Third-party delivery, streaming video, meal-prep kits, and other market disruptors are changing the face of the food and beverage industry as we’ve known it.

This paper will examine current market forces that are cutting into F&B profits, whether at restaurants, bars, or hotels, and provide important insights to keep guests coming back (and spending money).

Aggressive market forces are nothing new.

In July 2007, Technomic forecast “tough economic times ahead for same-store sales.”1 As reported by Nation’s Restaurant News on July 9, 2007, “Inflating commodity prices, a slowing gross domestic product, skyrocketing fuel costs and a weak dollar” were predicted to take a toll on food and beverage sales nationwide.

Experts identified opportunities for growth, however, noting, “The growing number of consumers under 35 in particular presents opportunities for targeted marketing,” suggesting further that “they are not cooking, so they will be very heavy restaurant users.”

Convenience (e.g. curbside pickup), variety, healthy options, corporate social responsibility, and value were all identified as being important to guests.

But neither Technomic nor NRN really knew what was coming. The article referenced above was published:

• a mere ten (10) days following the first release by Apple of its iPhone, which would change forever the nature of human interaction;
• six (6) months after Netflix began streaming content(for free back then), forever changing the way humans consume entertainment;
• one (1) year before Apple launched its AppStore, providing a marketplace for innumerable interactive apps; and
• eighteen (18) months before Lehman Bros. collapsed at the peak of the 2007-2008 financial crisis, triggering a recession that lasted until mid-2009. These market disruptors could simply never have been predicted, and the list could go on and on…

The advent of smartphones allowed guests to view restaurant webpages and menus online while away from their desktop computers, requiring restaurants to augment their web-based presences (and keep them updated). Netflix (and other streaming services), combined with the affordability of extremely large TVs, provided an alternative entertainment source beyond traditional network television and cable, effectively keeping guests at home, opting to Netflix & Chill (or even watch TV).The popularity of smartphone apps led to the availability of platforms for instantaneous verbal vomitus via Yelp, TripAdvisor, and other online rating services. The Great Recession affected consumer spending in ways never predicted by the economic indicators.

Current market threats.

Almost a dozen years after the above-referenced NRN article, the restaurant and bar industry faces new and insidious challenges to profits. Like 2007, however, the industry will rise above them, finding new ways to innovate and elevate the guest experience.

Smartphone apps continue to pose a threat,and have led to a meteoric rise in the popularity of food delivery services, resulting in significant encroachments into restaurant profits. The food delivery segment, with revenue of approximately $19B predicted for 2019, is predicted to grow to $24B by 2023, according to analytics firm Statista, though Morgan Stanley predicts that a whopping 40% of all restaurant sales will be via delivery, in the amount of approximately $220B. With costs to delivery services ranging from 15-30%, restaurants will face a significant hit in the event things continue along the current path.2

Food inflation continues to be a factor, as more families look to cook at home.The rise of delivered meal-prep kits (a la Blue Apron,etc.), where customers receive all the ingredients of a meal, plus a recipe, has people “cooking” away. Moreover, stores like Whole Foods and Central Market, which offer not only prepared meals for takeaway (at a significantly lower internal cost than what it costs a restaurant), but also wine bars, beer stations, happy hours, and customer events in an effort to increase guest spending beyond commodity groceries.

The most drastic market force facing restaurants and bars continues to be an incredibly tight labor market, driven by record low unemployment rates. This, coupled with organized labor’s pursuit of a national $15 minimum wage, presents a significant risk to the bottom line.

Finally, non-traditional market disruption is encroaching from market entrants such as Tesla Motors, which has announced its intention to include food and beverage venues in its charging stations. As in 2007, operators must always be on the lookout for potential threats to their ability to put guests in seats.

Overcoming the Challenge.

Getting guests in seats (and making sure they return) has always been the challenge. These days, however, since guests have so many other choices (most of which were nonexistent a decade ago), the restaurant has become a place they look for experiences they cannot get elsewhere. That might include specialized techniques like smoking, the use of specialty ingredients/flavors that are unfamiliar but appeal to evolving palates (Alabama white sauce,West African spices, etc.), featuring plant-based proteins,and/or providing flights, tastingmenus, etc. (home cooks do not routinely cook the same item multiple ways at the same sitting).

The restaurant and bar industry will continue to evolve, meet market challenges, and maintain its status as the second-largest private-sector economic force in the U.S.economy. But the tactics of just a few years ago are no longer good enough, and operators must adapt, react,and continue to innovate as the vortex of challenges continually swirls about them.

1. “Tough Economic Times Ahead for Same-Store Sales” available at: https://www.nrn.com/corporate/technomic-sees-tough-economic-times-ahead-same-store-sales (last visited February 21, 2019).
2. “Why the Delivery Market Will Look Different in 5 Years,”Available at:https://www.restaurantdive.com/news/why-the-delivery-market-will-look-different-in-5-years/546936 (last visited February 21, 2019).

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The general theme Plaintiff’s lawyers use in these cases is that the Defendant, in an effort to maximize profits, skimped on security measures that would have made the premises safe –i.e. crime free, risk free, covered in bubble wrap with no sharp edges or tripping hazards. To drive up the value of these cases and advance the argument the Defendant was ‘on notice’, Plaintiff’s lawyers rely on the crime statistics for the premises being sued as well as the surrounding community. Police call logs, news articles, social media postings, and the like are used to paint a picture that management was aware of the problem but disregarded the risk to its customers.

Once the groundwork has been laid for the ‘profits over people’ theme, the focus of the case shifts to deterrent measures –security guards, security lights, fences, other barriers, cameras, etc. From a defense perspective, the key is to focus on the word ‘deterrent’. More often than not, the criminal perpetrator, if identified and caught, will have an extensive criminal history. For such a person, the fear of going to prison is no deterrent. By focusing on the history of the criminal, you may be able to demonstrate that he/she has committed crimes despite the presence of ‘appropriate’ deterrent measures. Another factor to focus on is the deterrent measures used by other similarly situated businesses in the community. Again, experience tends to show that most businesses follow the same or similar security protocols.

Another effective tool in rebutting the deterrent argument is to place the local criminal justice system on trial in the civil case. What happens to the criminal Defendants charged with these crimes?Are the local judges tough or too lenient on crime? How effective/proactive is the DA in prosecuting these cases? In other words, do criminal Defendants have anything to fear? Unfortunately the answer is oftentimes ‘No’. Instead of relying on or fixing the system, Plaintiff’s lawyers would have the businesses in the community become fortresses impervious to the realties facing the average taxpayer in the community.

Defending businesses in high crime areas is a challenge. Very rarely does the opportunity to blame the victim arise. In addition to presenting positive evidence of the security measures implemented and associated costs, educating the jury as to the realties present in the community, including uncontrollable obstacles that exist when trying to provide a safe premises, can have a positive effect. At a minimum, it should result in a settlement well below policy limits, which is so often not the outcome in these cases.

Authors

David Eaton
David Eaton is a founding shareholder of the firm and practices in the Nashville, Tennessee office. He practices in Kentucky, Mississippi, North Carolina, and Tennessee and focuses in the areas of long-term care defense and general liability claims. As an advisor to health care providers, David has worked closely with nursing home staffs and personnel in the strategy and development of the defenses of cases prior to and through trials. David received a Bachelor of Arts degree in English from Nicholls State University in 1995 and a Doctor of Jurisprudence from Mississippi College School of Law in 2000.

Michael Phillips
Michael Phillips is a founding shareholder with Hagwood and Tipton and president of the firm’s Executive Committee. Michael oversees staff in both the Jackson, Mississippi, and Hillsborough, North Carolina, offices.A significant portion of Michael’s cases involves the defense of physicians, nurses, hospitals, nursing homes, assisted living facilities and other health care providers. He handles all phases of the litigation process – with a particular emphasis on trial – and has defended claims against nursing homes and assisted living facilities in Mississippi, Tennessee, Alabama and North Carolina. Michael also has extensive experience in the areas of complex defense litigation involving premises security/liability, insurance coverage and general insurance defense.

Property Crimes Still Dominate the Hospitality Sector

The majority of hotel crimes are property related. Burglary and theft are the two most common crimes in hotels and most hospitality-based businesses. Hospitality businesses are expected to provide a safe environment to their clients. Many clients have begun seeking legal action not only against the thieves, but the service providers as well. Evidence suggests that this number is tied to poor security practices and that many property crimes could be avoided.

Security for Your Staff

Harassment and discrimination crimes continue to soar in the hospitality sector. One poll of 300 workers in the hospitality sector showed that 89% had been sexually harassed by guests or fellow employees at some point. Of those, around 56% said that the harassment came from a member of the public or a client. Staff safety and avoidance of bullying for physical and mental health reasons however, is a priority.

Furthermore, legal issues regarding tip pools and Fair Labor Management are expected to become an important topic soon. In countries like America and the UK, prices in the hospitality sector are expected to fluctuate due to recent changes in policy. This means businesses trying to maintain their same wages and practices may soon fail to meet minimum wage laws, overtime laws, and more.

Negligence Maintaining Buildings and Permits Persists

For management, the most common legal issues still involve business maintenance. Laws regarding expiring building permits and health codes are expected to become stricter soon. The rate of legal cases involving tax obligations and trademark issues has remained steady for the time being.

The hospitality sector currently faces several legal issues. Discrimination and harassment are unfortunately considered common in the hospitality sector. Property theft and burglary are the most common legal issues facing guests and clients in the hospitality sector. The most common legal issues for management in the hospitality sector continue to be issues regarding health codes, expiring building permits, and tax or trademark issues that businesses have chosen to ignore.

Suppliers and retailers of alcoholic beverages advertise their respective products and offerings in a wide variety of digital outlets. Questions arise as to how the complex legal landscape of alcohol regulation applies in these digital spaces. Advertising media include social network services (e.g., Facebook), video sharing sites (e.g., YouTube), blogs, and smartphone applications. In addition to these types of media which engage consumers directly on their televisions and personal devices, other types of media target consumers in retail places. These media include digital screens which are physically present in store, as well as seemingly invisible technology which targets the consumer in store on his or her smartphone.

The Law Plays Catch-Up

Tied house laws, which address the financial relationships between supplier and retailer licensees, were enacted well before any digital media was invented. As a result, the alcohol laws have been playing catch up with this technology. Nevertheless, it is clear that social media qualifies as advertising for the purpose of alcohol beverage laws, and more and more jurisdictions are creating specific legislation to clarify this point. For example, Georgia, Kentucky, and Louisiana all now include social media in state definitions of advertising. On the federal level, the U.S. Tax and Trade Bureau (“TTB”) has confirmed that mandatory statements required in supplier product advertising are required in all forms of social media as well.

Paying for Technology: Compliance with State and Federal Tied House Rules

Technology can be expensive, and as a result retailers frequently wish to enlist supplier support to defray the cost of advertising both in and out of their premises. Generally, it is important to remember that the same rules which govern traditional advertising also govern these new technologies. Therefore, the same questions which come up in traditional advertising also apply here. For example, does the advertising involve the supplier paying for or buying advertising for the retailer in a manner that results in prohibited “cooperative advertising”? Does the technology involve the supplier providing or otherwise paying for a piece of equipment which is not covered by any applicable tied house exception?

The recent case of Retail Digital Network, LLC v. Prieto, 861 F.3d 839 (9th Cir. 2017), involved the issue of an impermissible payment for advertising. The plaintiff in the case installs liquid crystal displays for advertisements in retail outlets. Advertisers pay plaintiff for the opportunity to feature their brand advertising in the retail location. Plaintiff in turn then pays the retailer a percentage of the advertising fees generated by the display. Suppliers of alcohol beverages refused to do business with the plaintiff out of concern that California’s alcohol beverage laws prohibited them from paying to place advertising on a retail premises. The plaintiff sued the California Department of Alcoholic Beverage Control to enjoin enforcement of this particular part of the state tied house law. In short, the plaintiff argued that the suppliers’ proposed advertisements were protected commercial speech, and that the state interests and concerns inherent in the Twenty-first Amendment were outweighed by First Amendment interests. An en banc panel of the Ninth Circuit held that the California advertising prohibition directly and materially advanced the state’s interest in maintaining the three tier system, and therefore was sufficient to overcome First Amendment scrutiny.

Because digital advertising has become so popular, a cottage industry has developed for screens, closed loop televisions, and other devices that sit in retail places to stream digital content. Retailers frequently ask whether these items can be paid for or loaned by suppliers. This is a state specific issue, and the answer to the question will vary from one jurisdiction to another. One way to analyze the issue is to determine whether the item really a digital sign (likely covered under a tied house exception) or an illegal thing of value (a gift not covered by a tied house exception). The Texas Alcoholic Beverage Commission (“TABC”) has published two Marketing Practices Bulletins on this subject which provide helpful guidance. The TABC articulated questions to be used to determine the true nature of the item. They include:

• Is the primary purpose of the item to advertise a product?
• Is it a permanent fixture?
• Is it a thing of value?
• How long will the item stay in the retail premises?

Questions Raised by SmartPhone Applications

The uptick in digital advertising has also increased the number of smartphone applications directed at the marketing and sale of alcoholic beverages. Many retailers now have their own smartphone applications, and many interface with applications operated by non-licensees which drive traffic to the retail establishment.

Many of the best practices associated with applications which advertise alcohol are the same as the best practices for websites featuring alcohol products. These include, but are not limited to, age-gating and promoting responsible consumption. In addition, however, smartphone applications also raise several other legal issues in the alcohol space, depending on the functionality of the application. Consider the following issue-spotter questions:

• Does the app, if operated by an unlicensed third party, improperly use or avail itself of the retailer’s license to sell alcoholic beverages?
• Does the app facilitate an improper flow of funds between a supplier and a retailer?
• Does the app offer promotions which could result in violations of state happy hour or drink pricing rules?
• Does the app result in tied house exclusion by directing consumers away from one retailer and toward another?

Summary

Digital communications promoting alcohol present compliance challenges in terms of their jurisdictional reach, and to whom they may be directed. It is best for industry members to consult state law to determine which laws and regulations governing traditional advertising may also apply in the context of digital advertising. Furthermore, many states have developed enforcement policies and other opinion statements on social media and related issues; therefore, consulting state agency resources is recommended.

CRITICAL PROVISION #1: RENT COMMENCEMENT.

Unlike traditional retail tenants, such as shoe stores or hair salons, restaurants and bars (and donut shops and catering kitchens and virtually every other kind of F&B operation) require highly-specialized mechanical, engineering and plumbing drawings, as well as the inclusion of grease traps, vent hoods, patios, etc. These can affect the time required obtain architectural drawings and, once the drawings are complete, the time required to obtain a building permit from the municipality in which the premises is located. Traditional rent commencement clauses require rent (and other charges) to begin a certain number of days following execution of a lease or delivery of the premises to the tenant, but this can significantly increase the risk that the tenant is paying rent before it is ready to open.

CRITICAL PROVISION #2: EXCLUSIVITY.

Exclusivity provisions should prevent a landlord from leasing space to a similar, competitive enterprise. Tenants, however, often fail to realize that parcels of a shopping center or development are owned by different landlord entities, and without specific language to the contrary, an exclusivity provision binding a landlord entity on one parcel does not bind an affiliated entity in a neighboring parcel. Most landlords will not hesitate to put a paying tenant in close proximity to your client if they have the right to do so, regardless of its financial impact on your client.

Further, exclusivity provisions are often poorly drafted and lack the specificity necessary to prevent landlord infringement. If your client is a diner serving breakfast and lunch, then you do not want an exclusivity merely preventing the landlord from leasing space in the project to another diner. That exclusive is far too broad to afford real protection to the client.

CRITICAL PROVISION #3: ASSIGNMENT.

Landlords to not want tenants to have the unrestricted right to assign the lease to just anyone. That is a valid concern. Conversely, however, a Tenant selling its restaurant should not be beholden to the Landlord’s consent to determine whether the deal will close – especially when the buyer is of a similar net worth and experience level as the tenant. Thus, the use of “Permitted Transferee” language is critical, as is the elimination of landlord consent for an enterprise-level sale of the food and beverage company.

CRITICAL PROVISION #4: PAYMENT OF TENANT IMPROVEMEMT ALLOWANCE.

Because food and beverage tenants have much more significant build-out requirements than most retail tenants (see above), lease provisions requiring that tenants wait to receive 100% of the tenant improvement allowance allocation until after the completion of construction, opening for business, and receipt of all lien waivers is highly-burdensome. Food and beverage tenants should insist on progress payments of improvement allowances, which will reduce the upfront capital requirements on the tenant (often requiring fewer investors or less bank debt), with a final installment payable after opening, receipt of lien waivers, etc.

Security measures protect people and property from threats and dangerous conditions. This protection extends to all parts of the premises which the patron or employee may be reasonably expected to go and to those parts of the premises that the business has reasonably led them to believe they can go. Bars have a responsibility to provide reasonable protection to patrons and employees on the premises.

There are many threats to safety that may occur at a bar. The possibility of death and injury due to fire is an important issue that has to be effectively addressed. Proper policies and procedures should be established for the safe evacuation of all the occupants on the premises. Bars will have a large amount of cash on the premises. Liquor bottles may be stolen. Employees may be assaulted during a robbery or theft of liquor. Bottles and drink glasses could be used as weapons not only during a robbery or theft; but during a fight between patrons or an assault of an employee. In some circumstances, an employee can effectively handle a disruptive patron by using verbal and nonverbal (physical actions and demeanor) skills to diffuse the situation. An effective method is asking a disruptive patron to leave the bar. If the patron refuses, advise the patron that he/she has the opportunity to leave on their own or the police will be contacted to remove them from premises. Employees should be properly trained in the policies and procedures established by the bar to address the aforementioned threats and improper behavior that may occur on the premises.

Assaultive behavior can occur between patrons. Managers, waiters, waitresses, and bartenders may be assaulted by intoxicated or combative patrons. An employee policy should be in place identifying when the police and/or management should be contacted when there are violent or disruptive patrons. If security personnel are on site, the employee policy should identify when security personnel should be contacted.

Consumption of alcoholic beverages by everyone working for the bar during their work hours should be prohibited.

Security Personnel

Bars, taverns, restaurants, and nightclubs are usually the busiest on Thursdays, Fridays, and Saturdays. Most assaults occur on weekend nights. If assaultive behavior is foreseeable on the property, security personnel should be employed. Security personnel in bars are often referred to as bouncers, doormen, and floor men. The role of security personnel is to protect people and property. This responsibility includes patrons and employees.

The hiring, training and supervision of security personnel is an important aspect of providing effective security. One of the best methods of crime prevention is the obvious presence of security personnel. It is essential that security personnel be recognizable and conspicuous.

Proprietary and Contract Security

Security personnel can be proprietary or contracted. Proprietary security personnel, also known as in-house security, are employees controlled by the company that is providing security for its facilities and other property. They receive instruction and supervision from their employer. Contract security personnel are employed by an outside security firm. They provide security services to a business customer, but are managed by the contracted security firm.

Hiring of Security Personnel

Hiring of applicants should take place after a reasonable background check is conducted. This responsibility is one of the most important priorities for security management. The background check often includes requirements identified by a governmental entity. A business’s responsibility to its patrons is to provide effective security through proper hiring practices. The hiring of security applicants is a critical part of establishing and maintaining an effective security force.

Training of Security Personnel

Security personnel should be adequately trained prior to beginning, and continue to be trained once employed. If a security guard is required to be licensed by the city and/or state where he/she works, the security guard should be licensed. The importance of training cannot be overstated.

Adequately trained security personnel are essential to achieve management’s goal for employees to properly perform their duties. What management wants and how management wants it done is reflected in the training of security personnel. Without the proper response of the appropriate employees, the security measures in place are often ineffective with respect to the safety and security of the patrons and employees of a business. Security personnel should know what their responsibilities are and how to properly carry them out. By security personnel being properly trained, their actions will be in compliance to the policies and procedures of the business.

The importance of employees following proper training is essential to a proper response. Security personnel, not assigned to a stationary post, will move throughout the premises and observe patrons for reasonable behavior while they patronize a business establishment. It should be remembered that security personnel have the same rights as a private citizen. When appropriate, reasonable force should be used by security personnel. If two or more patrons are involved in a fight, they should be removed from the premises. An effective method is to eject the more aggressive patron or group of patrons first and wait until they vacate the area of the premises before ejecting the more passive patron or group of patrons.

Monitoring Performance of Security Personnel

The management of security personnel should be delegated to a knowledgeable and competent individual who understands the required safety and security responsibilities of the business. If the security personnel are contracted personnel, there remains a responsibility by the business owner or manager to monitor their performance. This responsibility can include assessment of contract employee performance, response of contractor management to the bar owner’s or manager’s concerns, and training. It is important to ensure the contractor is meeting contractual standards, but direct supervision of contract security should be carried out by the management of the contractor. When there is an issue involving contract security personnel, the bar owner or manager should communicate their concern through the management of the contractor.

The responsibility for supervising security guard performance should be executed by someone who moves throughout the premises. Security personnel should be properly hired, trained and managed. When security personnel’s actions are improper, it may be attributed to inadequate hiring, training, and/or supervision.

An effective strategy of controlling assaultive behavior is to position a security guard/security personnel at bar entrances and exits. This will control access into the building by confirming a patron is the proper age to enter and is in compliance with bar policy for entrance into the building. Additionally, the actions of patrons outside the front door and inside by the front door can be monitored. Crowding around the bar and on the dance floor creates the risk of patrons accidentally bumping into each other. This can lead to fights between patrons. These are areas of the premises which may need to be monitored if assaultive behavior is foreseeable on the property.

Bar security is important for the patrons and employees of the bar. It is essential that all workers on site are properly trained in the policies and procedures of the bar. An effective response to a threat, dangerous condition or improper behavior is required.