Some of the statistics used in this article are drawn from The Foodservice State of the Nation, a keynote address co-presented by Circana and CWB Franchise Finance at the 2023 Canadian Restaurant Investment and Leadership Summit. Parts of this article originally appeared on www.restobiz.ca, the official website of Canadian restaurant and food service news.
The landscape of Canada’s culinary scene offers a variety of flavours, cultures, and restaurants that are bound to ignite culinary business passions. Yet, beneath the surface lies a pressing issue: the restaurant market is facing oversaturation. Many of them are fighting to maintain or build their business operations, while the industry is grappling with the implications of a market flooded with dining establishments vying for consumer attention. So, what should experienced restaurateurs or those wanting to enter the industry do to thrive?
Looking back: how the events of past four years shaped today’s restaurant industry
The pandemic, inflation, a tight labour market, and rapidly changing consumer demands and appetites have thrust Canadian restaurateurs into uncharted waters.
A turbulent arc began in 2020, as the COVID-19 pandemic – with its lockdowns and restrictions on public gatherings – obliged owners to completely overhaul their business model in favour of takeout and delivery.
In 2022 and the early months of 2023, Canadian restaurants roared back as cooped-up consumers returned in droves to local eateries of all styles and sizes. We saw full-service restaurants jammed with customers at mid-day and late at night, well beyond traditional eating hours. It was demand that we’d never seen before.
Several structural shifts, though, started to bleed momentum from the industry through 2023. Growth in diners has slowed dramatically since the start of the pandemic recovery, and is expected to drop from seven per cent in 2023 to three per cent in 2024.
Among those who intend to cut back on restaurant spending, most say they’ll simply purchase fewer restaurant meals, as opposed to less impactful measures such as ordering fewer items during a night out.
2023 also saw a dramatic “trade-down” effect in the industry, where restaurant-goers abandoned plans for fine dining and full-service in favour of more affordable options. And we saw that happen down the line. Let’s say you’re a family who went to a casual dining spot once a week. Maybe that’s too much for you now. Now you’re going to choose another quick-service restaurant (otherwise known as fast food). Or, you choose not to eat out at all.
As traffic started to decline across all restaurant categories in 2023, owners tried to cushion the brunt of fewer patrons by raising menu prices. But inflation’s impact on restaurant costs – food, packaging, transport, labour – wiped out much of the effort to maintain sustainable margins.
The challenge is stark, and mathematically simple.
You’ve got a business that’s used to operating at a certain margin, and that margin right now is getting squeezed on both ends. Costs are up. Sales are down. What was once a 10-per-cent margin business is now, say, a five-per-cent margin business.
If you have bank debt, prime went from 2.7 per cent to 7.2, and only now are rates starting to decline. If you rent, that’s going up five per cent a year. Most provinces have hiked their minimum wage in recent years. Put all of it together and you’ve got a scenario where it’s getting really hard to make enough money to meet all your obligations. Unless you have deep pockets or you’re exceptionally well-capitalized – and some are, but not everybody – that’s where we see the fundamental challenge.
Labour shortage compounds complexity
Exacerbating the margin squeezes wrought by inflation and slowing traffic is a chronic labour shortage. A Restaurants Canada report released in 2023 suggests “restaurants have the highest job vacancy rates of any industry, accounting for one of every six private-sector job vacancies in Canada.”
Total employment at restaurants is almost 175,000 less than 2019 levels, the report says.
Moreover, young Canadians – the traditional stalwarts of the Canadian restaurant labour force – seemingly flock to other employment and education options, such as the tech industry and warehousing. Amazon, for example, exploded with opportunities for young people who could join a local fulfillment centre and earn a similar wage in a less stressful working environment.
Young workers or new Canadians who might have once applied for restaurant roles have been also increasingly drawn to ride-sharing work like Uber, or food-delivery services.
It all set up a bumpy 2024 for restaurant owners, a reckoning-of-sorts that feels several years in the making. The industry was already “overbuilt” at the tail end of the last decade. Then, when the pandemic hit, federal government subsidies – like Canada Emergency Business Account (CEBA) loans – kept some restaurants afloat that might have otherwise shuttered to due to natural attrition.
The industry’s typical ebb-and-flow – openings and closings – was disrupted by these artificial forces, and some restaurants outlived their normal lifespan.
Now that the world is re-balancing after the pandemic, we’re going to see some closures. And that’s unfortunate, because behind every closure are the livelihoods of good people. But – also unfortunately – it has to happen to allow this industry to right-size again and get back in line with population and demand.
There is light on the near horizon, though, for restaurant professionals who respond with their trademark resilience and creativity.
Thriving in today’s restaurant industry
When restaurateurs come to me for advice on how to stand out, my answer is simple: blend operational excellence with consumer-centric offering.
The three pillars of any thriving establishment are efficiency, effectiveness, and financial prudence. As a business owner, you need to ensure you have stable and robust business operations in place, which becomes challenging with an inflated economy and competition surrounding you.
The temptation to undergo drastic transformations often looms large when we are faced with cutthroat competition. Such endeavours, while seemingly well-intentioned, may compromise the very essence of your restaurant’s operations. The answer is not to react to the situation by adding more change to an already ever-changing economy and environment. Rather, restaurants should respond to the situation. And what we mean here is: listen to understand, evaluate the conditions of the business and the external environment, and then act. But, who and what should you be listening to?
Experience and convenience
In today’s noise of culinary choices, the path to distinction doesn’t lie in reactionary overhauls, but rather in a profound understanding of consumer preferences. Today, diners are driven by two things: immersive dining experiences and convenience.
“Social visits” to Canadian restaurants that promise engaging and memorable experiences have soared nearly 40 per cent since 2022.
This is good news, as experiential visits drive profitability. Social or experiential visits are typically marked by bigger tables, more items per order, and higher spending.
On the experience side, it’s been so interesting to watch restaurant owners’ response. They know they have to offer more than good food and good service. They have to offer enjoyment and fulfillment as well, and they have to create a better experience for customers.
It might be bowling, pickleball, billiards or trivia nights or other games. You want to be able to offer great food, great drinks, but also an experience that’ll bring them back next week or next month.
And while some seek to indulge in lavish adventures with friends captured on social media, others prioritize efficiency and seamless digital transactions. They want to buy $9.00 frappes using seamless digital technology because the goal is to get in and out quickly, drink in hand.
By discerning and responding to these nuanced preferences, restaurants can carve out their unique niche and emerge as beacons of culinary excellence amidst a crowded landscape.
Embrace the diversity of your consumer tastes and preferences. This will guide you to differentiation and successful business operations.
Don’t forget about technology
The restaurant industry has seen a lot of benefits from the integration of AI and robotics. In some cases, it’s brought the elevated dining experience to new heights; in others, these innovations support the workforce by freeing up time and tasks that can further drive convenience or drive up the experience factor.
Imagine a restaurant where robots assist in food preparation, allowing human staff to focus on exceptional, personalized service to patrons. The future of running a restaurant is both fascinating and attainable if you correctly leverage and lean into technology.
Top tips to stay ahead in the restaurant industry
The restaurant industry offers a tantalizing blend of creativity, entrepreneurship, and community engagement, but success requires careful planning and strategic execution. Restaurateurs need to consider 6 key factors before making critical decisions:
Understand your why
Ask yourself why you want to succeed in the restaurant industry. Is it a passion for culinary arts, or the dream of owning a thriving business? Do you have a realistic understanding of the restaurant experience – not just front of house, but back of house as well?
Understanding your motivations will guide your decision-making process and sustain your drive during challenging times, which will inevitably arise. You have to love and enjoy this work because it’s a grind, and one that is not for the faint of heart.
Use loyalty programs to shift from discounts to rewards
Customer retention is built on a foundation of two elements: your target audience and your offering beyond food and service. Many established restaurateurs are thinking about more than just discounts, they’re exploring the emergence of loyalty programs as a powerful customer retention tool for the ability to reward and motivate frequent patrons.
By offering a sense of exclusivity and incentivizing repeat visits, you can build a faithful customer base while maintaining profitability.
Develop a strategic layout
When conceptualizing a restaurant, remember that size really does matter. Opt for a space that aligns with your concept and target demographic. While large venues might seem attractive, they can often come with wasted room that incurs unnecessary expenses and impacts the ambiance.
When thinking of your look and feel, be realistic – carefully consider the layout flow and how that will cater to the overall guest experience.
The reality is that restaurateurs can create an environment that enhances the dining experience, whether patrons opt for in-house dining, pick-up, or delivery. Thoughtful planning will help contribute to a seamless and enjoyable client experience.
Strive for operational excellence
At the heart of every successful restaurant lies a robust operational model. From financial projections to menu engineering, anyone exploring an entrance to or growth in the restaurant industry should take time to work with a team, including your financial partner, to consider every aspect of what the operations entail.
Create a meticulous plan and execute it well. At the end of the day, running a restaurant is an exercise in consistency and always looking ahead. You’ll learn quickly that you need to nail the basics, including food, rent, and staffing. If you’ve dialed in your model, the things you can’t control (like market volatility) are less likely to affect your performance. Remember to keep the promises you make to customers front and centre - committing to them will send you on your way to achieving high levels of satisfaction, loyalty and recognition among your competitors.
Ultimately, those who adapt to the evolving needs of consumers will strengthen operational stability because it streamlines inventory management, kitchen workflows, and staff training while reducing costs and minimizing errors. These benefits translate into smoother operations, faster service, and higher customer satisfaction, which enable restaurateurs to weather market volatility and ever-evolving consumer demands with agility and precision.
Pick a lane
The tastes and habits of millennials and Gen Zers are driving new patterns in the industry. They want to spend money with their friends and have the kind of experience they can share on social media. Or, they crave convenience and want to get in and out of the restaurant as quickly as possible.
In many cases, restaurant owners have done a great job in recognizing consumer demand and responding with real change. They understand they can be about convenience, or they can be about experience, but they need to choose. You can’t be all things to all people. That’s a big part of my advice to owners: pick a lane.
Whether it’s upscale fine dining, casual comfort food, or quick and easy digital transactions, a clear focus will help restaurant owners resonate with their target market, drive sales, and build customer loyalty.
Choose your partners wisely
Good partners are more crucial than ever during fraught times. Find a lender who understands why your food costs are up. It’s important they understand your challenges with competition, the labour market or the impact of the interest rate environment. Find one who sees, knows and lives the restaurant industry.
It’s one thing when times are good and banks are throwing money at restaurants because the headwinds aren’t there. But in challenging times, a partner who understands every aspect of this sector is vital. The risk for you is dealing with a partner who takes a narrow view of market forces, inflates the risk it has on the business you’ve worked so hard to build and limits your opportunity. Those who work alongside restaurateurs will know you, your operation and the industry in an intimate way – and that leads to more accurate and personalized advice regardless of the economic environment.
At CWB we aim to be flexible and helpful. We get to the heart of why a deal or a decision makes sense because we’ve seen these challenges and have the expertise to work through them together.