It’s tough to succeed in the food industry. The food services industry is known for high competition, low margins and astronomical challenges to turning a profit, even though the industry is worth $783 billion in the United States.
For decades, the industry has relied on inexpensive labor to stay afloat. Labor costs, which makes up 35% of a restaurant’s total sales, is one of the few places the industry can tightly control its costs.
However, the industry is beginning to lose its grasp over these costs. A growing number of legislators, employees and the public are beginning to push back against these notoriously-low labor costs.
Initiatives such as the $15 minimum wage and tip elimination in favor of higher upfront wages are gaining momentum and encroaching on one of the few places the food industry has leverage over their costs. And from the way the tide is turning, it seems that this change is actually an unstoppable tsunami.
Generally speaking, better compensation for work is a sign of progress. The fact that there’s not a single state within the U.S. where a full-time minimum wage worker can afford to rent a 2-bedroom apartment underscores the need for change. Still, progress comes at a cost and in this case, it’s the cost of casting into doubt the economic viability of most food service operations.
Compensation as a Growing Challenge
Food industry workers are among the lowest-paid of any industry in the United States. The average employee earns $8.17 per hour, or around $18,000 per year.
Regulations targeting minimum wage are arguably the biggest challenge facing the food industry today. Proposals on the local, state and federal level are pushing – and securing – $15 per hour minimum wage laws, double the current federally-mandated requirement. (It is important to note that several states have minimum wage laws that require higher wages than what’s set by the federal minimum.)
A growing movement to abolish tipping and replace it with “fair wages” is gaining momentum as well. According to federal law, waitresses, busboys and other tip-dependent food service employees are only required to be paid $2.13 per hour, the assumption being that tips make up the difference between “tipped” wage and regular minimum wage.
With the balance tipping clearly in favor of higher wages, changes are already dealing a hard blow to the food service industry. Whether a restaurant is affected by a flat-out raise of the minimum wage, abolishment of the tipping system, or the need to remain competitive in the labor market as others bow to the pressure and raise the wages of their lowest earners, it still means thousands or even millions of additional dollars spent each month without any increase in revenue.
Applying the Process of Elimination to Potential Solutions
In light of the concurrent forces applying upward pressure on food service wages, the restaurant industry would be wasting its time trying to resist the inevitable. So where can restaurants look to make up the difference?
Just Raise Your Prices?
First, let’s examine the most common knee-jerk reaction: increasing prices. This seems like an obvious answer, but after further examination, it’s a risky one. This is mainly because of two facts:
- Fresh food costs are already going up, having already resulted in widespread price hikes among restaurants.
- The food service industry deals in a fairly price elastic product. By comparison, most food items (purchased for consumption at home) are relatively price inelastic.
These two facts taken together mean that most restaurants have already or will soon need to raise their prices (owing to higher food costs) and any further price hikes (due to higher labor costs) would almost certainly alienate their customers and invite a precipitous downturn in business.
The USDA has predicted that the price of animal products such as meat, dairy and eggs will increase in 2017. California – which grows the majority of U.S. produce – has also taken a beating due to an extended drought, which is driving up the price of nuts, fruits and vegetables across the board.
With an estimated elasticity of demand of -2.3, for every 1% the restaurant raises its prices, it can expect a 2.3% decrease in patronage. (When food prices go up, people obviously don’t stop buying food, but they do buy it more from stores and less from restaurants.) Under these conditions, the number of people who eat at restaurants is already dropping, and further raising restaurant prices will only make matters worse.
In other words, for a restaurant, higher prices are part of the problem, not the solution.
(It should be noted that the relationship between price and demand is a bit harder to predict when it comes to fine dining. Since fine dining is more about the experience than it is about the value of the food itself and the time/effort put into its preparation, it's an example of a luxury good. When people are feeling an economic pinch – such as when the CPI rises faster than income or in a recession –demand for luxury goods declines rapidly. At the same time, under normal circumstances, some luxury goods actually experience demand in proportion to their high price points. Which is to say, any given fine dining establishment may prove to be very price elastic, very price inelastic, or anywhere in between.)
Robots to the Rescue?
One futuristic solution – replacing staff with robots – has certainly received a lot of media attention, but such a solution is years away from industry-wide adoption. With a $3 million price tag, robots built to flatten dough, squirt sauce and toss toppings cost 10 times as much as the average fees to open a chain restaurant franchise – and the numbers don’t really move any closer to making economic sense when taking into account potential labor savings.
With restaurants hurting to make payroll in the first place, replacing unskilled food service labor with advanced robotics just isn’t a financially-savvy move at this stage.
Hunker Down and Embrace the Reality of Financial Attrition?
Another possible solution is attempting to seize a larger market share. After all, these problems are not just affecting you but your entire industry. If you can navigate the short-term perils of margin menace with a little more acuity than your competitors, in theory you can position yourself for longer-term success. (This calculous is based on the notion that slim margins are more manageable with larger enough volume since fixed costs are fixed and revenue is variable as a function of output.)
While the logic of a survival-by-way-of-market-share plan checks out fundamentally, it is very risky. One, there’s no clear route to achieving your goal – as a strategy it’s most abstract. And two, where there is practical expression of this strategy, it normally relies on aggressive loss leadership tactics. In the current economic environment, playing fast and loose with the financial fundamentals of your food service operation may drive you out of business before you ever enjoy the benefits of increased market share.
With the most top-of-mind solutions either being unfeasible, years away from feasibility, or downright risky, the dilemma is all the more maddening. Without some sort of strategic intervention, the entire industry is headed for crisis mode. It doesn't take a genius to understand that owners and operators need to find new ways to achieve overhead reduction in food services.
Advanced Energy Management as the Difference Maker
While it’s neither an obvious nor top-of-mind solution, the fact is that advanced energy management offers the best, most accessible route for the food service industry to stay ahead of its formidable balance sheet challenges.
Restaurants are heavy energy consumers, with energy expenses adding up to as much as 8% of total operational overhead. (The typical restaurant consumes almost 3x more energy than the average commercial building.)
Studies show that for the average restaurant, a $1 saved in energy production is equivalent to $12.50 earned in sales. (A dollar saved is pure profit, whereas only a fraction of sales revenue will become profit after accounting for associated input costs.) With ENERGY STAR estimating that the average restaurant can cut its electricity bill by up to 30% (simply by identifying waste and eliminating equipment inefficiencies), that easily adds up to the difference an operation in the red and one comfortably in the black.
This is of course nothing new. If you’ve seen the 2016 film, The Founder, you’ll know that one of the central quarrels between the McDonald brothers and Ray Crock revolved around the idea of using a powdered milkshake base in place of ice cream. Why? Because even in the 1960s Ray knew that any reprieve from the onerous costs of refrigeration could be a difference maker for McDonalds. While the brothers did not dispute this premise, they maintained that the integrity of the product must come first.
What is new is the fact that today it’s not an either/or proposition. With the advances in energy monitoring technology and energy management techniques, you can actually improve operational excellence (leading to an ultimately superior product) at the same time and through the same processes by which you pursue general overhead reduction.
There are some clear places where the food industry could monitor their energy use. Lighting, HVAC systems, ovens and fryers are obvious items to monitor for excessive consumption. True energy monitoring, however, goes beyond the simplistic identification of overuse and subsequent cutbacks. By intelligently applying the insights the energy use uncovers, it can contribute to significant savings in some surprising ways.
Most equipment in the food services industry is expected to last 5 to 10 years. With the right maintenance schedule though, that lifespan can be extended considerably – and breakdowns over that lifespan can be significantly reduced. To that end, energy monitoring can inform a predictive maintenance schedule, which allows managers to perform maintenance only and precisely as needed. Extending the life of legacy equipment, and reducing repair costs, saves tens of thousands of dollars in the long run.
If that weren't enough, the same energy monitoring mechanism can help enforce policies and procedures within the restaurant. For example, one energy-monitoring restaurant discovered that oil in the fryers wasn’t being changed according to the prescribed schedule. Changing the oil requires powering down the fryers, and the energy monitoring solution demonstrated that power was never cut off to the fryers. This raised significant questions about that restaurant’s adherence to internal policy as well as external food safety regulations – and allowed management to step in, identify responsible parties and ensure it never happened again.
So what does advanced energy management look like in practice?
Wireless, self powered sensors can be attached to existing equipment in seconds, with a full system deployed in a manner of hours. Real time visibility of energy use on the device level provides a clear picture of where managers should look to cut costs and improve operations.
Indeed, it could be argued that in light of mounting challenges in the form of rising food and labor costs, decision makers need to leverage new techniques for overhead reduction in food services. Better control on energy should be the first place owners and operators look in an effort to rein in costs and chart a path for long-term success.