An Appetite For Change
An appetitefor changeKey trends driving innovation inthe restaurant industrykpmg.com
A rapidly changing industryAll-day breakfast at your local drive-through. Blue Apronredefining home delivery. Eatsa creating a futuristic“Jetsons”-like restaurant experience. Real-time GPStracking of delivery to your door from your favorite highend restaurants offered by Caviar.Key trendsopC h ioaterAgainst this backdrop, most economists agree that thisnew normal environment is not one where secular growthcan satisfy most company growth needs.us on consumerFochealthann a ge sl c inonstrucin laborncygerin lawsStAt the same time, economic forces continue to havean industry impact. GDP growth is slowing while theaverage household income is decreasing, leavingconsumers with less to spend. In fact, rising healthcareand education costs have reduced spending on food by anaverage of 347 per household. Food accounts for nearly30 percent of a restaurant’s costs, and unfavorable weatherand macroeconomic conditions can result in a substantialincrease in food prices. However, fear over weakening theirmarket position often prevents restaurant operators fromincreasing their menu prices in the same proportion.That does not necessarily mean being the first to innovatein your market. There are benefits in being a fast follower.In fact, many restaurateurs may have better results as afast follower.orts tin gLike many industries, the restaurant industry facesa variety of challenges keeping up with the rapidpace of change driven by the consumer trends andchanging demographics. Growing preferences forhealthier food options, concerns over environmentalsustainability, increased competition from grocerystores, heightened consumer expectations, and rapidlyadvancing technology are reinventing the traditionaldining experience and forcing change on how theindustry operates. And the rising spending power ofthe millennial generation of consumers is acceleratingthe industry’s response to such trends.As restaurants juggle a variety of challenges, they mustseek to innovate and adapt nimble business strategiesthat enable them to cost-effectively compete in an everchanging tech environment. Yet, as they rethink businessapproaches, they must also factor in new regulationas well as economic and competitive market forces.No industry is immune to these forces. But to remaincompetitive and succeed, restaurants must be able toadjust and figure out how to meet and exceed consumerexpectations.Ensuringfsafet oodyThere is no question restaurants are innovating—but arethey moving fast enough to stay relevant in the face ofevolving consumers’ tastes and preferences? This is aparticular challenge for established companies where risksare magnified—there are enormous profits, thousands ofjobs, and publicly traded share prices on the line.tpre enniase emIncre equirr
The need to innovateThe threatThe “crowding out effect” of rising healthcare and education costs has reducedspending on food by an average of 347 per household.Mean household expenditure change 2000–2013 (2015 dollars) 52,000- 347-- 310 51,000 834-- 427-- 122 51,741 49,000 1,147- - 904 50,0002000FoodCPGLifestyle –mandatoryLifestyle –discretionaryApparelEducationContributionsand Healthcare and Others 51,6122013The opportunityDining out growing at expense of eating inConsumer spending 55B50Groceries4540“Thechallenge ina disruptiveworld is to becourageous.This is easierfor smallcompanies.It’s harder todo when thenumbers arevery big, andthe risks arevery big.”— CEO of brand namerestaurant chain353025201510Jan 1992Jan 2000Jan 2008Jan 2016Source: Bloomberg Markets, “Americans’ Spending on Dining Out Just Overtook Grocery Sales forthe First Time Ever,” April 14, 2015, ery-sales-for-the-first-time-everAn appetite for change1
Restaurant industry trendsSeven trends that should be at the heart of aninnovation strategy.Preferences for healthier food options—— Consumers prefer to eat at home and,if dining out, are inclined to consumehealthier and less processed foods.—— Restaurants have been making attemptsto influence consumption patterns bydeploying attractive pricing and marketingtechniques.Increase in food service options—— Restaurants have been losing marketshare to supermarkets, which have startedstocking wide ranges of ready-to-eatmeals; further, an increasing number ofthem have added eat-in areas.—— Additionally, an increase in the numberof players offering similar productsclustered in the same location is leadingto saturation—resulting in fewer uniqueconsumers per outlet.Modification of menu items driven byregulatory norms—— With nutrition labeling requirements beingenforced by the Affordable Care Act,restaurant operators are obligated to makechanges to menus to show the caloriecounts of their products.—— Restaurant chains are focusing onnarrower and more specialized menus—with an objective to enhance qualitystandards, speed, and service.Technological advancements—— Restaurant chains are adoptingnew technologies for ordering, payment,and loyalty programs to offer convenientand intuitive applications for customers.—— Analysts foresee creative usesfor Google Glass, such as glass-wearingservers using face recognition technologyto quickly locate patrons in crowded bars.Data from Apple Pay and other electronicwallet solutions will also make it easier topersonalize customer experience.Sources: QSR magazine as of August 20, 2015, accessed on August 31, 2015; Franchise Help accessed on September 1, 2015;Nerac accessed on September 1, 2015; PR Newswire as of August 10, 2015, accessed on August 31, 2015
Environment sustainability—— Restaurants have been focusing onreducing food waste to manage risingcosts and to “go green”.Inclination towards global cuisines—— Increase in preferences for global/ethniccuisines is prompting restaurants todiversify their businesses.—— Rising awareness of sustainability,especially among millennials, is forcingrestaurants to implement environmentfriendly and sustainable practices.—— According to a survey by the NRA,80 percent of consumers eat at leastone ethnic cuisine per month.Focus on Generation Z—— Restaurants are currently trying to appealto millennials and are competing forthe attention of this social media savvygeneration. They also need to be mindfulof Generation Z as younger teens arebeginning to make their own decisionsabout where to eat and what to eat.—— This demographic would also demandhigh-tech service, louder music, movingvisuals to get heightened experiences.Restaurants will have to adapt and modifytheir operating strategy to attract thistarget segment.An appetite for change3
The opportunity: Understandingthe new consumer mind-setIt started with millennials but it is not just about them.The millennial generation has changed and impacted theentire span of the whole consumer mind-set, regardlessof demographic. Consumers are constantly connected andhave high expectations regarding quality, sustainability,and convenience.This cultural mind-set has a greater value on “experience”and “convenience.” These empowered consumers shopanytime and anywhere, meaning that companies must getproducts to consumers where and when they want themin order to stay relevant.Consumers continue to raise the bar for what isconsidered “fast” and “convenient,” and restaurantsand food delivery companies are reacting with enhancedbusiness operating models to create customized,technology‑enabled experiences.With the rapid adoption of even more connected mobiledevices across multigenerations, consumer expectationson their path to purchase are evolving quickly into acomplex, multifaceted process. For example, today, thereare over 64 different paths to purchase versus just 1 inthe past 10 years.1 Social sharing has a large impact ondecisions and peer-to-peer reviews carry a lot of weight.All consumer-focused companies must understandand react to this power shift. Restaurant operators areemphasizing the quality of service while increasing thedirect interaction with customers. Restaurant chains,especially fine and casual dining, are also attemptingto increase foot traffic by expanding their socialmedia presence.1 1177942Meanwhile, brand and food expectations are also changing.Convenience and health are important, and people want toknow where products are coming from. Consumers do nottrust traditional media but instead look to reviews beforepurchasing. In addition, the barrier to enter the market islower than ever. This presents a challenge for establishedbrands. Small companies are now taking market share, andbig brands are not guaranteed to dominate in the sameway anymore.Therefore, with all the myriad challenges facing theindustry—changing demographics , advancing technologyrisks and opportunities, increasing regulations—restaurantcompanies need to keep a primary focus on innovation.Whether that means being a “first mover” or a “fastfollower” in the marketplace is less important than beingagile and ready to move fast. It means being aware of theweak signals in the marketplace and having a frameworkfor innovation embedded in your organization in order to bein a position to move when the time is right.
The result is that food expectations are changingMedia plays an important part in American food culture. From movies such as Super Size Me toreality shows such as The Biggest Loser, weight loss (and how people are losing weight) are at theforefront of American culture.84%of millennials do not trust traditionaladvertising73%56%of Americans trust food blogsof Americans have purchased aproduct from the recommendation of afood bloggerOur expectations offood have changed.More nutritioussnacks 50%of eatingoccasions aresnacksMeal assemblyUltraconvenienceDIFM and DIYmealsOur expectations ofbrands have changed.30% of eatorganicAuthenticbrands tellinga storyHealthy food& authenticbrands42% of buyingstore brandMore nutritioussnacksDeliveryFast casualRise oflocalArtisan &handcraftedTransparencyof nutrients“Real” andfresh (notprocessed)Organic &specific dietsQuick, healthy, authentic, and reviewed or suggestedSource: BlogHer Survey and McCarthy Group, 2014An appetite for change5
Innovation inthe industryConsumer trendsby the numbers64% – Consumers who are moreadventurous in their restaurantfood choices than they weretwo years ago69% – Consumers who are morelikely to visit a restaurant that offerslocally produced food items60% – Consumers who arelikely to choose a restaurant thatoffers items grown or raised in aneco‑friendly way76% – Consumers who are morelikely to visit a restaurant that offershealthful options79% – Consumers whosay restaurant technologyincreases convenience70% – Smartphone users who viewrestaurant menus on their phonesat least a few times per year32% – Smartphone users whoare willing to use an app to payfor meals instead of using cashor cardsSource: National RestaurantAssociation, 2015In response to the decreasing food dollarand the empowered customer, restaurantsare turning to innovative business andoperating models to grab a greater share ofthe market.In fact, more venture capital and tech company money is going to foodbusiness than any other industry except for healthcare. Most notably,competition for the consumer food dollar is not just from the traditionalrestaurant industry but is coming from new types of chains anddelivery services.Because the paths to growth are limited, restaurants are looking forgrowth through increased market penetration, innovative productdevelopment, new markets, diversified businesses, and new businessmodels. For example, restaurants are redefining what is “fast” and“convenient” by offering fast-growing fast food chains, “do it yourself”(DIY) food delivery, and “do it for me” (DIFM) food delivery. ast-growing fast food chains: Fast-growing fast food chainsFare pursuing innovative ideas over the food concept, therestaurant experience, and technology enablement. Chainsare focusing on healthy food or changing the concept of fastfood in new ways that is prepared fresh using natural, highquality, locally sourced ingredients. They are also changing therestaurant experience and pursuing the “fast casual” conceptthat uses the line model and has transparent and customizedfood preparation, hip dining areas, and alcohol products. IY food delivery: Companies are innovating onD“convenience” as there are emerging concepts insubscriptions for food boxes that provide everything neededto prepare a healthy, high-quality, home-prepared meal. Thisincludes everything from meal replacement shakes to high-endrecipes and focuses on healthy options that are sustainableand local and that also eliminate food waste.
DIFM food delivery: The concept of “fast” is also changing, asDIFM food delivery services emphasize easy and fast service that islocal, provides specific subgroups of restaurant tastes, and comesfrom a curated restaurant list.These services focus on niche value propositions such as extra quick deliveryof everything, specialty meals delivery, free delivery, and real-time tracking.These options just scratch the surface of what is possible for offeringquick, convenient, and appetizing options that can keep up with the newconsumer demand.More venturecapital andtech companymoney isgoing to thefood businessthan anyother industryexcepthealthcare.An appetite for change7
A recipe forthe futureIn our work with successful innovators acrossmany industries, we have seen two commonfactors in driving successful innovation. The firststep is in reducing the obstacles that typicallycrimp attempts to innovate. The second is toemploy a simple three-step framework to driveinnovation efforts.We believe the approach requires two essential and related steps: facing theobstacles to change and aligning the organization for fast-paced innovation.The power of an approach lies in the details.—— Step 1: Facing the obstaclesMany in the restaurant sector recognize the multiple challenges facingtheir industry but have not yet fully come to terms with their effect on theability to innovate. They understand completely that fast-paced innovationcan be disruptive, and they understandably struggle to balance it with corebusinesses they must not change. And yet there are other cultural andinstitutional obstacles—many of them core strengths in the past—thatimpede innovation in the current ecosystem:–– Reward failureInnovation is high-risk and requires failure—something that true innovatorsexpect and celebrate—but industry tends to reward well-executed,low‑risk change.–– Invest in riskInnovation means making financial commitments according to compellinginvestment theses. This marks a difference from traditional industryapproaches, which make business decisions based on carefully calculatedROI. For example, as a business decision, a concept like Uber would beturned aside.–– Think disruptivelyThe traditional industry often finds it difficult to embrace trulypowerful innovation, refusing to examine it where the industry hasbeen most successful. That is different from the courage Appleshowed to intentionally disrupt the iPod with the iPhone, producing aphenomenal result.
–– Partner to innovateMany industries instinctively prefer to build from within, cuttingthemselves off from the ideas of outsiders and the dynamism partnershipsbring.–– Secure new talentMany industries face a war on young talent at the same time theirknowledge base is shrinking as older talent retires.–– Build global awareness of innovationIndustries need to capitalize on innovation anywhere, which means itneeds better awareness of new centers of innovation everywhere from TelAviv to Berlin and from New York to Silicon Valley.There is nosingle answerto innovatingsuccessfully,no one-sizefits-all solution.—— Step 2: A framework for innovationThere is a means of addressing these challenges and achieving fasterpaced innovation. First, however, a simple truth: There is no single answerto innovating successfully, no one-size-fits-all solution. No expert—nobusiness professor, successful entrepreneur, author, or consultant—offers a prescription that works for every company and every solution.The most successful innovators today take different approaches. Andsuccessful innovators from the past do not offer an enduring lesson for allcircumstances and all companies.Of course, we have seen and believe in patterns and common elements tosome approaches, but successful innovation fits the individual company andits culture. It must be customized.A tailored approach works like an innovation engine with a three-stageassembly line: sensing unmet needs of the consumer from a profoundawareness of the ecosystem and a leverage of the proprietary insights ofthe company, intensively investigating potential innovations from theseinsights, and creating market-changing innovations that are appropriate tothe culture of the company. Admittedly, it is a complex process, but theresult can enable a company to institutionalize faster innovation paces.With a new capacity of faster innovation in place, there is still a critical stepthat remains and must not be overlooked. The processes for faster innovationmust connect with the larger organization of the company. They mustbe integrated with existing processes that connect the company with itscustomers and, in turn, can help satisfy their appetite for change.An appetite for change9
About the authorsPaul FultzRestaurant Segment LeaderPaul is an Audit partner and has over 23 years ofexperience with the firm. He is the managing partner ofthe Louisville office and the National Restaurant segmentleader for the firm. He is also an SEC reviewingpartner—KPMG’s designation for its top technical partners.Joel RampoldtStrategy Leader, Consumer MarketsJoel leads KPMG Consumer Markets Strategy group andhas over 15 years of experience in strategy and operationsconsulting, focused in the retail and consumer sectors.He specializes in value creation for retailers, ranging frombroad-scale turnarounds to engagements on specific topicssuch as corporate strategy, assortment, pricing, promotions,format innovation, and supplier negotiations. He has ledmajor engagements with retail clients in North America, theUnited Kingdom, and continental Europe.
Contributors:Dan ShaughnessyPrincipal, AdvisoryDan is a principal in KPMG Strategy with more than25 years of experience working in a variety of industriesincluding consumer markets, retail, diversified industrials,media, healthcare, and financial services. Dan specializes inthe development of business and operating model strategy,target operating model design, and large transformationprojects.Colleen Drummond Karmen WardManaging Director,KPMG Innovation LabSenior Manager, AuditAn appetite for change11
About KPMGKPMG International and its network of member firms (collectively “KPMG”)are a global network of professional firms providing Audit, Tax, and Advisoryservices operating in 155 countries and employing more than 174,000 people.Our U.S. member firm, known as KPMG LLP, traces its origins all the wayback to 1897 and became a limited liability partnership in 1994. As a leadingprofessional services firm, KPMG LLP has more than 30,000 partners andprofessionals providing services throughout all 50 states. With 90 offices,we are a significant presence in your current markets and in those locationswhere you may want to expand.Our high-performance culture promotes using our experience and insight tosimplify complex challenges, seek new opportunities, and deliver informedperspectives and clear methodologies of value to clients and stakeholders. Ourclient focus, commitment to excellence, global mind-set, and consistent deliverybuild trusted relationships that are at the core of our business and reputation.KPMG is one of the leading professional service providers to the largestrestaurant companies. This experience, coupled with our access to andknowledge of all major international markets, strongly positions us to assist ourclients in recognizing opportunities and taking actions in response to industry,marketplace, and regulatory changes.The KPMG Innovation Lab focuses on sensing and understanding signals ofchange through a people-first lens. Leveraging design thinking and outside-inperspective, we help identify how these signals may impact the growth andrelevance of organizations based on our decades of research and knowledgein neuroscience and human creativity, as well as leadership in technologyinnovation, trends analysis, and start-up scanning.
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Contact usMark LarsonNational Line of Business Leader, Consumer MarketsU.S. and Global Retail Sector LeaderT: 312-665-2126E: mlarson@kpmg.comPaul FultzRestaurant Segment LeaderT: 502-562-5652E: pfultz@kpmg.comJoel RampoldtStrategy Leader, Consumer MarketsT: 312-665-8964E: jrampoldt@kpmg.comkpmg.com/socialmediaSome or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after athorough examination of the particular situation. 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliatedwith KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name and logoare registered trademarks or trademarks of KPMG International. NDPPS 552325
Sources: QSR magazine as of August 20, 2015, accessed on August 31, 2015; Franchise Help accessed on September 1, 2015; Nerac accessed on September 1, 2015; PR Newswire as of August 10, 2015, accessed on August 31, 2015 Restaurant industry trends Seven trends
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AND FRAMEWORK Version Control Version Number Description Date Version 0.1 Risk Appetite And Tolerance Policy And Framework 16 -10 2018 Version 0.2 Risk Appetite And Tolerance Policy And Framework 27-01-2020 Version 0.3 Risk Appetite And Tolerance Policy And Framework 29-01-2021 Version 0.4 Risk Appetite And Tolerance Policy And Framework
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risk frameworks, these can form a starting point for developing risk appetite. Risk appetite and tolerance form the key components of a risk appetite statement. Although the specific content will vary in line with the needs of individual entities, a risk app
