Focus on consolidation in the restaurant sector

No matter the economy, there will always be floods, fires and storms. This constant demand can be leveraged by new startups in combination with emerging technology to build the next generation of vendors that will consolidate in 2030 and beyond. (Credit: riopatuca/Shutterstock)

How long does it take to build a successful restaurant business? If your measure of success is someone else wanting to buy your business and combine it with theirs, the answer is about eight years.

The reason it takes so long has nothing to do with EBIDTA or balance sheets, but rather the confluence of three important factors: First, it takes time to build a successful organization worth purchased from a technical point of view, which can be done in as little as three years. Second, you need willing buyers who can integrate your business into theirs. Finally, you need a source of money to finance the sale.

This combination of events is always in motion, with one or two of the required ingredients available at a time; occasionally, the three align to create demand for sales and mergers as reflected in the current market.

The story repeats itself

A look back at economic activity around consolidation in the restaurant business shows spikes in merger activity in 2007, 2016 and now in 2021. In the two to three years since Hurricane Katrina, it seemed like many of those who had done well in previous years were ready to expand their empires and were in a buying mood. There were also many willing vendors looking for a way out. These factors, combined with an abundance of cash before the 2008 financial crisis, created its own perfect storm for restaurant industry consolidation. This combination of willing buyers, sellers and easy funding fueled similar cycles again in 2016, just as it is now.

To better understand why this pattern recurs, it helps to understand what forces are contributing to the consolidation push.

Customer service expectations are increasing every year and many organizations are struggling to keep up. Clients now expect hands-on, concierge-level project management and detailed progress reporting like never before. Some vendors feel that the only way to provide this new level of service is to spread the new cost over a much wider project base. The easiest way to get a larger project base is to buy or merge one.

Rising administration costs and growing overheads also impose pressure to consolidate in order to maintain efficiency. The cost of property and administrative labor is rising at a faster rate than income and this pressure can often only be relieved by increasing the scale at which these services are provided. Doing payroll for an organization of 20 employees costs almost as much as doing payroll for 80 employees. These types of efficiencies have always been part of any merger and will continue to have an impact in the future.

Changing demand for technology fuels the need to constantly reinvest in new, more expensive platforms for product delivery. In the past, one computerized accounting system or one estimating platform was enough. Today, restoration companies use separate systems for humidity mapping, document retention, estimating, personnel management, and billing. This weight of technology has begun to transform the industry in terms of service and documentation. However, it also creates challenges for traditional operators who are faced with the choice of an ever-increasing investment in technology to be spread over a finite share of the market.

As the industry continues to move toward consolidations, industry professionals need to keep an eye out for great opportunities to improve the customer experience and overall claims outcomes that result. In general, we can expect to see some of these positive effects:

  • More uniform billing and administrative products. Organizations, whether franchised or corporate owned, are always pushing for more efficiency and brand awareness. This is facilitated by the larger monolithic approaches present in larger organizations. It’s very easy to fine-tune the look of invoices and marketing materials based on what works. Great organizations simply make more sales and produce more invoices, which means there are far more opportunities to learn and hone.
  • Increased efficiency. Large organizations allow large-scale access to better training, less expensive consumables, and improved software systems that would be impractical for small businesses. For example, imagine a small drying business buys three palettes of concentrated cleaner to get the best price. It would take years for the smallholding to use up all the cleaner, not to mention the added cost of storing it and keeping it safe from damage. Meanwhile, a larger operation might buy three pallets a week and send one to each region. The efficiencies achieved are real and can mean the difference between profit and loss at a given price.

While there are positive effects of consolidation, the industry may also begin to encounter the following potential pitfalls:

  • Lack of choice and different approaches to the same problem. There will always be more than one way to accomplish a task, but consolidation can make the second and third ways much less important. For example, instead of three local options available for media blasting on a project – dry ice, baking soda, and pressurized water – there may be only one readily available option as the consolidation process drives the less profitable processes in the market. Instead, the only way to get a more expensive option would be to call a multi-city specialist. Due to consolidation, claims professionals may find themselves limited in choices about the types of services offered in all but the most specialized and cost-tolerant circumstances.
  • Less responsive pricing. Small farms must be nimble to survive, often changing prices every few months to reflect market realities. Large organizations may not be as willing or able to react to rapid market changes as they often establish their base price schedules on an annual basis and enter into long-term emergency response agreements that lock in prices. When prices go up, the sluggish nature of large organizations can be seen as a benefit to customers, but when it goes down, it is just as likely to be seen as a burden.

Predictions for the industry

As consolidation continues, the industry will move more towards managed repair products. As pressures for service and price uniformity grow, an increasing number of restaurant businesses will work with direct repair operations in an effort to take advantage of the services and volume discounts available to members. of the group. While not new, the value proposition with this approach continues to grow as participants gain much of the same benefits as larger organizations at a relatively low cost.

The evolution of the restaurant industry post-consolidation also means that there will be plenty of new startups working to fill the voids left by consolidation. While starting a new business is always risky, the restaurant industry has historically benefited from fairly substantial job opportunities. No matter the economy, there will always be floods, fires and storms. This constant demand can be leveraged by new startups in combination with emerging technology to build the next generation of vendors that will consolidate in 2030 and beyond.

Justin White is Vice President of Specialty Services, Senior Building Consultant, for Sedgwick.

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