The 2018 Hospitality Market Report

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Since 2017, the hospitality industry has experienced slowdowns in the full-service and QSR segments. Yet, despite the fact growth numbers are flat to modest at best, it doesn’t mean the industry has stagnated.

New variations on the foodservice theme — such as takeout, home delivery and catering — are changing the foodservice landscape considerably. Technology has become a de facto game changer and menu selections are a stronger drawing card than ever. A tight competitive environment also means opportunities for revenue growth are squarely focused on stealing market share.

The big picture

“It’s been an interesting year so far,” says Chris Elliott, senior economist with Restaurants Canada in Toronto, which has recently released its Foodservice Facts 2018: Mining for Margins report. “The industry has come off a fairly strong growth period, which averaged 5.7 per cent annual commercial foodservice-sales growth over the past four years. This has helped total food sales climb to nearly $85 billion. A lot of that was driven by millennials and the wealth effect. Once you factor in menu inflation, real commercial sales have still increased by a solid 3.1 per cent.”

He notes that since the 2008 recession, foodservice has consistently ranked as the third-fastest-growing component of the economy behind real estate and wholesale trade. “We’ve been growing much faster than industries such as construction, mining, oil and gas, retail and manufacturing.”

Year-to-date foodservice sales are at five per cent and forecast to reach 5.3 per cent in the balance of the year. However, menu inflation drops those number to 0.7 per cent and 0.8 per cent, respectively. “That’s a significant slowdown compared to the real-sales growth over the past four years,” Elliott says.

Factors that have led to this slowdown include rising utility, labour and food costs, he notes. “Operators have been forced to raise menu prices, but in doing so, they’re not seeing much in terms of traffic growth. Consumers want affordability, so the question remains, how much are they willing to pay for an experience.”

Geographically, B.C., P.E.I. and Quebec are showing the strongest sales growth due to strong population growth. In contrast, Ontario traffic is relatively flat. “The challenging regions are Saskatchewan and Alberta,” Elliott says. “Saskatchewan is still seeing the effect of the six-per-cent meal tax. And, even though the economy in Alberta is strong, people aren’t spending as much because of the lack of jobs.”

Full-service growth has been driven by gains in Quebec, B.C. and P.E.I., reports Geoff Wilson, principal, fsStrategy Inc. in Toronto. “QSR continues to perform well, but more moderately than previous years. However, drinking places continue to struggle, as younger consumers aren’t going out to bars as much and, when they do, they order less.”

As the market becomes more tiered, QSR and casual dining are taking a bit of a hit from the fast-casual segment, Wilson adds. “Fast casual is really appealing to millennials because they can enjoy a quick experience and customize more premium food. Some are bordering on the same level of quality that we see in casual dining at a lower price. The value proposition is very strong.”

In 2019, Elliott says operators can expect foodservice sales to be affected by higher interest rates and household-debt levels. “Those will be the number-1 threat to foodservice operators.” Overall projections for commercial foodservices sales growth are 4.4 per cent. “We won’t see the big spike in menu inflation that we saw last year so the real-growth projection is 1.3 per cent. Therefore it will be stronger, but coming off a very weak 2018.”

Pushing the envelope

Overall, that means the pie is not growing for the average operator, so the only way to grow is to steal market share from someone else, Elliott says. “That’s why we’re seeing more consolidation. It’s easier to grow your business by buying up others where you see an opportunity. In addition, 30 per cent of operators are looking to add a new profit centre, which could include catering, delivery and hosting more special events.”

The reality is, margins are squeezing and operators are struggling, Wilson confirms. “In a market where overall traffic is mostly flat, the key to success right now is stealing market share. We’ll end up seeing some casualties, more so with independents, unless they operate in a very agile way.”

Grabbing that market share in a rapidly shifting market demands innovative thinking on the part of operators, says Ryan Moreno, CEO and co-founder of Joseph Richard Group (JRG) in Vancouver. “Consumers are obviously changing and developing. They’re a lot wiser, more adventurous and have sophisticated palates. The landscape is different now.”

As the owner of more than 20 branded locations and expanding, Moreno says operators have to look for new opportunities to grow revenues. “On the one hand, there’s a lot of takeout with services such as SkipTheDishes and UberEats. Another area of opportunity is catering, where we’re establishing a dedicated division. Catering is a good fit and allows us to give the JRG experience everywhere.”

“We’ve noticed a lot more activity around the catering space,” says Robert Carter, industry expert with The NPD Group in Toronto. “That’s a function of restaurant operators looking to expand their distribution network. Recipe Unlimited’s (formerly Cara Operations Ltd.) acquisition of Pickle Barrel, for example, was squarely focused on the catering opportunity. Even smaller players are getting into it.”

One driving factor behind the catering push is the changing work environment, Carter explains. “A lot of companies have meal plans for employees. Their people are working in different areas or remote meeting spaces. That drives more opportunities within catering. When you add in the technology play through companies such as SkipTheDishes, it makes the entry to catering that much easier.”

Delivering the goods

With that, the online-delivery space has also exploded in the last couple of years, Carter says. “We’re seeing $1.8 billion in sales right now, accounting for five per cent of all restaurant traffic. The growth continues to increase at a double-digit rate. It’s become the new battleground for restaurants.”

He says online delivery will dramatically change the business model for most operators over the next five years. “It’s the exact same scenario we saw when retail stores were going omni-channel seven years ago. It’s still a bit of a Wild-West area and there are only a handful of platforms for now. But operators will become savvier as this space evolves.”

A matter of personal taste

Menu offerings are also becoming a critical survival tool. “The ability for consumers to customize is crucial,” Wilson says. “We’re also seeing more ethnic influences on menus as consumers become better educated and more interested in exploring different foods.”

Mark Wilson of Mark Wilson Culinary Consulting in Toronto pinpoints a few top trends helping keep margins intact. First is sticking to menus that are much smaller and more nimble. “Gone are the behemoth tri-fold menus with 80 to 90 items, which kitchens always struggled to manage. Smaller menus should have no loss leaders and each item must be simple to prepare in order to keep labour costs down and preserve margins,” he says.

Consumers are also steering away from the formal menu structure, he notes. “They’re less interested in the appetizers, salad/main/dessert structure. It is now melding into single offerings with greater focus on shareables and platters.”

Successful restaurateurs are also learning to focus on margins compared to costs. “Higher-priced items can yield double or triple the margin with the same labour cost,” Wilson says. “For example, a sandwich could cost $6 to produce and sell for $10 for a $4 margin. Steak frites might cost $15 and sell for $30, giving you a $15 margin.”

Vegetarian and vegan are also becoming must-haves on any menu, from QSR to fine dining, he adds. “Vegetarian is mainstream on menus today. Customer demands and the inclusion of calorie counts are pushing operators to think healthier and offer something for everyone.”

Studies show 11 per cent of consumers would like to see more vegetarian options, Carter reports. “One-in-10 millennials consider themselves to be vegan or vegetarian. Plant-based menus are up eight per cent as of 2017 and have been on a five-year steady-growth trend.”

One need only consider the sell-out status of A&W’s Beyond Meat Burger to realize the relevance of plant-based menu items, Elliott says. “They really hit it out of the ball park with that [offering]. Products such as the Beyond Meat and Impossible Burger are delivering on both texture and taste that go beyond the typical soy burger.”

Rio Infantino, founder of Copper Branch, has found success in the vegan space. He opened the first outlet in 2014 and now has 30, with more to come.

But his choice to offer vegan was more about healthy eating than social commentary. “We never went after the vegan/vegetarian consumer. What made us successful is that our marketing and food are actually geared to mainstream clients. In other words, to people who want to eat healthier. The key has been our focus on authentic ingredients and clean-label listings and offering a healthy alternative. Consumers look for that.”

The franchise movement

The franchise landscape is going strong as top U.S. brands Chick-fil-A, MOD Pizza, Potbelly Sandwich Shop and Firehouse Subs make their move into Canada.

Joseph Pisani, director of Franchise Financing at the Bank of Montreal says much of the growth in the franchise space can be attributed to concepts with an “international flair” rather than the historical coffee, doughnut and burger staples. “Pita places, falafel, Greek, Indian — the flavours of the industry have expanded and continue to grow year-over-year.”

Pisani reports that the overall franchise market in 2017 was $96 billion, with foodservice accounting for 70 per cent. The main players are newcomers to Canada and accumulators. “The latter are the next-stage professionals who want to build franchises as their own corporation. We are seeing big growth in both those groups.”

He adds that Ontario still represents the main launch market for franchisors entering Canada. “B.C. is similar in terms of being a major centre, but the price of real estate is a challenge. Saskatchewan was a booming market, but has suffered since the slowdown. It will become a growing market as oil prices climb. One major challenge for franchisors looking to [expand to] Eastern Canada is finding franchisees.”

Fighting for future success

Given the crowded marketplace, Canadian operators need to focus on a number of key elements in order to maintain or grow their market share.

“Canadians are motivated by innovation. Companies that focus on innovation, food quality and expanding their menus beyond core staples are the operators that are growing,” Carter notes.

Branding and messaging are becoming extremely powerful drawing cards, Elliott says. “One of the biggest keys to success is the image of the company. What is its role in terms of environmental sustainability, food waste, animal welfare, treatment of staff? People care about those things.”

This ties into another major issue: ongoing labour shortages, he believes. “Retaining and recruiting employees is going to be huge. Provinces such as Quebec are dealing with the lowest unemployment rates in a generation. It’s hard to grow a business without staff. The economy might be running on all cylinders, but you might not be able to find workers to meet demand. That’s why a positive image is so important when it comes to attracting and retaining workers.”

Technology innovation stands out as an essential area of focus for operators, as younger-generation consumers look to convenience and speed, whether it’s forward-thinking apps, online delivery and ordering, mobile payment, or self-order kiosks. “If you’re not embracing technology, you’ll be left behind,” Elliott says. “It really appeals to the younger generation and drives up sales. It’s all about convenience.”

Technology also plays a critical role in alleviating the margin squeeze, because it can help operators address food and labour costs, Carter notes. “The Chief Technology Officer will continue to evolve as players become more sophisticated.”

Ultimately, the best way to stay ahead of the game, Wilson says, is “to differentiate your product, provide a better experience, or a better value proposition — something that makes them want to keep coming back. It’s really crucial for operators to understand their target market and what their consumers really value in their restaurant experience.”

Moreno says, as a restaurateur, you always have to be cognizant about what’s going on in the industry. “There are a lot of talented people in our space and it’s very competitive. But that’s both a challenge and an opportunity because we’re constantly being pushed to deliver new and exciting experiences to stay relevant. Whether it’s catering, diversifying your offering or embracing apps, you need to be aggressive.”

Written by Denise Deveau

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