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Marco's COO predicts real estate pressure, higher prices for restaurants this year

Technomic research recently predicted that the $680 billion restaurant industry will see three percent growth in 2015. What else can industry leaders expect in 2015?

February 9, 2015 by Nicole Troxell — Associate Editor, Networld Media Group

Technomic research recently predicted that the $680 billion restaurant industry will see three percent growth in 2015. What else can industry leaders expect in 2015?

Pizza Marketplace spoke with Marco's Pizza President and Chief Operating Officer Bryon Stephens on the economic trends he expects the industry to face this year and what companies can do to prepare.

Due to federally mandated labor laws that extend to wages and working conditions for retail sector employees, Stephens says the best thing a restaurant can do right now is to prepare for those policy changes. As these changes infiltrate the industry, economic trends are taking hold and knowing what to expect and how to prepare is key to staying in the game.

Higher prices on the menu

Looking at macro trends across QSR and the pizza category, check averages are climbing, Stephens said. Restaurants are offering fewer discounts and we're seeing some of the highest price increases on the menu in the last few years.

Wage increases, changes in health care policy and significantly higher commodity prices are affecting restaurants' bottom line, according to Stephens. Though the trend has moderated somewhat, overall check averages are up.

What can businesses do for their bottom line? Menu innovation, according to Stephens, is a way to provide incremental value to guests. One way to do this is to bundle and package things together. Stephens gives the example of the "burger wars," when everywhere we looked chains were discounting primary products that ultimately lead to the strategies we see today such as value meals and dollar menus.

Stephens says the pizza category is starting to follow suit, as more bundling is offered and products are tied together in an effort to increase the price of checks. It’s a way to provide value to the customer and prepare for the rapidly changing political landscape affecting restaurants.

Shortage of real estate

More restaurants will be building from the ground up due to shortages in commercial real estate in 2015.

While high quality commercial real estate tends to be market driven, even high growth markets are seeing a shortage, according to Stephens. Some of this, he says, is remnants from capital markets that "got soft in 2008" when developers weren't putting out leasing space.

But as the economy improves and grows again, restaurants are now left chasing a shrinking supply of real estate, ultimately putting pressure on pricing. When real estate is in demand, prices go up, and this has caused restaurateurs to look elsewhere for opportunities.

These pricing pressures are suddenly making ground-up options more affordable. This ground-up trend is mostly driven by the influx of brands that are smaller box users, those usually housed in 1500 to 2000 square feet spaces. Smaller brands are paring up with developers for pre-leased deals with a similar mix of tenants.

But some brands are going the freestanding real estate route, which Stephens says can be a cash-flow positive, as interest rates are low and modest down payments are required. With a length of term usually 20 years as opposed to five, as is often seen with pre-leased deals, it can be easier on the wallet from day one.

Technology a top demand

The cost to take advantage of cutting edge technology is getting lower and lower because there are more vendors and people in the industry providing third party platforms in the ecommerce world, Stephens said.

"Lots of technology is on the move right now and better technology is getting cheaper," he said. "Especially in the world of energy conservation like cooking and lighting, people are replacing non-energy efficient with energy efficient appliances. Refrigerators are one example. It's higher in cost, but the returns are better for the long run."

And, it's one of the last lines where restaurant owners and operators have the opportunity to squeeze savings, he said.

Social media will become even more important for restaurants in 2015. It's an opportunity to connect consumers to brands, it's free and can offer an extreme amount of press. Online ordering platforms will follow suit and likely be the most significant trend in 2015. The pizza category has been the leader, but now places like Taco Bell and Chipotle, known for counter service, are jumping on the online trend so customers can bypass lines in the store.

"Starbucks is even creating preorder coffee; it's amazing how many people are going to that digital world of ordering to enhance consumer experience," Stephens said.

What's next? Digital payment. We're approaching the era where we will be a cashless society, he said. One huge move toward that was Apple Pay, and we're going to see more as consumers are adapting quickly.

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