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traded down during the recession have not returned.
Interviews with full-service operators indicate that costs of goods sold have increased 1.5 per cent as a percentage of revenues over the past 12 months. Similar increases are expected going forward. Quick-service restaurant operators have been able to maintain cost of goods sold as a percentage of revenue thus far, but will have to increase prices to maintain this going forward.
Discussions with distributors indicate the cost of a shopping basket of popular items will increase by about five per cent in 2011.
Any discussion on cost of sales must look at pricing. fsSTRATEGY annually completes a menu analysis of the Top 50 full-service chain restaurants in Canada. In 2010, the Top 50 chains registered only slight and cautious increases in menu prices across all menu categories (appetizers, mains and desserts). Interviews with restaurant operators indicate there is little consumer appetite for price increases. However, price increases have been necessary in 2011 due to rising cost of sales.
“The restaurant industry continues to face strong headwinds in many parts of the country,” says Garth Whyte, CRFA president and CEO. “CRFA’s first-ever Restaurant Outlook Survey showed that rising food costs, labour costs, a weak economy and sales taxes were the top issues for operators in Q2. However, they were relatively optimistic – 83 per cent said they would maintain employment levels or add new staff over the remainder of the year.”
 Other costs of doing business
Other than cost of goods sold, the primary operating expense for foodservice operators is labour. In the CRFA’s 2011 Foodservice Operations Report (2009 data), labour cost in the foodservice industry averaged 33.9 per cent of revenues, down from 34.8 per cent in 2010 (2008 data). For comparison purposes, in 2006 labour costs represented 31.5 per cent of revenues. Operators have indicated that labour cost as a percentage of sales have been increasing, primarily as a result of changes to minimum wages.
Employment in the Canadian accommodation and foodservice sector declined by about 24,000 between 2007 and 2008 indicating employment levels were cut during the recession as a cost management initiative. Employment in this sector has yet to return to pre-recession levels.
Unemployment levels are a much better indicator than minimum wage with respect to labour cost. As unemployment levels decrease, foodservice labour costs as a percentage of revenues increase. As the economy recovers and the employment situation improves, foodservice operators will experience pressure on wages.
The aging of Canada’s population will continue to affect foodservice operators. We will experience a shrinking labour pool in the 15 to 24 age group, from which the foodservice industry draws a significant proportion of its workforce. Labour pressure has been eased slightly by the recession but will return. Labour is especially a challenge in Western Canada.
Rental and leasing expenses have also increased as a percentage of foodservice revenues. In 2006, rental and leasing expenses were 6.8 per cent of revenues increasing to 7.2 per cent by 2009 (the most recent year for which data is available). Not surprisingly, rental and leasing expense as a percentage of sales is greater in quick-service operations than full-service operations. Interviews with foodservice operators and landlords indicate rents are increasing at a greater rate than inflation, especially in prime markets and locations. Changes in the retail market including the entry of U.S. apparel retailers and outlet malls will affect availability and pricing of foodservice real estate.
Other expenses that foodservice operators indicate are increasing faster than inflation include utilities, insurance and bank charges.
Legislation
2011 has been an interesting year for legislation affecting our industry. Federal, provincial and municipal elections have provided a platform for the CRFA to lobby on behalf of its membership.
The recent rejection of the HST by British Columbians is positive for foodservice operators in that province. The HST resulted in an additional seven per cent tax on restaurant food, creating an inequitable situation with respect to groceries (i.e., restaurant meals were taxed at a greater rate than most groceries). The return to the GST/PST taxation model is expected to result in all food purchases in the province to again be taxed equally.
“With the HST in British Columbia, and with every other issue we work on, CRFA’s objective is to engage politicians and senior federal officials in a conversation about the importance of the restaurant sector. We need them to understand and value our industry. We need them to make policy decisions that allow restaurant and foodservice operators to compete and succeed on a level playing field,” says Whyte.
Successful lobbying by CRFA resulted in two jurisdictions implementing lower minimum wages for those serving liquor/receiving tips (Alberta and B.C.) and one freezing minimum wage (Ontario). In Quebec, the minimum wage for tipped employees saw a smaller increase than regular minimum wage. Further, a scheduled minimum wage increase in New Brunswick was delayed from Sept. 1, 2011 to April 1, 2012 to give the provincial economy additional time to recover.
“These provinces must be congratulated for recognizing the difficulty small businesses have faced in dealing with steep minimum wage increases, and taking steps to ensure that entry level job opportunities continue to be available to young people and others entering the workforce,” says Whyte. “As one of the country’s largest private-sector employers and a major employer of youth, restaurants have a vital role to play in job creation.”
Supply managed products continue to pose challenges for foodservice operators competing against prepared foods in grocery stores. A prime example is the challenge faced by Canadian pizza restaurants. The price of mozzarella is 30 per cent greater for those making fresh pizza (i.e., restaurants) than for those making frozen pizzas. Further, restaurant operators must charge GST or HST while frozen pizzas, as grocery items, are exempt from this sales tax.
“Between dairy pricing and sales taxes, the government has stacked the deck against restaurants,” says Whyte. “We’re launching an aggressive consumer campaign this fall to draw attention to Canada’s antiquated dairy pricing system, and we will continue to fight for a level playing field in this area.”
In 2011, the price of industrial milk used to make cheese (including mozzarella), yogurt, butter and ice cream was increased by 1.5 per cent despite calculations by the Canadian Dairy Commission (CDC) indicating pricing costs are stable. The CRFA notes that since 1994 the CDC has increased the price of industrial milk by almost 60 per cent while the cost of milk production has only increased 6 per cent as a result of innovations and efficiencies. To help achieve more fairness and transparency in dairy pricing, CRFA has launched “Free your Milk.ca,” a public campaign designed to educate consumers and gain their support.
On the menu
The fsSTRATEGY Top 50 report on full-service restaurant chains in Canada also examines menu mentions of key variables such as cooking methods, ethnic dishes and specialty ingredients. The preliminary 2011 results reveal some strategies that are very relevant to current health, economic and communication trends.
- Health claims. Menus made fewer health claims in 2011 compared to 2010. Gluten free items, however, increased by almost 30 per cent and were the most common health claim, appearing 3.5 times per menu on average. Although this number is driven primarily by only eight chains offering separate, gluten free menus, it illustrates how chains are attempting to establish a favoured position with consumers by responding to emerging consumer needs. Despite a drop in the average number of mentions of health claims, the number of chains using certification programs (such as the Heart and Stroke Foundation’s Health Check) has increased. This may indicate that the market wants to be told what is healthy instead of relying on common buzz words.
- Entrée, appetizer and dessert dynamics. Chains offered fewer dessert and appetizer options in 2011, likely in response to changes in customer purchasing patterns resulting from the recent recession. NPD/CREST data indicate a slight decrease in appetizer and dessert purchase frequencies and an increase in entrée purchases in 2011. At the same time, fsSTRATEGY research indicates that the average number of side dishes per menu has also increased. It appears that consumers reduced their consumption of appetizers and desserts, so chains cut back on these items to increase efficiencies, while enhancing the differentiation of their entrees and adding more sides to sustain average checks.
- Premium ingredients. Chains appear to be adding value to their entrée offerings by increasing the use of premium ingredients. The use of premium meat descriptors (AAA, Angus, etc.) increased, as did the use of gourmet cheese varieties. Specialty cured meats and specialty nuts (especially pecans) also saw slight increases. All of these strategies are assisting the chains in differentiating their offerings from those of their competition.
- Social media. Operators continue to reach out to customers through social media. While social media is rarely mentioned on menus themselves, more chains offered social media options on their websites in 2011 than did in 2010. Not surprisingly, the most common social media tools were Facebook and Twitter.
Looking forward
In 2011, many foodservice operators developed an armour of resilience, combating uncertain economic conditions with sound strategies. As a hesitant recovery continues in the global economy into 2012, the New Year won’t foster any significant relief. In order to succeed in these challenging times, Canadian foodservice operators will need to analyze trends and make strategic decisions to grow market share.
Key strategies to focus on will be competitive differentiation, sound menu and price management, employee training and retention and selective communication strategies that reach the ear of consumers amidst the din of mass marketing.
See also:
About the authors
Geoff Wilson, Jeff Dover and Andrew Waddington are principals at fsSTRATEGY Inc., a consulting firm specializing in business strategy in the foodservice industry. They can be reached at 416-229-2290 or info@fsstrategy.com.
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