Is Desktop Dining Hurting the Restaurant Industry?

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Wharton's Jason Riis and Miguel Gomez of Cornell discuss the restaurant industry's current slump.

The restaurant industry is in a slump and one of the culprits is the popularity of desktop dining. Last year, the number of Americans going out to lunch hit its lowest level in four decades, according to The Wall Street Journal. The reasons: People don’t have time for a one-hour lunch, they want to save money or their employers provide meals for free. Desktop dining cost the industry $3.2 billion last year, according to the NPD Group.

Wharton marketing lecturer Jason Riis and Miguel Gomez, associate professor at Cornell University’s SC Johnson College of Business, chewed on the issue recently when they spoke on the Knowledge@Wharton show, which airs on SiriusXM channel 111. Here are five key points from their conversation.

Customers have less time and want more choices

People are leading busier lives that give them less time to cook at home, and yet more restaurants are losing money and shutting down. The two seemingly conflicting facts can be explained in one word: takeout. “The trend toward people eating more food away from home continues to rise, so it seems to be largely a takeout story,” Riis said.

“The trend toward people eating more food away from home continues to rise, so it seems to be largely a takeout story.”— Jason Riis

Gomez cited figures that show consumption of food outside the home accounts for about half of total spending, a number that has held steady for about 12 years. Since there hasn’t been an increase, he blames the downshift in the restaurant industry on macroeconomic forces and competition from supermarkets.

“It’s the demand of consumers for convenience,” he said. “They have less time, they have more flexible hours, so they want to have lunch more quickly. I think restaurants are going to be working on deliveries much harder in the future.”

Supermarkets are filling the food service void

“One of the points that has not been emphasized enough is that people are concerned about their health and they want to have more control of the meals that they have in terms of the size and the quality,” Gomez said.

Here’s where supermarkets come in. Whole Foods, Harris Teeter, Kroger, Publix and other grocers offer an array of prepared meals that customers can grab and go. They are pulling in customers who don’t have time for a sit-down meal or to cook at home.

“The prices of food at supermarkets, relative to the prices of food at restaurants, has been declining over the past five years,” Gomez said. “This is definitely playing in favor of the supermarket sector because people are finding cheaper food in the supermarket.”

Gomez also points out that more restaurants are offering breakfast, chasing the trend of consumers who are going out for their first meal of the day. But “breakfast meals have a smaller ticket, so that also has an impact on restaurants,” he said. That revenue gap is widened by the loss of alcohol sales from customers who don’t linger in a restaurant over lunch or dinner. “Sale of alcohol is a factor on margin,” Riis said. “If people are doing takeout or delivery, that sale is entirely gone.”

“The prices of food at supermarkets, relative to the prices of food at restaurants, has been declining over the past five years.” –Miguel Gomez

Delivery isn’t an easy fix

The fast-casual chain Panera recently announced it intends to hire more employees to begin delivery service, a smart move that could help the company capture a large share of office workers who want to eat in.

But not every restaurant will be able to follow suit. “So few of the chains have been able to specialize in delivery service. The pizza space is the exception, and something like two-thirds of delivery meals are still pizza,” Riis said. “Those casual dining chains, the sit-down ones, it’s a bigger step for them to go to delivery than the fast-casual chains that just crank out the meals.

Gomez agreed, saying that adapting to delivery introduces a plateful of logistics for which many restaurants aren’t ready. “It’s harder because of the type of meals that they offer and their big investments in having people come to their restaurants and spend time there,” he said.

Loss is felt across the supply chain

Food service is one of the largest employment sectors because it is a labor-intensive activity. As restaurants adjust their business models, employees will be affected in terms of scheduling, positions and pay. “There’s also minimum wage pressure on these restaurants,” Riis said. “For the chains, as they think about their strategic futures and their costs, that’s going to be a big piece of it.”

The impact will also hit the supply chain. “It’s interesting because from the supply-chain perspective, when you are serving restaurants, your business model is completely different than when you are serving the supermarket industry in terms of packaging standards and presentation of the product,” Gomez said. “In the grocery store, products are usually sold fresh, so you want them to look good.”

Labor costs will be a major issue for restaurants in the future. “They’ve got changing customer preferences, the changing nature of the supply chain and changing labor pressures,” Riis said. “The ones who win will be the ones who figure out how best to manage that. It’s not easy. It’s not a trivial job to do it right and provide the customer with an in-restaurant delightful experience that’s not going to annoy them in some way.”

Don’t forget about technology

More restaurants are turning to technology to lure customers through apps that can manage reward points or facilitate ordering. “Even if you want to eat on the premises, you see people who want to order in advance,” Gomez said. “If you are not applying technology, you are going to be way behind the industry standards for business models.”

But Riis cautions that consumers may not want to deal with app overload. “One thing we do have to think about with each of these brands having an app is how many apps consumers are willing to have on their phone,” he said. “And those aren’t small investments to get the app going and the kinds of services that people are going to want.”

The experts agree that restaurants can turn the tables on sliding sales by focusing on their customers. “They should keep the focus on consumers and understand what the consumers want and how they are consuming meals. Why are they going less and less to restaurants? Really, at the end, consumers are king. Restaurants are there to make them happy, keep them coming and keep them loyal. I think they just need to adapt.”

Gomez cites Starbucks as an example of success. “In the early 2000s, when they started getting new consumers who wanted faster, good-quality coffee but they didn’t want to linger, they changed their business model, and they are what they are today.”

But Riis acknowledged that it’s tough to keep up with customers when tastes are fickle. “The companies that do the best prediction of consumer preferences and can execute on it are going to win,” he said. “The mix of fine dining and quick serve is always going to be there in the same individual.”

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