Toby Malbec, Managing Director for Constrata Technology Consulting
I expect that this may be one of the more controversial articles I have put together, partially because it will question some conventional mindsets in the restaurant industry as well as raise some alarm to some of the “emerging norms.”
With that being said, let’s get started!
The hospitality industry has learned some hard lessons over time as it relates to the effective and beneficial use of technology. In some cases, it has leveraged the medium to deliver value to their business, and in other cases it has over the long run brought hardship and increased competition for rooms, revenue, and profitability. One could argue that the travel and leisure industry could be the poster-child for the adage that “hell is paved with good intentions.” Here are a few lessons that the restaurant industry should take note of and learn from the hospitality industry.
Yield Management as a Key Revenue Driver
In the general scheme of things, Revenue or Yield Management is a relatively new thing in the hotel business, only becoming popularly used and leveraged in the last 10-15 years. Early iterations can be traced back to 2000, but it has only been with the improvement of data collection, customer marketing, data normalization, analysis, and improved business tools that the practice has become more effective.
The premise is simple: create a model that predicts demand based on a myriad of conditions and construct an artificial ladder of price levels that increase or decrease based on these conditions. As a consumer we experience these levers being pushed and pulled all the time as we book an airline ticket or stay in a hotel; we can check hotel rates for three days in a row for the same period of time and come up with three different rate quotes. Why? Conditions change, demand increases, demand decreases, other hotels are showing less availability or other lesser-visible conditions have changed.
The travel and leisure industry is constantly honing their skills in this art form to maximize profits during peak and shoulder periods while mitigating the impact during the soft seasons. While there is a lot of science behind the numbers, it is a coveted skill that requires a fair amount of art as well to be effective in this area. If you have a good Revenue Manager, be sure to take care of them!
The restaurant business could learn a thing or two from the leisure industry and look at ways to maximize their profitability by adopting a variable pricing model. It’s interesting that we as consumers are more than happy to pay variable pricing for the same product or service (in the form of hotel bookings and airline tickets) yet we are horrified at the thought of a burger being more expensive at lunch time than at 4 pm. Some operators experiment with this concept by introducing a discount at 4 pm or marketing Happy Hour pricing rather than saying the price at noon is a surcharge. While it is an argument in semantics, it does sit much better with the consumer.
However we couch it, the strategy is very sound and should be leveraged to a much greater extent than it is today. Operators that do have time-of-day pricing more likely do not extend this strategy to day of week or more creative practices for fear of confusing a customer or perhaps even slowing down speed-of-service, but being creative in this manner can be an effective tool to smooth out the massive demand peaks and raise the soft periods in a typical day. With labor costs being a major determinant in the cost model of a restaurant, does it not make sense to try and leverage the resources you have appropriately?
Not only could the restaurant business look at tier pricing, but how about the notion that different table locations in restaurants have greater value? The airline industry and even theaters are now experimenting with this concept, and early returns are quite positive. Is there a problem with charging a customer $10 more for an ocean-view table rather than one by the kitchen? Our only objection is our own internal mindset that we are driven to be the consummate hosts and that placing a premium on seating location will somehow dampen the experience. How about a prime table location on a business Saturday night at prime time? You get the idea. All it will take is one “industry early-adopter” to take the plunge and you’ll see that this concept will spread. If it makes you a little uneasy to think about this concept, that’s ok – change can often cause initial nausea or agita.
The Parasitic Nature of Third-Party Distribution Channels
During one of the big downturns in the travel and leisure industry, airlines and hotels looked to the marketplace to help them market their products and offer new channels for consumers to find and book their offerings. The marketplace answered, and while it initially looked like a savior for the industry, it could easily be viewed as something less than that today. The hotel business saw the growth of third-party distribution companies like Expedia, Booking.com, Travelocity, and a myriad of others who were technology companies that had no product to sell other than re-marketing airlines, hotels, and car rentals. While they were highly effective at marketing their services and reaching a larger customer-audience than any single brand could muster, it came with a heavy price. It is not uncommon for these OTA’s (or Online Travel Agency) to take 25-30% of the total room revenue for a hotel booking.
With their expenses being much lower than those of a hotel or resort, the OTA’s can outspend the brands in the conventional marketing space as well as on the Internet. Try an experiment: google any city (like Paris) and the word “hotel” and see how many listings out of the first page of listings are actually hotel companies. The results are quite frightening; the OTA’s are out-SEO’ing the hotel chains and as a result they are heading them off at the pass. The brands are responding by trying to create greater value for the consumer to come directly to the hotel website or have active campaigns in the hotel to convert the guest to a direct channel to eliminate future fees but the battle is an uphill one.
Sound at all familiar?
The restaurant industry is widely embracing the growth and proliferation of third-party delivery companies who are offering to take the unpleasant and costly task of delivering food to the growing segment of the market look for increased convenience. While this looks like a blessing, the 25-30% fee associated with providing this service is a heavy price to pay.
Compounded to that is the fact that many of these services lack strong technology, and as a result more manual processes (and therefore more chances for mistakes) are introduced to the restaurant. Subscribing to the philosophy that more is better, many operators are signing up with many delivery providers creating a spider’s web of confusion with fax machines, tablets, and other non-integrated delivery methods. These issues manifest themselves in a restaurant often during the peak times when the operations are already stressed. Orders can often be missed or delayed meaning that the customer experience will be less-than-ideal.
Next, the “last mile” is completely out of the hands of the operator, so even if the order is timely and fresh leaving the restaurant it doesn’t mean it will arrive that way. Many third-party delivery companies lack strong operational guidelines for food handling, order tracking, or guaranteed delivery times and as a result even a well-prepared meal can arrive after it’s peak. Who will the customer blame for their poor dining experience? The delivery company? You guessed it – you.
The comparison between the OTA’s and the delivery companies is eerily similar, and if operators don’t recognize these patterns, they will suffer a similar fate as the travel and leisure industry. Organizations should study long and hard before signing away 30% of their revenue and ask themselves some key questions:
- Are we cannibalizing our business by offering delivery, or is it truly incremental revenue? Depending on how you answer this question will drive a different decision set.
- Are you selecting multiple delivery solutions for fear of missing a piece of the market rather than selecting 1-2 and working on tighter integration with your in-store technology?
- Are there conditions under which you would consider managing your own delivery? Do you have heavy concentration of units in areas that could justify the expense? Is it worth building delivery bands whereby you would commit to managing the delivery within a limited area and only using third-party outside that limit?It’s important to recognize that delivery may not necessary be “the solution,” and in the long run it could actually become “the problem.” If the industry isn’t careful, a Google search in the near future for “BBQ restaurant” and “Chicago” will yield nothing but services and delivery vendors.
History has a way of repeating itself.