Restaurants and their suppliers comprise one of the world’s largest industries and perhaps its most unpredictable: successful restaurants have to learn to constantly adjust to people’s buying habits, even in a recession. Yet the restaurant industry remains a fragmented business, based on millions of transactions in hundreds of thousands thousands of local operations. Even with the conversion of recent years to a predominance by corporate owned chains, the industry is ripe for transformation.

What worries CEOs

Most large restaurantl chains are wrestling with a similar, overriding challenge. To generate the kind of buzz (and revenue) that fuels the industry, they must grow the business. But at the same time, CEOs must improve their return on invested capital.

“When the industry was largely family owned, it was relatively lean and invested with great discipline,” notes John Lang, an Associate in the Chicago office. “Paradoxically, once the family fortunes were made, the more professional management teams that came in paid less attention to the return on capital. They focused more on operating costs. Of course, CEOs must think about both operating and capital costs. Ambitious growth initiatives – whether through national or international expansion or new restaurant formats – must pay for themselves.”

Furthermore, restaurants must grow in ways that sharpen rather than dilute their brand image. That requires greater customer insight and more tailored offerings, not simply more locations or generic loyalty programs.

Four levers for intelligent growth

CEOs can use four levers to deliver more capital-efficient, customer-centered growth.

  • Lean dining. Extensive supply chains, complex production processes, large, semi-skilled work forces, and other hallmarks of restaurants have clear counterparts in manufacturing environments. Techniques pioneered by the world’s most efficient factories can dramatically reduce stores’ cost structures, improve production quality, and help finance growth.
  • Format renewal. New store concepts and layouts – for instance, smaller more specialized variations on a restaurant’s core market – can grow revenue, keep the brand fresh, and allow more cost-effective, targeted expansion.
  • Sourcing and supply management. As restaurant networks grow, it’s important to know how, when, and where to relocate links in a supply chain. Late or defective merchandise can wipe out the potential savings from suppliers. In addition, restaurants must maintain collaborative relationships with key suppliers, even while pushing for lower costs.
  • Delivering customer value. Restaurants need not necessarily promise the lowest prices. But they must provide distinctive value in something – for instance, quality, service, or comfort. Convenience, location, selection, excitement, and catering also are part of the value equation.

Attention, guests

To sustain growth, restaurants ultimately must build relationships with the customer, not just sell them meals. “When consumers trust a brand, they are willing to purchase a stunning variety off the menu,” says Lang. “For example, we now see leading chef-owned branching into management services, travel services, kitchenwares, beverages, even consumer product sales. A few market leaders in every segment are pulling away from the crowd – in terms of innovation as well as scale of operations. Those that don’t respond will have a hard time catching up.”

The Epicurus Group

Founded in 1978