. In the CRFA’s market review and forecast published this summer, it projected that the inflation-adjusted real change in total foodservice sales for 2009 would decline by 5.3 per cent.

It’s true; the news is rather surprising given the doom-and-gloom media reports of the past year. Standouts: in April the owners at one of Toronto’s fine-dining establishments, Perigee Restaurant, succumbed to financial woes, and in September, Toronto’s Jamie Kennedy Wine Bar changed hands around the time New York’s iconic Tavern on the Green applied for bankruptcy protection.

The common thread is plain to see — the majority of failing operations are independents, perhaps lacking the support of a strong, mature brand and the backing of a corporate office to steamroll through the recession. “In the past, independents were experiencing growth because people were looking for variety and a more unique dining experience,” hypothesizes Carter. “But in times of economic uncertainty, from what we can see through our data, Canadians made decisions like: ‘I’m going to go to a chain concept where I know what to expect.’”

The numbers speak for themselves — family mid-scale chains attracted eight per cent more diners and earned 10 per cent dollar growth in May ’09 versus May ’08. Casual chains brought in nine per cent more traffic and 10 per cent more dollar sales and QSR chains drew two per cent more customers and five per cent more dough over the same period. And anyone who’s ventured into downtown Toronto lately can attest to the swell of branded chain concepts moving into high-profile locations in the city’s core (and eating into the traffic that many independents used to enjoy).

Again, the stats seem surprising. After all, aren’t consumers supposed to trade down during a recession, giving quick-service restaurants a noticeable boost? According to Carter, we’re confusing the facts in Canada with those from the U.S. In Canada, value won out yet again, regardless of segment. If anything, Canucks traded down from fine dining to casual restaurants, not QSRs — with a record 10-per-cent drop in traffic and $408-million loss in the upper-end category since last May, Carter explains.

Outside influences // Of course, chains and independents faced other challenges as well. “In a lot of provinces you’ve seen increases in minimum wage, you’ve seen increases in municipal practice,” says Garth Whyte, president and CEO of the Canadian Restaurant and Foodservices Association. “Right now, I’m in Vancouver, and they’re announcing the HST [harmonized sales tax], which [will see a bit] of an increase next year, so those things creep up in many cases, it’s shrinking the profit margins.”

The introduction of the HST in B.C was also top-of-mind when White Spot’s Erhart chatted with F&H in September. “The buzz on the West Coast for the past little while has been the HST,” he explains. “Obviously it’s a big concern for our industry because there will be a seven per cent increase to restaurant meals.”

It’s a similar story in Ontario, where there will be an eight per cent hike when the same tax kicks in July 1, 2010. In P.E.I., minimum wage rose twice, and the nutritional labelling debate also heated up across the country, followed closely by influential lobbyists  demanding limits on sodium levels in processed foods, school and restaurant fare.

“The wildcard often is not just the economy but government policies,” Whyte agrees. “What government policies are going to hit us between the eyes? The garbage strike in Toronto, for example. Who could have anticipated that? There are many different kinds of variables you have to adapt to, but you can’t lose sight of the good news — people are always going to go to restaurants.”

There’s good news on the economic front, too, says Nazareth. “One positive for the industry is the higher Canadian dollar, so some imports will actually be lower in terms of pricing (though it will also have a negative impact on inbound tourism). In fact, some analysts are calling for parity with the U.S. by the end of the year. Of course, you’re probably going to be looking at higher prices for commodities as the world recovers.” In June, Canada’s GDP also grew by 0.1 per cent, although growth was flat in July.

Effective strategies // It’s clear, now is not the time to sit back and ride out the storm. “It’s important that we keep analyzing things, like the economic situation, watching unemployment rates, watching tourism and what’s happening within that sector. We must stay focused on all the key elements of our business,” advises Erhart.

At White Spot, a labour crisis from years earlier sparked the introduction of its Red Seal chef-certification program, which allows cooks the option to complete their culinary training with the company. “It was good for our guests as we dedicated our energy into growing our business by quality [and introducing] Red Seal chefs in our restaurants, but we also provided a recruitment and retention tool for our people,” recalls the company head. While a labour shortage certainly wasn’t a problem this year, training and retaining staff with updated DVD training programs, and encouraging loyalty once the economy heals was, and continues to be,  paramount at White Spot.

Carlo Catallo and his partner, chef Victor Barry, had challenges of their own this year when their roles changed from employees at Toronto’s fine-dining gem, Splendido, to co-owners. Closing, renovating and re-opening a high-end establishment in the midst of economic uncertainty was, perhaps, both brave and smart. Turns out the duo had plans to create a more casual dining atmosphere, selling fare at lower prices. “We wanted to broaden our scope as to who could enjoy an excellent dining experience,” says the general manager and co-proprietor.

So far, so good; in August sales were on par, perhaps even slightly exceeding August 2008, a commendable start considering the traditionally low-grossing summer months. Admittedly, prices at the renovated restaurant aren’t cheap, but the venue itself appears more assessable with an inviting open window-front and bar menu. “Value is what’s most important,” stresses Catallo. “There’s a restaurant formula that I believe in: quality food, professional service, great value and consistency. Those are the four pillars of a successful business.”

Value was often mistaken with discounting this year, a trap in which a lot of operators fell victim. Pizza Pizza took a different approach in its recession strategy. “Customers are being very prudent. They’re looking for great bundling and value and that’s what we try to give them,” says Pat Finelli, vice-president of Marketing for the pie chain. Take the recent “Plenty for $20” promotion, which bundled pizza, wings, dipping sauce and soft drinks for an economical price. “You just try to balance your franchisees’ food costs, because they have their own expenses, so I’m not discounting as much as I used to,” he adds. “Even though we’re down minimally, I could fix that by saying, ‘let’s come out with a $9.99 special,’ but you’ve got to maintain food costs so franchisees are successful and happy.”

McDonald’s Canada came out swinging this year with a free premium-roast coffee promotion that was positioned to woo customers into adopting a new morning coffee habit, while also enjoying another premium offering — not unlike its popular premium Angus burger. Breakfast sandwiches were likely garnering lots of consumer bites, too, as the afternoon snack dwindled in popularity.

Looking back, it’s clear that the downturn was the ideal time for savvy operators to increase their value proposition, grab market share and boost the strength of their brand. “If anything, we’ve increased our marketing budget,” says White Spot’s Erhart. “In fact, we’re buying as many TV [ads] today as we did in the past. So, we’re thinking that coming out of these tougher times, we’re going to be very well positioned.”

Finelli has a similar mindset. He’s still advertising on radio and in print and, this fall, the company launched a million-dollar peel-and-win contest in concert with Coca-Cola. “We’re going to look at doing more campaigns where we can interact with consumers a lot more,” Finelli says, running through his game plan. “We’re also going to be driving our websites, which are doing great. We’re going to start doing different types of campaigns, ordering online.”

Savvy owners and managers know that regardless of the operating environment, a panicked, knee-jerk response should never be an option. Operators that stayed cool, assessed their options, proceeded with caution and executed a well thought-out strategy won the day.

Food trends // Fighting to keep market share also involves keeping abreast of trends, many of which were influenced by the economy itself this past year. Canadians were tightening their belt buckles, figuratively and literally. “People were still going out and getting their morning cup of coffee, but they were not getting those extra cups of coffee that they would have prior to the economic downturn,” says Carter.

While some independent restaurants were forced to shut down operations completely, many others reacted quickly and cut costs where they could, like labour or food, but they did it in a way that didn’t hurt the quality of the dining experience or damage the brand. Some restaurants, coincidentally or not, changed their focus. Take Splendido, which converted into a more casual — albeit still upper-end — destination. Toronto’s Ultra Supper Club was transformed into Ultra, boasting more affordable meals starting at $8. Montreal’s Résident followed suit as well, opening with affordable comfort food in a chic environment, an ideal oasis for this year’s discerning diner. New gastropubs popped up in cities from coast to coast.

In one of the hottest trends of the year, restaurateurs and chefs got innovative and created prix-fixe menus, often highlighting local producers. Sometimes they even teamed up with friendly rivals and co-hosted extravagant affairs, which still offered great value. Although using cheaper cuts of meat and prix-fixe menus to entice cost-conscious diners is a strategy that still generates a lot of debate.

“We haven’t gone for those,” says Erhart, who did offer a summertime blueberry special at White Spot, complete with a burger, salad and fresh B.C.-sourced blueberry pie. It did quite well but was introduced purely to capitalize on the blueberry-picking season, further proof of the food trend that continues to dominate industry kitchens — fresh, local fare.

Catallo points out the growth in the slow food movement, 100-mile menus and the evolution on his wine list at Splendido. “We’ve increased our wines-by-the-glass program, which has a section dedicated to an Ontario winery,” he says, stretching his customer’s dollar, while also alleviating worry diners may have drinking (even moderately) and driving as the result of the stricter impaired driving penalties implemented in Ontario this past spring.

Burgers remain one of the hottest menu items (see sidebar above), but surprisingly, the sale of premium burgers grew as QSR operators upscaled their patties and entered into a new burger war. A recent report by Chicago-based Technomic highlighted the fact that consumers are willing to spend more money for a premium burger — regardless of the recession. Some 75 per cent of those polled in the report ranked quality of meat as the first or second most important attribute in choosing a burger and 35 per cent claimed they would pay more for a premium offering.

Healthy options remained popular as well. At White Spot, Erhart found success with Heart & Stroke Foundation, Health Check-approved menu items, and Pizza Pizza execs forecasted the growing distaste for salt, introducing a new low-sodium, whole wheat crust a few weeks ago. “My end goal will be to have a slice that has a whole different sauce with no salt in it at all, so if that’s what you would like, you can say: ‘give me the slice with the low-sodium sauce and the low-sodium cheese,’” says Finelli. “We’re always listening and trying to work with the trends.”

Looking ahead // Talk to operators about the coming year and they are bullish, even if they are expecting hardships. NPD’s Carter is slightly more confidant. “We’re going to experience pretty positive restaurant growth over the next six to 12 months,” he hypothesizes. “I think a lot of that is driven by the gain in consumer confidence and the turnaround in the economy.” Such confidence has been growing steadily, since hitting a low of 67.7 in December of last year (compared to 96.2 in December 2007); in June, the numbers were up to 82.1.

Moving forward, there’s much to learn from the year that brought what economist Nazareth calls “the worst consumer recession since the 1930s.” Pizza Pizza’s Finelli was encouraged to see franchisees push their own growth with store-led initiatives, White Spot’s Erhart was reminded of the power of flexibility and preparedness and Splendido’s Catallo learned how to sacrifice price without sacrificing value. “You’re not fed by the economy; you’re fed by people,” he reminds us.

“We know there are some other headwinds coming up, whether it’s taxation or things [like that]. But no one ever said it would be easy, and it’s important that we keep positive,” says Erhart.

Better yet, expect the unexpected.

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