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Business Observer Friday, Mar. 13, 2020 3 weeks ago

Food for thought: Restaurant industry leaders ponder their future

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Ghost kitchens, automation and third-party delivery are among the many challenging developments restaurateurs are grappling with.
by: Brian Hartz Tampa Bay Editor

For many restaurateurs, the business of serving food has always been a learn-as-you-go venture.

It can also be a quick path to a solid, middle-class income for people who choose not to pursue post-secondary education. That second way is how Jeff Gigante, one of the most successful restaurateurs in the region, launched his career. 

“My college education was opening up a pizzeria with my best friend during my senior year,” says Gigante, co-founder of Ciccio Restaurant Group, which operates 13 restaurant concepts in the Tampa Bay region, including Fresh Kitchen, Better Byrd and Taco Dirty. “I couldn’t tell you one thing I learned at Florida State. You’ll get an education in this business that’s hard pressed to be surpassed by anything you can learn in a classroom.”

But owning and operating restaurants has traditionally been a career path that’s fraught with risk. Failures abound — and provide a seemingly endless stream of fodder for hit reality shows, such as “Kitchen Nightmares” and “Restaurant: Impossible.”

Inept management, outdated decor and bad food aren’t the only threats to the restaurant industry. Larger, macroeconomic trends like automation and a rapidly declining U.S. birth rate loom on the horizon as major long-term challenges that will need to be overcome. The rise of third-party delivery apps, such as BiteSquad, DoorDash and Uber Eats, which hit eateries with fees that restaurateurs think should be passed on to the consumer, also spell trouble.

It's enough to make a novice restaurateur turn in their keys. Yet several industry players, Gigante and many others, have overcome some of the obstacles to develop sustainable businesses with some of the hallmarks of any good entrepreneur: staying nimble in the face of changing trends and a willingness to be bold and tough and take risks, among other traits.

"I'm super bullish on our industry," Gigante says. "But we're preparing for a possible softening in the coming year, only because things can't be this good for this long. But what we'll see is that a lot of people who probably weren't meant to be in this industry get shaken out." 

LABOR DAY  

Joe Kadow, a former Bloomin’ Brands executive and a past chairman of the National Restaurant Association, speaking at an Urban Land Institute event in early February in Tampa, dubbed “State of the Plate,” put some of the core challenges in context. (Gigante was on the panel at the event too.)

Joe Kadow is a former Bloomin’ Brands executive and a past chairman of the National Restaurant Association. Courtesy photo.

“The birth rate in this country has basically fallen to replacement level,” Kadow says. “We have an aging workforce. … Twenty years from now, that’s a big deal. And as we reduce immigration, particularly low-skilled immigration, we have to wonder what’s going to happen to our industry.”

Keith Sedita, vice president of new business development at Tampa-based Columbia Restaurant Group, whose concepts include The Columbia, Goody Goody and Ulele, and Rosana Rivera, a chef who owns Xilo, a Mexican-inspired restaurant just north of downtown Tampa, accompanied Kadow and Gigante at the ULI event. 

“The labor pool is the biggest problem,” Sedita says. “Health care costs and affordable housing are two other big challenges. But the good news is that as long as we have this great influx of people moving to Florida, we can continue to grow."

The bad news is there’s more competition than ever for talented, hard-working employees who, thanks to the tight labor market, often have their pick for job opportunities in the restaurant industry — a sector already notorious for high turnover.

“We offer great benefits,” Sedita says. “We’re an old company that’s been around for a long time and that makes us attractive to employees. But you also can’t be afraid to pay people. You have to pay them because if you don’t, someone else is going to. The labor market is tough, but if you can make yourself attractive and be an employer of choice, any way you can, you’re going to do fine.”

EXPENSE ACCOUNTS

Fine, of course, is all relative. The average profit margin of a full-service restaurant is usually 3-5%. Quick-service restaurants’ margins are a bit higher, at 6-9%. Eateries of all types share a common formula, however, when it comes to calculating that profit margin. The standard playbook says 30% of revenue should go to labor costs, 30% to food and beverage expenditures and 20% to operating expenses like rent and insurance. That leaves 20% left over for profit — in a perfect world.

Lately, though, third-party, app-based delivery services have been chomping away at restaurant profits.

“One of the things we haven’t figured out is delivery,” Kadow says. “We started with Uber Eats telling everybody, ‘We will deliver the restaurant food to you at the same price you would pay at the restaurant for $4.99.’ They did that by charging huge amounts to the restaurants, which was unsustainable. And now what’s happening is they have to lower [their fees].”

‘The labor market is tough, but if you can make yourself attractive and be an employer of choice, any way you can, you’re gonna do fine.’ Keith Sedita, vice president of new business development at Tampa-based Columbia Restaurant Group

That’s because restaurants are pushing back. David Benstock, co-owner of Italian restaurant Il Ritorno, for one example, has refused to work with delivery services because of the high fees and the risk to his brand’s image if errors occur. Gecko’s Hospitality Group in Sarasota stopped all third-party delivery for similar reasons. “You’re putting your service in someone else’s hands,” Benstock says.

Kadow adds, “They have to lower what they charge to the restaurant and increase what they charge to the consumer.”

Observing how the app-based restaurant food delivery trend has played out, Kadow thinks he has pinpointed the disconnect. “The delivery companies aren’t making any money because it’s not a technology business,” he explains. “A technology business is one that sells technology and is scalable, with very small, incremental costs, as opposed to a business that just uses technology.”

GHOSTS IN THE MACHINE

Frustration with the added expense of delivery services has led to the rise of so-called “ghost kitchens” — food preparation facilities with no dining area, no front-of-house staff, not even a storefront or public entrance. Ghost kitchens allow for multiple “restaurants” to operate out of the same space, at the same time, filling online orders for delivery.

Rosana Rivera, a trained chef and owner of Xilo, a Mexican-inspired restaurant in Tampa. Courtesy photo.

“If I can do a ghost kitchen,” Kadow says, “I don’t need anything else. I just need a kitchen. That way, I can better absorb the extra cost of delivery and get my margin where it needs to be.”

Gigante says he’s looked at the ghost kitchen trend but isn’t yet ready to go there. Ciccio’s 13 different restaurant concepts are big on “storytelling,” he says. “It’s experiential.” However, he views takeout and delivery a bit differently from Kadow by categorizing it as more of a marketing expense.

“Restaurateurs are very skeptical of spending hard dollars on marketing because you just don’t know how it tracks back to you,” Gigante says. “But you all have been on Uber Eats and looked at a restaurant that’s nearby that you've never visited and said, ‘Let's just try it.’ Then the food comes, it’s amazing, and that restaurant goes onto your docket of places you want to check out.”

Rivera also keeps tabs on the ghost kitchen trend and says venture capital has been flowing into the space. Even high-profile entrepreneurs like Travis Kalanick, former CEO of Uber, are jumping in. Kalanick, who resigned from Uber following a series of scandals, has acquired a controlling stake in a ghost kitchen startup called CloudKitchens.

“The latest product in food delivery is kitchens going into empty malls,” Rivera says. Simon Property Group, one of the largest owners of shopping mall space in the country, has shown a willingness “to take old abandoned retail projects and convert them to ghost kitchens. And Food Network and some of their chefs, like Rachel Ray, are getting into ghost kitchens.”

It’s not surprising restaurateurs want to find a way to make delivery work for them, not against them — and if that means radically reshaping their business model, so be it. Third-party restaurant food delivery was $10.2 billion industry in 2018, according to data firm Technomic. 

“It’s consumer-driven,” Rivera says. “People want the kitchen to come to their house or workplace. Instead of farm to table, we are transitioning to kitchen to table.”

DO THE MATH

Another trend affecting the restaurant industry in Tampa Bay and beyond is automation. (One already-here example: CaliBurger, a Santa Monica, Calif.-based burger chain that opened its first Florida location in Fort Myers in November. Employees there work alongside robotic kitchen assistants — named Flippy — to prepare meals while guests order from a PopID kiosk, a digital authentication system.)

Keith Sedita is vice president of new business development at Tampa-based Columbia Restaurant Group. Courtesy photo.

Kadow believes automation will eventually phase out many quick-service restaurant jobs, which are already under threat because of the nation’s slowing birth rate.

“We’re in a race between automation and a shrinking labor pool and the cost pressures that relate to that,” he says. “The automation trend is going to continue and has great societal implications for all of us. Also, if my choice is between a kiosk and a surly teenager, I’m going to the kiosk.”

Fewer and fewer teenagers are going to work, however, Kadow notes, citing the U.S. Bureau of Labor Statistics. In 2000, 50% of all 16- to 19-year-olds were employed. By 2018, that number dropped to 35%. More alarming? The National Restaurant Association projects that by 2028 there will be 1.2 million fewer 16- to 19-year-olds. 

The business lesson is clear: Develop a succession plan — sooner than later. 

“I'm a public company guy,” Kadow says. “If I want to sell my stock in Bloomin’ Brands, I just call my stockbroker, sell it, and I’m out. But if I run a family business and want to pass my restaurants onto the next generation, I should be very concerned about demographics. You’re going to see more automation to labor because you really have no choice.”

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