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TECHNEWS · Friday, May 15, 2020

It’s time to rethink traditional hospitality business models

Worldwide the restaurant and bar-sector has been hit hard by Covid-19. How can we revamp an industry that is based on social interaction and sharing experiences? Food for thought.

Hospitality isn’t exactly what they call a walk in the park: labour intensive business models, heavy capex , high staff turnover, complicated operations, demanding customers and tiny margins. Especially in big cities like New York, London and San Francisco where property leases are beyond expensive, making a profit is quite the exercise. Imagine these cities though, without their amazing restaurant and bar-scene and you’re left with an average town. When Le Pain Quotidien reported they’d go into administration because of Covid-19, they explained they would close the London-branches first because the cost-structure was too challenging. If cost-structure was challenging before Covid-19, then one needs to start looking at how restaurants are going to survive after the lockdown with being at approximately 40% of their normal revenue while operating on full costs.

The first thing we naturally do then is pointing at the ones who are costing us the most: the landlords. You might have read articles about rent free periods, which is definitely helping for now. However, one has to think ahead as this is not a sustainable solution: landlords need to pay off their debts too. One thing is sure though: we have to share the pain in order to save as many parties as possible involved in the ripple effect. Open conversations between landlords and businesses, with transparency on both parties’ costs structures, could help in finding a solution that minimizes losses on both sides. Unfortunately, we haven’t seen of a lot of that yet with real estate funds taking the wait and see approach, leaving their tenants in the dark.

Most of the financial forecasting done by hospitality businesses at the moment, is based on the assumption they will run at 40% of their normal revenue-levels. With the Consumer Confidence Index [1] being the lowest since the financial crisis in 2008, increasing unemployment and decreasing disposable income, social distancing rules becoming the new normal and fear of contamination, this assumption is upsetting but unfortunately rather realistic. Especially fine-dining will be hit hard if they don’t find other ways to earn their money. Experiments with placing plexiglass between diners at the same table is completely undermining the point of going to a restaurant and therefore by far a suitable solution going forward.

With both the cost- and revenue-side under a lot of pressure, restaurant owners will have to become creative and open-minded in order to survive these unprecedented times. Now more than ever, it is time to rethink traditional hospitality business models and make the industry more efficient. There’s two main blocks to consider here: decreasing costs by optimizing Operation Productivity System (OPS) and increasing revenue by adding revenue streams.
Decreasing costs by optimizing Operation Productivity System is something many operators think they’ve done properly, but are usually not quite there yet. Menu-engineering, proper cost-control in kitchens and meticulous waste management are the cornerstones of a profitable kitchen. Too many times menus are created by chefs with insufficient insights in cost structure, therefore creating beautiful dishes with horrible Cost of Goods Sold (COGS). Cost-control in kitchens is often ignored in the heat of the moment, but when a kitchen assistant puts 60g of guacamole on a sandwich instead of the prescribed 30g, margins are thrown out of the window just like that. With restaurants most likely being more quiet when they’ll reopen, this is the moment to tackle those inefficiencies and create waterproof systems for their staff.

Restaurants are very individualistic structures with each having their own kitchens, staff, equipment, suppliers, delivery-drivers and management. But imagine restaurants start sharing their assets and resources and therefore sharing the costs instead of bearing them on their own. Some start-ups have been doing this for years already: sharing kitchens and staff while ramping up to full capacity. However, in a post Covid-19 world, everyone will be a bit like a start-up again: trying to regain customer confidence, retraining staff to the new norms and operating at the highest quality and service levels while having minimal resources. In this case, bigger restaurants might want to consider using a start-up mindset and create synergies where possible, leveraging each other’s strengths instead of competing with them. The collaborative economy applied to the hospitality industry, creating synergies within and outside companies, will become the ‘new normal’, as we like to say these days.

On the revenue side, restaurants will have to start adding alternative revenue streams to make up for the revenue streams they’ve lost. In-restaurant dining will decrease, food-delivery is on the rise and recipe/ingredient boxes have never been so popular. The message for the restaurant industry is clear: follow demand. Making menus delivery-proof, creating more virtual brands related to your cuisine and using the existing marketing channels to promote the new sister-brands are the way forward. A high end Spanish restaurant for example, can join a high end delivery platform, as people still like to treat themselves. Additionally, they could create a spin-off menu, using elements of the high end menu (synergies!), make it more accessible and affordable and join the more popular platforms like Uber Eats and Derliveroo. They could take it even further and create a street food-version menu or dessert-only menu to address the adventurous junk-food market on the platforms. While utilizing the existing kitchen capacity, restaurants can create a lot of internal synergies and at the same time increase their presence on delivery platforms.

Platforms like Uber Eats, Deliveroo, Seamless and Caviar will become, even more than they were already before Covid-19, crucial in the hospitality supply-chain. Therefore, it is of incredible importance they won’t abuse this powerful position, and that, just like landlords, platforms have to share pain and responsibility. Furthermore, they should lower their commission fees to the extent possible. Partnerships in times like this, are created to survive, not to get the very best deal out of someone. If restaurants close, platforms have less suppliers, which makes platforms less attractive. Now is not the time to squeeze margins for restaurants, it’s time to make it work for all parties, so we can stop the ripple effect. We want landlords, hospitality businesses, suppliers and delivery-platforms to work closely together by sharing the pain first, so they can start sharing the successes later.

[1] Consumer Confidence Index is a survey that measures how optimistic or pessimistic consumers are regarding their expected financial situation.

Valerie Aelbrecht

Valerie is a TVLP Institute alumna and the founder of ProToGo, a healthy meal delivery service in London. In 2019 ProToGo merged with a bricks-and-mortar hospitality venture and Valerie is now COO of the joint-venture. 

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