A New Model for Sit-Down

The sit-down model is broken in the post-lockdown world, but all is not lost as this crisis has simply brought to light weaknesses in the dine-in foundation that were there all along.

So it is time for operators to do what they do best – analyze, innovate & improve!

At the heart of the issue is how do sit-down operators charge appropriate “rent” to consumers for use of their facilities? The dichotomy of charging for food and rent has become increasingly apparent now that consumers have the option to buy sit-down food (either for pick-up or delivery) apart from the in-restaurant sit-down experience.

How do you charge the same price for food picked-up by a consumer to be eaten in their own home as you do for food that is consumed on your own premise? Doesn’t it seem that you must charge more for the food consumed on premise if you are to cover the fixed costs associated with your facility?

We know that some customers prefer not to use your premises, they prefer to eat at home while others want a break from eating at home and want an opportunity to socialize with their friends and family. These are two distinct need states (with some consumers moving between the 2 options) with distinctly different cost structures.

The challenge is that some consumers are willing to pay more for food delivered to them at home which has the potential to confuse us into thinking that dine-in customers, generating lower checks, are less valuable. However, as off-premise customers are actually the minority, they will always represent the minority of profits at sit-down restaurants.

The real challenge is how to generate sufficient “rent” from dine-in guests to create an appropriate ROI on the total investment cost of a sit-down facility. This concern is on the mind of every banker and investor.

As a consummate consumer of chain restaurants, I can attest to the frustration of sitting down for a meal at many brands. When I want to go out on a Friday or Saturday night the wait here in Charlotte can be close to 1 hour, so I often move on to the next chain until I find one (if any) that will seat me. The tables & booths are not always clean and there is a good chance of being sandwiched next to another crowded table (hopefully not with a crying baby!). Many times it is hard to get the server’s attention and I often find myself with a further wait just to order. Then, on top of all this, I leave a 20% tip which is usually warranted but certainly not always.

It’s almost like the sit-down chains have been left in the dark ages while the rest of the industry moves forward with the understanding that there are new tools in today’s technological era. Sure, the sit-down chains have finally come to understand that there are apps and digital platforms for off-premise, but, once again, that is a small part of their business. More tech solutions are needed for dine-in food ordering & table reservations. I want to use an app to schedule my table and pre-order my food!

How will such tech solutions change the economics of dine-in? Firstly, social distancing may prove to be a good thing – not just from a health perspective, but from an experiential perspective. For this to work, operators must turn tables faster and that’s where scheduling and ordering tech can be used to quicken the que. In turn, fewer servers can cover more table turns and this not only means the potential for margin boosting labor savings (which maybe a necessary evil to keep the sit-down model viable for the long-term), but also the potential for a reduction in recommended tip percentages without lowering the servers’ total compensation. And last, but not, least, consumers may give permission for operators to charge more for the dine-in experience (to the extent that they save on tips) which further helps towards facility investment ROI.

Faster dine-in service that is more convenient & consistent combined with lower post-tip pricing and more social distancing elbow room should translate into more traffic as the dining-in experience catches-up with the 21st century. However, using tech to minimize/eliminate wait times further suggest the potential to use smaller footprints that exclude waiting lobbies, saving on real estate and construction costs. Perhaps some of this savings in construction costs could be reinvested in attaching drive-thrus for a superior carry-out experience.

In conclusion, it is time to rethink sit-down. Operators must apply tech and process improvements not only to regain lost ground but to take new territory in a brave new world.

RR’s Unit Sales & Growth Report

  • Notably, pre-lockdown closure rates continued to rise through 2019 (2.5%), exceeding the 17-year high (2.4% set in 2009) which reflects persistent unit level margin pressure over the last 4 years (with 2019 store-level EBITDAR margin representing the lowest level in at least 17 years).
  • The question remains – how much post-lockdown closure can we expect over the next couple of years? The consensus seems to be that closures will be most dramatic among the independents, helping the major chains.
  • On the positive side, lower construction costs post-lockdown and the likelihood of an abundance of available sites could help the stronger chains to grow above their previous trend lines.

RR’s 2020 Unit Sales & Growth Report Features:

10-year history for 56 $1B+ chains including: (1) total units; (2) company vs. franchisee ownership; (3) new units; (4) closures; (5) franchise transfers; (6) average units per franchisee by concept; (7) systemwide sales; and (8) system sales market share.

Let’s Not Forget Indoor Air Quality

  • While everyone is scrubbing hard surfaces, we should also consider scrubbing the air inside our restaurants (remembering that viruses can get airborne).
  • Fortunately, there is an easy and inexpensive way to do this using UVC (ultra violet light) which is effective at killing viruses. Amazon sells a whole-house/restaurant unit for $99 which easily installs in HVAC ducts (click on graphic below).
  • Also, it may make good sense to pay attention to introducing fresh air into sealed HVAC systems (remembering that “V “stands for ventilation).
  • Further, maintaining proper humidity levels during colder weather may be important as research suggests that viruses don’t thrive as well at proper humidity levels.
  • Restaurant guests are likely to appreciate this added safeguard which could be easily advertised with in-store communication.

Papa John’s – RR Executive Summary

Papa John’s positioning is around a relentless pursuit of “better” and bringing people together with quality differentiators that include: fresh original dough, fresh packed sauce, meats without fillers and pizzas with no artificial flavors or colors. The brand’s more recent marketing effectiveness is attributed to new creative that focuses on pizza quality together with a reallocation of ad spend away from high-cost national sponsorships into working media where it is able to reach a broader range of consumers more often. The chain has expanded beyond a primary focus of sports enthusiasts towards a broader audience (including Millennials & Gen Z) accessible on social media & digital. Also new is a sharp ramp-up in new product intros during 2019 & 1H20 which is consistent with corporate’s stated desire to evolve with consumer tastes. Papa John’s innovation expands beyond pizza (crust variations) to new food categories (including Papadias & Jalapeno Popper Rolls) which help address different dayparts (particularly lunch). Also, as aggregators have broadened delivery accessibility, Papa John’s desires to make sure they eliminate the veto vote. A low/hi promotional approach includes: $6 Papadias sandwiches; Choose 2 or More Picks for $6 Each ($12+ total); any large specialty pizza or up to 5-toppings for $14; and Papadia & large 1-topping pizza for $15. In any case, it is difficult to translate a pizza+ quality positioning into a higher price as the crowded pizza segment addresses a lower income demo. As research shows that PJ loyalists often choose a lower priced competitor, price-value remains a challenge as the chain does not emphasize everyday value, online discounts or carryout deals. In any case, everything is working together in the current operating environment to drive a nice sales rebound which includes a +5.3% system comp increase during 1Q20 and astounding +33.5% growth during May 2020. In conclusion, new management has driven a solid turnaround which has perfectly coincided with a unique time period when demand for delivery and easy, affordable carryout may be at an all-time high because of lingering COVID concerns.

Applebee’s – RR Executive Summary

Applebee’s (the 2nd largest player by sales in the casual segment) benefits from its “Eatin’ Good in the Neighborhood” grill & bar positioning (approachable, accessible & affordable) which provides a place to connect with family & friends. Culinary innovation (leveraging mainstream American recipes/flavors) and buzzworthy Neighborhood drink of the month deals keep the restaurants interesting and LTOs almost always feature attractive price points and popular promotions including its All-You-Can-Eat Riblets. Its value positioning further benefits from abundant plate coverage, its popular 2 for $20+ everyday value platform and its $7.99 Irresist-A-Bowls. However, it is not easy for the brand to balance value (required by its core middle America customer to maintain traffic) with a need to attract guests willing to pay-up for higher checks. Also, the brand’s traffic challenges may reflect the economic condition of its core blue collar customers as much as it does with finding the appropriate value offers. Help may come from its success in driving high ticket, incremental off-premise sales. In any case, TV ads are well done (featuring compelling food photography set to famous pop songs to create emotional connections) and operations benefit from a reduction in store performance variability and back of the house simplifications. Also, operators report that the senior management team is considered very collaborative in its work with franchisees. Taken together, improving internal guest satisfaction scores speak volumes. In conclusion, while Applebee’s has worked hard to balance the pursuit of value for its core Middle American customers and increased relevancy to attract a younger guest, more time may be needed to address the disparate needs of these demos especially as the system seeks to recover from a post-lockdown world.