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:
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.
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]]>EXAMPLE #1: EMPLOYEE HANDBOOKS. Though payroll companies and the Internet have made it easy to create an employee handbook, all restaurants and bars would benefit from crafting an employee handbook specific to their needs. Working with a professional who knows your company ensures a familiarity with the employee handbook that becomes invaluable when, inevitably, matters involving discipline, investigations, employee benefits, drug testing, alcohol policy, and termination arise.
EXAMPLE #2: TIP CREDIT NOTIFICATION FORMS. While the restaurant knows it is taking a tip credit in calculating a tipped employee’s wages, and the tipped employee (almost 100% of the time) knows the restaurant is taking a tip credit in calculating his or her wages, that is not enough for the U.S. Department of Labor (“DOL”). The regulations require that an employer specifically tell each employee about the rules regarding the tip credit – and any tip pool – in detail. While the regulations allow notification to be made orally, there is no way to prove oral communication in court. Because DOL enforcement guidelines state that the generic FLSA poster does not meet this obligation, employers should have a written tip credit and tip pooling notification policy before hiring their first tipped employee. Liability for this failure can be astronomical – up to $5.12 per hour for each hour worked by a tipped employee during the previous two years. Multiplied by two!
EXAMPLE #3: RESPONSIBLE ALCOHOL SERVICE POLICIES. Most retailers are well-aware of the fact that they should only hire employees who have received certification from state alcoholic beverage commission-approved courses (or require their employees to obtain certification promptly after hire). However, in Texas, retailers can only invoke the Safe Harbor (preventing the TABC from suspending or revoking their license) in the event of a server’s TABC violation if the retailer has written policies regarding “responsible alcohol service and consumption, and ensures that each employee has read and understands these policies.” Thus, failing to include a straightforward Responsible Alcohol Service Policy for new hires to review and sign could result in significant liability down the road.
EXAMPLE #4: WAGE DEDUCTION AUTHORIZATION FORMS. The FLSA does not permit any employer to deduct an employee’s wages below the minimum wage. Many states, Texas included, only allow wage deductions (for reasons other than taxes and court-ordered garnishments) if an employee has authorized the deduction in writing. Thus, even in Texas an employer cannot legally deduct an employee’s pay for stealing company funds absent a written authorization. This makes a Wage Deduction Authorization another very simple, but very important, document to include with new hire paperwork. Notably, because an employer cannot deduct any wages below the minimum wage, that necessarily means an employer cannot make any deductions for employees that are paid $7.25 per hour or less (such as servers and bartenders). This includes branded/non-generic uniforms, cash register shortages, breakage, walkouts, etc.
EXAMPLE #5: DOCUMENT TRANSLATION. Finally, it is important to mention that even the best employee documents do nothing for an employer if the documents are not translated into a language the employee can read. If an employee cannot read the employer’s documents, the employer is treated as having no employment-related documents at all, and it cannot take advantage of numerous defenses afforded to it in all manner of employment-related disputes.
]]>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.
]]>In recent years a sizeable amount of time and effort has been put into developing menu labeling laws. The impetus for such laws stems from the fact that more and more Americans are eating away from home, and portion sizes are becoming larger and more caloric. This pattern of food consumption is believed to be one of the leading causes of obesity and overall poor health of Americans. The theory behind menu labeling laws is that consumers who have access to complete nutritional information will make healthier choices and improve the overall health of the nation. Some recent studies tend to show other more effective ways to effect unhealthy eating behaviors, but regulators continue to believe menu labeling laws are the way to go.
Regardless, sooner or later the time has come for qualifying restaurants to start complying with the new federal menu labeling laws. With all the anticipation surrounding the release of rules by the US Food and Drug Administration (FDA), restaurants and hospitality companies remain curious about the impact of this law and the swarm of other state and local laws regulating the disclosure of nutrition information to their guests. The “Patient Protection and Affordable Care Act” (Affordable Care Act), referred to colloquially as “ObamaCare,” contains, buried deep within it, Section 4205, “Nutrition Labeling of Standard Menu Items at Chain Restaurants and Articles of Food Sold from Vending Machines.” This is the first nation-wide menu labeling law that will hopefully consolidate the compliance requirements for restaurants operating in multiple states. However, the FDA has recently stated that writing the necessary rules for compliance with the Affordable Care Act “has gotten extremely thorny.” According to the FDA, “there are very, very strong opinions and powerful voices both on the consumer and public health side and on the industry side.” These “opinions and powerful voices” (aka lobbyists) are apparently making implementation of the Affordable Care Act a most challenging issue for the FDA.
With all the activity and confusion surrounding menu-labeling laws, smaller restaurants at least now have a choice: comply with the host of state and local rules, or opt to comply with the provisions of the Affordable Care Act under the federal preemption measure. This article will provide an update on the current status of menu labeling laws throughout the U.S.
Regulatory Background
Due to growing concerns about the public health of our nation, legislators at the local, state and federal level have enacted laws and regulations requiring the disclosure of certain information about the nutritional content of the foods served at restaurants with the intention of providing consumers with the ability to make informed decisions about their food choices, and ultimately to improve the health of the citizenry.
Federal Regulations
The FDA has had regulatory authority over food labeling since the inception of its predecessor, the Board of Food and Drug Inspection, in 1907. In 1938, Congress enacted the Federal Food Drug and Cosmetic Act (FFDCA) with the purpose of regulating food labels in order to protect the consuming public from false advertising, misbranding and adulterated foods.[1] In 1990, with scientific advancements in analysis of foods and nutritional content, Congress passed the Nutrition Labeling and Education Act (NLEA). The NLEA amended the FFDCA by requiring food labels to contain accurate nutritional information on all food products under FDA authority. However, until recently, restaurants were exempt from complying with this federal food labeling and disclosure law.
The NLEA also includes, under Section (q), a mandate that any “claims” about food be accurate.[2] “Claims” include statements such as “high in fiber” or “low in sodium.”[3] These are voluntary statements that food purveyors may make regarding the nutrient content of their foods. With regard to “claims” about food, restaurants are not exempt from and must comply with Section (q) of the NLEA. However, until 2010, there were no federal laws regulating or requiring the disclosure of nutrition information by restaurants. The absence of a unified national law regarding menu labeling led some states and municipalities to begin enacting their own legislation.
State Regulations
In 2008, perceiving a growing concern about public health and without a solid menu labeling mandate from the federal government, a handful of states began enacting their own menu labeling legislation.
California became the first state to enact state-wide legislation requiring disclosure of nutrients on menus. In 2009, Maine, Oregon and Massachusetts followed California’s lead and enacted very similar menu labeling legislation. As of April of 2013, six states, including New Jersey and Tennessee, have enacted menu labeling laws and several other states have laws under consideration. Many of the laws have similar features, but all of them vary to some degree making compliance a difficult task for hospitality companies or restaurants in multiple states.
Recently, California amended its Health and Safety Code to conform to the Affordable Care Act provisions related to menu labeling.[4] Thus, covered restaurants must disclose calorie information for standard menu items clearly and prominently on menus and menu boards, including drive-through boards, and a succinct statement regarding the suggested daily caloric intake. In addition, the following provisions apply:
Many of the other states with menu labeling laws have similar provisions to California. However, even slight differences can make compliance difficult for multi-state restaurants. To complicate things even more, many cities and local governments without state-wide menu labeling laws began enacting their own rules.
Local Regulations
As with state governments, local jurisdictions (cities and counties) have an interest in improving the health of their citizens. Some of the largest restaurant markets in the U.S. are metropolitan cities such as New York, Dallas, Seattle and Chicago. Many of these markets are subject to menu labeling laws enacted by cities and counties. In 2006, New York City became the first jurisdiction in the U.S. to enact menu labeling laws. Since then, Philadelphia and Nashville have enacted similar laws at the city level and Seattle and Portland have enacted laws via their respective counties.
As with state menu labeling laws, local menu labeling laws vary in degrees. An example of New York City’s rule requires covered food service establishments (CFEs) to disclose calorie information prominently on menus and menu boards for all standard menu items. The following relevant provisions apply:
Lawsuits have attempted to challenge the constitutionality of local menu labeling laws without much success. For example, in 2006, New York City enacted a local menu-labeling law under New York Health and Safety Code (Section 81.50) requiring disclosure of nutrition information on menus in restaurants that already voluntarily offer such information somewhere other than on menus (e.g. websites or pamphlets).[5] In addition, if the calorie information for a particular dish was available as of March 2007, the restaurant was required to list this information on its menu and menu boards next to the relevant food items. After losing a court battle on the issue of federal preemption under the NLEA, New York City Board of Health revised their law to require all restaurants within the City of New York that are part of a group of fifteen or more “chain” restaurants doing business nationally to display calorie content on their menus and menu boards. More litigation ensued on the issue of federal preemption and free speech but the Second Circuit upheld New York City’s revised menu-labeling law.[6]
It is easy to see how compliance with state and local menu labeling rules and regulations could be expensive and time consuming. Without a unified menu labeling law, restaurants of all sizes would have to set up compliance systems for each location where there are menu labeling rules. Now, with the enactment of the Affordable Care Act, all of these state and local laws may become irrelevant.
The 2010 Affordable Care Act and Federal Preemption
In March of 2010, Congress passed, and President Obama signed into law, the Patient Protection and Affordable Care Act (Affordable Care Act) that (among a great many other things), created a federal menu-labeling law.[7] Section 4205 of the Affordable Care Act amends the NLEA by extending the nutrition labeling requirements to restaurants. Restaurant chains with twenty or more locations, including franchises (Covered Restaurants), must list calorie information for standard menu items on menus and menu boards, including drive-through menu boards.[8] The following provisions of the Affordable Care Act became effective immediately upon enactment of the law:
In addition to these disclosure rules, the Affordable Care Act contains an amendment to Section 403A of the FFDCA that attempts to standardize menu-labeling by preempting state and local laws. Under the Supremacy Clause of the United States Constitution[10], state laws that conflict with federal laws have no effect.[11] Under Section 4205 of the Affordable Care Act, State and local rules governing menu labeling cannot directly or indirectly impose any nutrition labeling requirements on restaurants covered by the Affordable Care Act that are not identical to requirements imposed by this Section.[12] In other words, Covered Restaurants do not have to comply with State or local menu-labeling laws unless they are identical to the federal requirements. Importantly, restaurants that are not Covered Restaurants, because they lack twenty units, may elect to participate in the federal regulatory program by registering with the FDA every other year. Doing so will cause them to become subject to the federal menu-labeling regulations, but not State or local menu-labeling regulations.
Having the choice to participate in the federal regulatory program could be of great benefit to smaller restaurants. But it is important to compare local requirements against the federal requirements to determine the best pathway to compliance. Below is an example of a fictional company and an analysis of its compliance options.
ABC Burger Company
ABC Burger Company is a Texas-based restaurant operator that runs hamburger restaurants within the United States. Currently, ABC has restaurants located in Texas, New York and Oklahoma with a total of fourteen restaurants. Plans are in place to open new restaurants in Philadelphia, Pennsylvania, Seattle, Washington, and Nashville, Tennessee. When all of the announced restaurants have opened, ABC will have a total count of twenty-five restaurants nationwide. All of these restaurants are going to be operated under the same trade-name of ABC Burger Company and offer basically the same menu items.
ABC Compliance Scenario
Under the FFDCA, ABC Burger Company, as currently constituted, would be considered a small, non-Covered restaurant because it has only fourteen open restaurants operating under the same name with substantially the same menu items (and doesn’t meet the twenty restaurant minimum to be considered a Covered Restaurant). Therefore, it would not be subject to the federal menu-labeling mandate under the FFDCA.
Under New York City’s menu-labeling regulation, ABC is also exempt from compliance. With only fourteen (14) units, ABC would be one restaurant short of the minimum requirement. However, as more and more restaurants are opened by ABC, it will become necessary to either comply with the FFDCA (on a voluntary basis at first, and then under its mandate when ABC becomes a Covered Restaurant), or comply with New York’s Section 81.50 until ABC reaches twenty units requiring compliance with the FFDCA.
Restaurants such as ABC that are not considered Covered Restaurants under the FFDCA could still be subject to State and local menu-labeling laws. However, ABC may voluntarily register with the FDA as a non-Covered Restaurant, and thereafter, comply exclusively with the federal regulations, rather face the rigorous task of complying with various State and local regulations.
If ABC elects to participate exclusively in the federal regulatory program it will need to begin (a) disclosing the number of calories in each standard menu item on menus and menu boards; (b) providing written nutrition information to consumers upon request; (c) providing a clear and conspicuous statement about the availability of such information on menus and menu boards; and (d) for self-service food, providing calories per serving information on a display adjacent to each food item. In addition, ABC will need to register bi-annually with the FDA until reaching twenty (20) units.
Although the FDA has announced that these disclosure requirements are effective immediately, it is not clear when enforcement of the FFDCA will begin since. Though the FDA is still developing final guidance on implementation of the FFDCA, it has stated that it will give restaurants time to comply before it begins enforcement.
Conclusion
While many startup restaurants are not currently large enough to be within the regulatory framework of their local menu labeling rules or the Affordable Care Act. Restaurants with twenty or more locations should start obtaining nutritional information for standard menu items. It will not be much longer before the FDA figures out how to appease the lobbyists, as well as comply with the mandate to create rules regarding the (now three-year-old) menu labeling law. Once that happens the FDA has promised to start enforcing the menu labeling portion of the Affordable Care Act. For restaurants with fifteen to twenty locations, it would be wise to check with local governmental authorities or a food and beverage attorney to determine whether there are menu labeling laws affecting your existing restaurants (or those in your growth plan). If so, you can choose to register with the FDA and comply with a unified, national menu labeling law, or take your chances complying with your local rule. Either way, unless you are a small restaurant and hope to remain so forever, the days of stuffing your standard menu items with calories and salt are behind us, and the new era of full disclosure and transparency has begun.
Previously published in the September issue of Restaurant Startup and Growth Magazine.
References