Too many cooks in the kitchen for restaurateurs

The Australian restaurant industry has faced difficult trading conditions during the past five years due to the flow-on effects of the global financial crisis.

The discretionary nature of the industry leaves it exposed to adverse changes in household income and other broader macro-economic factors such as tax, interest rates and employment, which influence consumer sentiment and expenditure.

Declining household income during the recent global economic downturn, alongside rising unemployment and low consumer sentiment, saw demand plummet as consumers became vigilant in their spending by choosing to cook at home rather than eat out and they sought value for money in food purchases.

That reduced the frequency of restaurant visits and lowered spending on high margin menu items, prompting a fall in industry revenue during the 2008-09 period.

Those factors restricted growth during the past five years, when revenue grew at an annualised rate of only 1.1% per annum.

The industry is expected to recover in 2011-12 thanks to robust growth in economic activity, falling unemployment, and improving business profit and consumer sentiment.

Other factors that will lift performance include positive flow-on effects from the success of popular reality TV cooking shows like MasterChef , which reconnect people with the joys associated with the total meal experience, incorporating the package of well-presented quality meals along with the ambience associated with dining out.

There will be opportunities rising from social trends such as busier lifestyles, which fuels demand for convenience. Added to that will be opportunities associated with rising health consciousness, driving consumers to factor in health and nutrition into their spending habits and food purchases.

Those factors combined are expected to produce a 2.9% rise in industry revenue to total $14.32 billion in 2011-12.

Looking further ahead industry growth will be tied to overall improvement in economic conditions, especially for factors such as disposable income levels, employment and consumer confidence.

Those elements are expected to fuel demand for the industry given that people will be more able and willing to spend on discretionary products such as restaurant meals for social outings, celebrations, convenience or leisure.

Rising health consciousness and ethical consumerism will present operators with ongoing opportunities to reach niche markets with premium products to increase profitability and revenue.

That means restaurateurs will face tough competition from other hospitality operators including takeaway food retailers, who are also trying to capitalise on these trends. Industry revenue is expected to increase at an annualised rate of 3.0% over the five years through 2016-17 to total $16.63 billion.

Industry Outlook

The positive outlook for the Australian economy during the next five years bodes well for restaurant operators, who will benefit from rising income levels and increased consumer spending.

Operators can also look forward to a range of business opportunities related to the ongoing increase in health consciousness and the rise of ethical consumer spending, which is expected to enable industry players to serve niche markets with premium products.

But significant competition from takeaway food outlets and other food service and hospitality operators – particularly clubs and pubs – will challenge industry growth and increase the need for operators to remain efficient and responsive to changes in customer demand.

Growing revenue but stagnant profit

During the next five-year period restaurateurs can expect to benefit from projected growth in the Australian economy along with the positive outlook for key drivers of demand such as disposable income levels, household consumption and expenditure on eating out of home.

The accelerated growth for the Australian economy, especially over the next three years, is expected to trigger a substantial rise in employment and consumer confidence.

In turn that will prompt a rise in disposable incomes, thereby encouraging households to spend more on discretionary products and services such as dining out in restaurants.

As consumer confidence rises with disposable income levels consumers are expected to be less cautious in their spending and more willing to purchase expensive, higher value items, which will bode well for all industry players.

Other macro-economic factors sustaining demand for the industry will be overall wage growth in the economy as baby boomers retire and the working population shrinks.

That will sustain long-term growth in disposable income, which means consumers will be more likely to spend more on higher value food items or choose to attend premium silver service restaurants, which will boost industry revenue.

That will be reinforced by ongoing lifestyle trends such as busier lifestyles, greater workloads and a greater reliance on convenience products and services.

Industry players can capitalise on those trends by offering quick and reliable service of nutritious meals and beverages so consumers spend less time cooking in order to maximise spare time and maintain healthier lifestyles.

Over the five years through 2016-17 there will be an improvement in profitability but that will be capped by fierce industry competition, particularly on a price basis.

New restaurants will continue to enter the market as barriers to entry remain low but profit margins for operators will range between 1.0% and 11%, dependent on establishment size and they will fluctuate in line with the economic cycle and changes in real household disposable income.

Profit will always remain a function of efficiency and the ability to successfully sell higher value items alongside additional meal options such as dessert and coffee.

Industry employment is expected to grow at just 0.2% during the next five years, which means operators may experience the re-emergence of issues related to attracting and retaining staff.

That particularly relates to the high casual employment component of the industry as well as to continued high demand for chefs and cooks.

Training will become critical to ensure that appropriate standards are maintained in all areas and that revenue and profits grow at satisfactory levels. The continued monitoring of changing customer tastes and preferences will also be vital for this process.

Business opportunities and competition

There are several growth opportunities for the industry in terms of developing niche markets for those observing popular social trends and investing in technology to reach new markets by responding quickly to changes in consumer demand and behaviour.

For example rising public concern over carbon emissions, climate change and the health implications of consuming products grown full of harmful pesticides indicate investment opportunities in niche markets, such as organics and eco-consumerism.

That could entail restaurateurs differentiating their products and services by promoting the use of organic ingredients or by highlighting the effort to reduce their carbon footprint by using local suppliers for transportation and energy-saving practices during service.

Industry players can also enhance their competitive advantage and increase brand recognition via the internet through online advertising, an informative and interactive company website or via social media streams.

The growing trend of ethical consumerism presents another lucrative growth opportunity where industry players can reach niche markets and promote ethical business practices by using fair trade coffee and other food products.

Fair trade products have grown from an increased awareness and demand for transparency in food sourcing practices in order to ensure that coffee growers and food producers in the developing world are not being exploited by multinational corporations.

Fair trade certified products ensure that growers and farmers receive better prices and decent working conditions while educating them about sustainable agricultural practices.

As consumers become more discerning about their food and beverage consumption the ethical sourcing of food becomes a major determinant of food expenditure as people are more willing to pay a premium for coffee or food that has been ethically sourced.

As new concepts for restaurants continue to emerge as a result of time constraints on households and general lifestyle changes people will have an increasing number of alternatives to choose from to meet their needs, such as hotels and clubs.

The industry will feel the effects of greater competition from pre-prepared foods sold by supermarkets that are ready for home cooking or heating, especially during periods of low economic growth.

Industry players will also be forced to compete with the growing health movement within the traditional fast food industry given the success of takeaway chains such as Subway or Sumo Salad marketing themselves as  fresh and healthy alternatives to traditional deep fried and fattening fast food.

Added to that will be higher competition from established fast-food operators such as McDonald’s, given the expansion of their menu to include healthy meal options including healthy wraps and salads.

Key Success Factors

IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:

Access to niche markets: Being a recognised quality restaurant operating in a niche cuisine area helps to reduce competitive pressure.

Quality control processes: Ensuring a hospitable environment with quality food and service ensures a good reputation and repeat custom.

Effective cost controls: For an industry characterised by low profit margins it is important that players minimise costs and wastage, especially with regard to food inputs.

Access to multi-skilled and flexible workforce: Operators need access to a high number of skilled, casual and permanent wait staff, cooks, chefs and kitchenhands to maintain a high level of customer service especially during periods of peak demand.

Word-of-mouth recommendations: High-quality food and excellent customer service is the key to gaining favourable recommendations from customers. That encourages new and returning business.

Must comply with government regulations: Complying with all planning, health, wage, occupational health and safety, food handling/storage and liquor and other regulations is essential.

Market research and understanding: A thorough understanding of the market and ongoing market research to remain informed about the latest consumer trends helps operators capitalise on new business and product opportunities

Business expertise of operators: Business expertise, such as experience in hospitality or retail, is a crucial factor to succeeding in an industry characterised by high revenue, low profit and a great propensity for losses.