Foodservice Industry Challenges

Increases in labor costs, higher interest rates, negative same-store sales, years of negative EBITDA, flawed real estate strategies, high food prices, customers cutting down on dining out, and COVID lingering government support withdrawal are some of the factors chains and franchisees were unable to surpass and leading to a soaring number of restaurant bankruptcies in 2024. From the restructuring of large chains such as Red Lobster, Rubio’s, and Tijuana Flats on the one hand, and franchisees unable to make the unit-economics work (including franchisees for Popeyes, Arby’s, Pizza Hut, and Subway) on the other, bankruptcies can be seen across categories and segments. We are seeing this play out in many geographies. Despite the pain and pressures of challenging conditions, it seems like in some organizations it hurts less to remain indecisive — holding one's breath waiting for the situation to improve itself – than it does to bite the bullet on bolstering the team, capabilities, competencies, and critical thinking that’s needed to confront the issues head-on. It somehow hurts less to lose millions slowly over many months than to plunk down a few hundred thousand to get the shot in the arm that’s so desperately needed. Our advice? Waiting may hurt less, but it costs a lot more in the long run. #restaurants #bankruptcies #strategy

Could things be even worse than they seem for big food? Quarterly reports (and lowered guidance) from Kraft Heinz and Mondelez last week sparked a sell-off, but Chipotle’s earnings also sent up a less-obvious – and possibly more telling – signal flare. Chipotle’s CEO said of the company’s traffic struggle: “We’re not losing them to the competition.  We’re losing them to grocery and food at home.” We’ve seen this calorie migration before.  When budgets tighten, consumption shifts from restaurants to lower cost at-home meals. Historically, this shift delivers a growth tailwind for grocery stores – and big food brands typically capture their fair share. But that’s not what we’re seeing now.  It’s an old movie, but the plot has a new twist, and the foreshadowing suggests a different ending is possible. Volume is leaving restaurants, migrating to grocery – but it’s not flowing to the big brand incumbents. It’s going to two winning camps: -  Those delivering value – private label. -  And those delivering relevance – emerging and insurgent brands. This puts big brands in a dangerous spot. Even with an in-home consumption tailwind, they’re still losing in both directions. And when that tailwind inevitably reverses, they risk losing in yet another direction – this time to restaurants. This lose-lose-lose scenario is strategically untenable – and it suggests today’s struggles may be structural, not just cyclical. If true, the implications are significant.  It will require either major supply side restructuring to match a lower-volume reality – or investing heavily (at the expense of earnings) to recapture relevance and growth leadership. Those waiting for a macro recovery to fix their problems may have lost the game already. What do you think: is the old normal returning eventually, or is it really different this time? https://lnkd.in/gGkpDQJM

I have spent much time recently discussing innovations in the food service sector, like mobile ordering, robotics & automation, and ghost kitchens. This innovation is being driven by customer demand for more convenient food options. Therefore, I was interested to read Heather Haddon’s article “Drones and ‘Game Film’: Inside Chick-fil-A’s Quest to Make Fast Food Faster” in the The Wall Street Journal. For years, Chick-fil-A Restaurants' popularity has resulted in long lines of cars, causing major congestion at some locations, frustrating customers and nearby residents, businesses and municipal leaders. Heather provided an overview of how Chick-fil-A is using data analytics and video analyses, like professional sports teams, dispatching specialist teams from its headquarters to its more than 3,000 restaurants to study the minutiae of parking-lot traffic patterns and how employees hand off orders. By integrating data from security cameras in the kitchen and drones outside the restaurant, Chick-fil-A was able to see that more workers were needed to reduce the burden on existing employees working the drive-through and the Wi-Fi used by parking-lot order-takers needed to be extended further from the store. By using visual data, Chick-fil-A was able to identify bottlenecks, as well as test and analyze different solutions, enabling the company to be at the forefront of fast-food drive-through science, and adjust to changing consumer patterns. One of the biggest takeaways from this work is that Chick-fil-A realized it had underestimated how many different challenges it faced. Chick-fil-A is the same company that in 2024 opened a multi-story, drive-through only restaurant in Georgia. This new restaurant design can handle three times as many drive-through cars as its other restaurants and includes lanes just for customers who order through the chain's app. The kitchen is two times larger than a typical Chick-fil-A restaurant kitchen and utilizes a food conveyor system to deliver a meal every six seconds, according to Chick-fil-A. This food conveyor system is an example of how the use of automation & robotics is changing the FoodTech sector. With an almost unlimited amount of data available from security cameras, sensors and other devices throughout the facilities and the growing power of AI and machine learning (ML), we should expect that other quick service restaurants will follow a similar strategy to optimize operations, to reduce costs and improve the consumer experience. https://lnkd.in/gsF6YeyH #ai; #robotics; #automation; #innovation; #technology; #restaurants; #foodtech; #food EcoTech Capital Cy Obert

Why is data and AI adoption so slow? Many clients and students struggle to get business leaders to act in the company’s best interests when it involves change. Here’s how I explain the barrier. Robotics automation is huge right now in the restaurant industry, especially for kitchens. However, startups hit a brick wall selling solutions that are proven to work with proven ROI. Most restaurants’ operating models incentivize putting off upgrades for as long as possible. Here’s how this plays out. Retrofitting kitchens for robotics is expensive and time-consuming. Shutting down a restaurant for 6-8 weeks for the update creates a loss of revenue and makes the new retrofit expense even less attractive. Executives will decide to wait “for a better time,” which never comes, or hold off until they’re forced to do it. The event that forces their hands will be the emergence of more efficient competitors. Restaurants that adopt automation are better positioned to compete on price or spend more on food quality without raising prices. Some automation makes new food offerings viable at scale, making menus more innovative. Laggards will be forced to match those moves, which means less free cash flow to fund the upgrades and more incentives to put them off. The downward spiral eventually leads to business failure. How should businesses look at this problem? If you know kitchen automation is coming, new locations should be built with space for robotics. Remodels should include updates and fittings to support the eventual upgrade. However, the time to begin that process so everything is ready now, when it’s needed, was in 2020. Businesses must start to make decisions today, knowing what’s coming to lower the cost of the next transformation. The robotic automation trend has been evident since 2018. The cost of preparation is always lower than the cost of reaction. Predicting things like precise timing or technical capabilities is impossible. Larger trends are much more stable, and businesses must be forward-looking and prescriptive with technology investments. Stasis is a myth. Transformation is continuous.

This has to be one of the strangest downturns to hit the restaurant industry in a while. For every standard "bad" thing, there is an opposite " good" thing going on. Here's what I mean... Record restaurant closures. This past winter saw the most restaurant closures since 2020. This is obviously bad. But also... Record restaurant openings too? The total location count of restaurants went UP last year. There was a great article in the WSJ about how restaurants are becoming the darling for real estate this year. 💰 Now add in that #restaurants will top $1 TRILLION in sales for the first time! Wow! That's huge! But also... 📉 The growth rate from last year didn't outpace inflation. And foot traffic is down. So most of the growth came from price increases. Ok so traffic is down and when adjusting for inflation, the trillion dollar number, while a great milestone for the space, isn't quite as sexy. And isn't 2024 the year of the "value meal" again? Fast food chains are all putting together $5 deals. "Coupon clubs", aggressive promos, BOGOs, etc. are all back and being leveraged to fight for the decreased traffic. BUT... The fastest growing restaurant groups aren't fast food. They aren't coupon clubs. They're... more upscale quick-serve? The groups that are getting capital and opening up stores are NOT doing it with discounts and promo's. They're more expensive than Chipotle and having tons of success. Also, Catering is back!! And while it may not move the needle as much on top line sales, we all know this is where the PROFITS are. I know restaurants that have a core business that's around break even and they make all their actual profit on catering and events. So to summarize... ⬇ Record restaurant closures ⬆ Record restaurant openings ⬇ Foot Traffic Decrease ⬆ Total sales over $1 trillion ⬇ When adjusted for inflation, sales are down though ⬆ Catering is back driving more profits ⬇ Year of the value meal My theory? The market inputs are not good. It's harder to run a restaurant right now than ever. But operators are smarter right now than they ever have been. There is more accessible content out than ever before. And restauranteurs are soaking it up, learning, and are running better businesses. What do you think? Doom and gloom? Restaurant Renaissance? Did I miss any other big macro impacts on the restaurant space? #Entrepreneurship #Leadership

Even the biggest and best restaurant companies in the world are admitting their labor model is broken. The entire industry is starting to wake up. A 40,000-location fast food giant is spending millions on AI ordering systems. Not because it's cool tech. Because they can't staff their stores. • A 35,000-location coffee chain? Closing locations due to "staffing challenges." • A 3,000-location fast-casual brand? Investing in automation to reduce dependency on labor. • A 400 unit industry leader losing $7 million a year to a model that isn’t optimized. • Your favorite local spot? Probably closed Mondays now. The old model no longer works: • 75% turnover isn't "just how it is" anymore • Gen Z won't work 60-hour weeks for pride • 90-day turnover costs more than manager salaries • Sales per labor hour? 1985 math for 2025 problems I watched a restaurant group lose $1.2M last year. —> Not from food costs. —> Not from rent increases. —> Not from government wage hikes From replacing the same positions every 90 days. Here's what's actually broken: —> Managing by percentages when you should manage productivity. —> Scheduling like it's 1995 when you have 2025 data. —> Onboarding like the team is replaceable when training costs $1,800 per person. —> Measuring sales ÷ labor instead of what actually drives profit. The shift that's coming: Smart operators are already moving: • From "How many hours?" to "How productive were those hours?" • From "Fill the schedule" to "Optimize the output" • From "That's just restaurant life" to "Let's fix the model" Data is one thing, but your team’s ability to translate the data is where the magic happens. One small group I worked with last year? They looked through a different lens: • Stopped managing to labor percentage • Started managing productivity metrics • Built schedules based on output, not coverage • Created careers, not jobs Result: $600K saved. Same sales. Better service. Not by cutting harder. Not by raising prices. Not by squeezing staff. By finally admitting the old model doesn't work. Even the giants are admitting it now. Time to stop managing like it's 1985. 👊 P.S. Want my favorite resource? The same framework that helped that small group save $600K? Comment "MODEL" and I'll send you the guide that shows exactly how they did it. P.P.S. I had a restaurant operator tell me “wow, you’re really good at managing labor cost.” Wrong. I’m no better than the rookie manager on your dining room floor. I’m just better at interpreting the data so your rookie manager can make faster, better decisions. #restaurants #restaurantmanagement #labormodel #hospitality #restaurantindustry

U.S. restaurant industry is on the path to have the worst non-pandemic same-store sales year (aside from 2020) since 2016, and the larger than historical average gap between restaurant and grocery prices is the major reason why. What’s driving this gap is higher food cost (consolidated food manufacturing, third party delivery companies charging restaurant 25-30 percent cost), higher labor cost, and expensive new rental rates (landlord renewal of existing and new business are still asking outrageous pricing per square feet) There is some dimmer of hope while menu prices have outpaced grocery/supermarket prices for the past 20 months, last month’s difference was the smallest since April 2023. #restaurant #grocery

I have sat in on multiple restaurant exec-level meetings as we head into the end of year, and a critical discussion topic centers on the "price / value equation" in 2024. Many brands are questioning if their value prop still makes sense on the heels of some of the most aggressive price increases in recent memory. On one side are brands that have positive comps, but declining traffic. On the other side are folks who took too much price and struggling to figure out how to restore their pre-inflation price / value equation. Either way, one thing is certain. In 2024, the discounts are coming. My old colleague Peter Saleh had what I thought was the best take on price / value looking ahead in 2024: "We believe 2024 will be the most normal year since 2019 when it comes to sales, unit development, commodity and labor inflation as pandemic-related headwinds and tailwinds have mostly subsided. That said, normalcy also brings some less desirable elements back to the industry, specifically heightened promotions and value offerings as restaurants battle to restore customer traffic. We expect this dynamic to benefit larger chains, as they seek to restore customer traffic and recapture market share from regional and independent operators. We expect the coming year to be defined by modest sales gains, heavy discounts to drive traffic, more normalized inflation, additional pricing and a faster pace of unit development." Discounting will take many forms - mix and match bundles, value menus / items, or straight up coupons / promos. The accelerated digitization of the industry - and adoption of loyalty platforms and engagement tools - will make it easier than at any point in this industry's history for operators to deliver more value-oriented messaging. This increase in 1:1 messaging will be coupled with over the top TV spend as folks spend more time on screens due to the increasing importance of live sports as the only "synchronous" viewing experience and (of course) the 2024 election. On the impact of discounting - I like Peter's take: "The combination of normalized sales trends, greater promotions, continued inflationary pressures and more modest pricing create a cautious outlook for restaurant margin and unit economics. We expect a modest increase in restaurant margins for most operators as margins continue to slowly recover from last year's lows, but don't see any catalyst for outsized margin improvement." I'm not well-versed enough to have a call on margins yet, but definitely something to keep an eye on moving ahead. If 2024 does play out as above, the biggest impact would be on smaller brands. If everyone is discounting, and you don't have the ad budgets to come over the top and blanket your markets in TV / digital advertising, then it's more important than ever to focus on your core. That means being vigilant about maintaining current frequency and churn levels. I have more to share, but am out of space. Would love your thoughts as well!

Running a restaurant today isn’t what it used to be. I was looking at a simple comparison the other day — McDonald’s large fries cost $1.89 in 2007 and about $4.99 in 2025. That’s more than a price change; it’s a story about how every input cost around us has been compounding for years. While reviewing a new lease for our upcoming Atlanta location, it really hit me how many layers operators are managing today: 🔸 Base rent increasing 3% every year — $40/SF in 2025 becomes $53.75/SF by 2035. 🔸 Annual audits from landlords on CAM, insurance, maintenance, and taxes — and any cost increases flow directly to tenants. 🔸 Minimum wage increases pushing labor expenses up year after year. 🔸 Trash, water, and utility costs climbing steadily. 🔸 Workers’ compensation insurance, which is its own complex world — and never trending downward. When you add all of these together, it’s not “inflation” in the traditional sense — it’s compounding pressure from every direction. Add tariffs to the mix, and it really does feel like a nightmare scenario for operators trying to protect already thin margins. Margins get tighter. Break-even points shift higher. And the cost of simply opening the doors each morning continues to rise. Despite all of this, restaurant operators show up every day with resilience, creativity, and a deep love for serving their communities. But the reality is clear: profitability today requires sharper planning, smarter negotiation, and more disciplined operations than ever before. If you’re building, expanding, or operating in this environment, you’re not imagining it — it really is getting more challenging by the day. And sharing knowledge, data, and strategies is more important than ever.

I’ve worked with enough restaurants to spot patterns fast, and the ones that fail almost always have these 3 issues in common. Restaurants don’t usually fail because of high competition. They fail because the foundations were shaky from day one. 1. No feasibility study or financial planning Most failing restaurants skipped the essential groundwork: • No feasibility research • No market analysis • No pro-forma • No realistic projections • No planning for cash flow swings • No understanding of operating costs They open based on passion, not numbers. And passion doesn’t pay rent, payroll, or food costs. If you don’t know your break-even point, capacity realities, revenue model, or true margins, failure is already built in. No feasibility means no financial stability. 2. Generic marketing with no defined target Many restaurants “do marketing,” but it’s random posting, generic promos, and hoping word of mouth does the work. There’s no defined audience, no positioning strategy, no value proposition, no pre-launch buzz, no local engagement, no loyalty plan, and no foot-traffic strategy. Marketing isn’t content. It’s a connection. When you don’t know who you’re speaking to, you can’t build loyalty or steady traffic. 3. No strategy for foot traffic and local demand generation Restaurants live and die by foot traffic, yet most don’t intentionally engineer it. They rely on hope, visibility, last-minute discounts, or delivery apps, but never build a system for consistent demand. Successful restaurants design street presence, partnerships, community engagement, activated storefronts, experience-based moments, and repeat-visit incentives. No demand strategy means no volume, and without volume, there is no cash flow. Whether it’s one of these issues or all three, the outcome is the same: Cash flow stalls. And no cash flow means no restaurant. #RestaurantStrategy #HospitalityBusiness #RestaurantDevelopment #FandBInsights #HospitalityLeadership #RestaurantSuccess #BusinessFundamentals #CustomerExperienceDesign #BrandStrategy #CommercialHospitality