One segment of the economy that has experienced an incredible amount of volatility since the pandemic is the food service industry. From forced closures to simple survival and finally reopening but struggling with severe staffing shortages, the restaurant space has been almost forced to evolve very rapidly. Mike Halen, the restaurant analyst for Bloomberg Intelligence, joined the ETF Think Tank to discuss his views on this sector and where it could be headed next.
The first and perhaps most inevitable question had to do with food inflation and when it might come to an end. Halen says that the biggest factor right now is that customers are willing to pay the higher prices that restaurants are passing on to them. That goes for both food input prices and the costs of working with companies, such as GrubHub and UberEats. For now, higher prices haven’t been enough to change customer behavior and as long as people are willing to pay the convenience fees for food delivery, conditions will probably remain at least in the near-term.
Staffing, of course, is a big issue in the restaurant industry today and Halen, unfortunately, doesn’t see it returning to pre-pandemic levels. Turnover has always been high in food service – 130% annual turnover in hourly workers and 40% at the general manager level – but low pay, stress and other factors are causing a large number of workers to leave the space and never return. That’s forced many restaurants to raise wages and improve benefits to attract workers, but other innovation is going to be needed to address staffing problems.
Halen feels that technological development is where the industry is headed next. Businesses are testing and implementing new technologies to make operations more efficient and more cost-effective, while reducing the need for workforce. Some examples would include self-ordering and bill payment right at the table of casual dining restaurants or self-ordering kiosks at fast food restaurants.
Halen also expects more restaurants to move towards a 1-to-1 marketing model. Starbucks is currently a leader in this space. It encourages people to use the Starbucks app for mobile ordering and then uses the data, such as order times and favorites, to send coupons at exactly the right moment. The old model of big chains buying time on TV to advertise is probably going to start going away as technology develops to allow them to be more direct at the individual level.
Other key takeaways:
- What Domino’s has done as a turnaround story should be taught in MBA classes for the next 50 years. The company was very upfront about bad food taste and what it was going to do to address it. The technological development it has done has also helped catapult it to a leader in the industry.
- The gig economy has been very good for the restaurant space. It took some time to figure out the food delivery piece and it wasn’t profitable for a while. Now, companies are making money off of it as they’ve been able to use their scale to squeeze the delivery providers on fees.
- There have been two restaurant ETFs previously that didn’t survive and a third that just recently launched. Why haven’t restaurant ETFs been more successful? Halen thinks it’s because people just don’t understand the space. They associate a bad experience at a restaurant and don’t want to buy the stock. There’s also the perception that restaurants are a terrible business, and many go out of business quickly.
- Halen feels there’s not much of an ESG story in restaurants. There’s a push towards more locally sourced foods and shortened supply chains, but the combination of worker hours, food quality and other factors are likely to work against it.
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