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Is today's market too tough for upscale restaurants?

Operating a restaurant is never easy, but is it particularly challenging for upscale restaurants?

Restaurants Unlimited Inc., for instance, which operates 35 fine-dining and “polished casual” eateries, filed for bankruptcy in Delaware last week. Earlier in June, the Four Seasons Restaurant, an iconic spot for power lunch in Manhattan also closed for business after its reopening within less a year.

Are these two examples an isolated case or the tip of the iceberg? Then, if upscale restaurants are struggling to survive in today’s market, what challenges are they facing?

The rising labor cost

According to the Bloomberg report, Restaurant Unlimited Inc. hires 50 salaried employees at the chain’s headquarter in Seattle, plus another 168 full-time and 1,885 part-time restaurant workers. The rising wages in Seattle, San Francisco, and Portland have resulted in a total of $10.6 million wage expenses in the fiscal year of 2019. Nevertheless, its revenue for the year ended in May dropped 1%, at $176 million. The company has made other attempts to consolidate its debts but did not succeed.

Skates on the Bay in Berkeley, CA

The restaurant industry, or the food-service business in general, is highly competitive, with very low entry barriers but many substitutions. As a result, many restaurants are operated in a low profit margin.

In the ideal world, when the wage expense goes up, a restaurant could possibly pass the higher labor cost to its customers. In reality, however, consumers can easily find other substitutions in the market, perhaps at a more competitive price. Restaurants must find ways to lower other operational costs to avoid raising the price.

One solution is to use machines to replace workers in service operations. Not only machines can significantly lower the labor cost but also help restaurants deliver consistent service.

The consumers going to the fine-dining, upscale restaurants, however, are probably not the ones who favor the interactions with machines. They may still expect to be served by well-trained, friendly staff.

The shifting consumer behaviors

Referring to the case of the Four Seasons Restaurant, it employed a wonderful team, served great food, and had an outstanding place. Yet, the restaurant still failed to attract the clientele, according to Alex von Bidder, the restaurant’s managing partner. He added: “But we just couldn’t make it; the restaurant world has changed.”

Previous predictions for the restaurant industry indeed did not favor the fine-dining, upscale restaurants. While mobile ordering has become more critical for restaurants, for example, it is still difficult for people to picture how mobile ordering works in a fine dining restaurant. Then, when it comes to the “value war” among restaurants, “price” or “value” is simply not the area where fine dining restaurants want to compete against others.  

Besides, today’s consumers are accustomed to ordering everything online. They not only embrace the mobile ordering trend but also expect their food to be delivered right to their doors as quickly and as inexpensively as possible. Even if a fine dining restaurant joins others in food delivery, eating restaurant food at home is very different from having a seven-course meal in the restaurant.

Too many competitors in the market

The restaurant industry just lived through the greatest period of growth in history, without going through any real recession since 2008. When the number restaurants grew even faster than the population, and the Gen Zers have not become the major force in fine dining, there are just too many restaurants in the market “chasing too few consumer dollars.” Accordingly, some critiques believe the good time for restaurants has come to an end.

It appears that fine dining restaurants are just not as adaptable to what is happening in the market, as compared to the quick-service or quick-casual restaurants. If now is the tipping point for restaurant growth, fine dining restaurants are probably the first ones that get busted.   

The good news is competition often promotes innovation. The strongest will survive. 

Do you expect more fine dining restaurants will close their doors in the near future? In the end, what types of fine dining or upscale restaurants will survive? 
  
Note: This post is also available at Multibriefs.com. The picture was downloaded from Skates on the Bay's Facebook page (one under the Restaurants Unlimited Inc.). 

Comments

  1. It will be more difficult for fine dinning restaurants to hold up to mobile ordering in the future as more and more people are beginning to adjust to mobile ordering. With mobile ordering, many consumers can enjoy their food at the comfort of their own home. The pricing of fine dining is also a problem as consumers are more likely to order through their mobile device as it’s a cheaper alternative to fine dining. There’s also no wait time for mobile dining while in fine dining there might be a need for reservation to dine.

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