Food service industry needs to adapt to thrive

Over 5,500 new food service outlets have opened, or are poised to open in the region between 2017 and 2020. The profusion of new outlets is raising concerns within the food service industry and proving a challenge to many established players in the six-nation Gulf Cooperation Council (GCC) bloc.

Increased competition from the slew of food service startups that include full-fledged restaurants, fast-food venues, pop-up kitchens, delivery-only options and other non-traditional formats, is only the latest of woes confronting food service operators. The industry as a whole, already plagued by slump in sales, rise in costs, fall in margins and  having to cope with inconsistent labor policies of governments, is said to be struggling to stay in the black.

Many in the industry are reporting  between 5 to 20 percent drop in same-store sales, as margins that were once comfortably above 20 percent  dwindle in the face of increasing cost of labor, supplies and rent. To contend with the downturn, many organizations have resorted to hiking their prices, shrinking portion sizes in menus, squeezing vendors for better prices on food supplies, and renegotiating rents.

Some operators have even shelved or slashed investments in repairs and refurbishments essential to revive their stalling businesses. It is estimated that around 3 percent of annual revenue, which would normally  go into marketing, and nearly 2 percent that would be earmarked for yearly maintenance, are now being diverted to shore up falling margins.

According to a recent report by global restaurant consultants, AaronAllen & Associates on the food service and hospitality industry in GCC, while half of the downturn in performance could be attributed to market changes, the other half came down to mismanagement. Unfortunately, many in the industry are willing to accept and address the half outside their control, while ignoring what they can change.

The report reveals a mix of external and internal factors for the current predicament. Since the sharp fall in oil prices in mid-2014, many GCC states were compelled to  implement economic reforms, including by encouraging Foreign Direct Investments (FDI). While opening up of the market made the region attractive to foreign investments, it also attracted a horde of global food service chains that now pose a challenge to established domestic businesses.

Rather than depend on local franchisees, as in the past, many Western food chains have chosen to directly enter regional markets or to make strategic acquisitions of domestic concepts. Global chains, which already had a significant share in local markets, are growing their footprints more than twice as fast as domestic independents. It is projected that within the next few years, 40 percent of the growth in the industry will come from global chains.

On another note, the AaronAllen report shows that three of the biggest expenses for restaurant operators usually comes from food, rent and labor. While food and rent costs tend to fluctuate with the rise and fall in oil prices, the cost of labor is only going up. The job nationalization drive being implemented by several regional governments is only likely to make labor costs even higher in future, as more foreigners get replaced by locals.

Also, an unintended consequence of the job nationalization policy is that an estimated 730,000 expatriates are reported to have left Saudi Arabia in recent years. This exodus has further rattled nerves of food industry operators, as they not only reduced available workforce and made hiring new labor more expensive, but also impacted the bottom line through loss in revenue from the spending by expatriate customers dining out. In Kuwait, which is calling for cutting expatriate numbers by half in the next five years, the impact on the  food service industry could be even larger than that in Saudi Arabia.


The AaronAllen report points out that while disillusionment in the present circumstances is understandable, there is no reason for despondence among operators. While the region may have the fastest falling margins among major food service economies around the world, it still performs at relatively high levels. The US$4 billion in annual growth is projected to take the industry to over $20 billion in the next couple of years.

Moreover, the report notes that the growth figure estimates could be on the conservative side,as they do not take into account growing tourism numbers in the region. Domestic tourism promotion initiatives by individual states, as well as the hosting of two mega international events in the next few years are likely to boost tourism to the region and prove a blessing to the food service industry.

In addition to Saudi Arabia gearing up to receive over 30 million tourists, both religious and secular to the kingdom by 2030, the UAE is preparing to welcome over 17 million visitors to the World Expo 2020 in Dubai, and is Qatar planning for a similar spurt in visitors to the FIFA World Cup Football tournament in 2022. All of this augurs well for the region’s hospitality and food service industry.

The report urges industry operators to blend business acumen with exceptional service by offering guests an appealing ambiance, quality foods, speed of service, convenience and value. By remaining relevant, sharing values and providing a differentiated, yet consistent experience, local food service operators can prove resilient and thrive in the changing circumstances, said the report.

Some of the salient recommendations from the report are:

Training: Many operators see training employees as an unnecessary investment. But untrained, or poorly trained, cooks and servers impact the bottom line. Proper training has been shown to reduce food costs by 0.5 percent of revenue, which may appear inconsequential until one projects it across a $100 million annual business. In that instance, a training program focusing just on preventing food waste could save the business over $500,000 annually.

Restaurants that do not invest in training also tend to have higher rates of worker churn. Since the cost of replacing an employee is about 1.5x their wages, a 50 percent turnover rate would drain about 10 percent of the revenue from an operation. Most training programs cost only half that.

Investing in upkeep: The best and surest way to cut costs is to increase sales. And the surest way to increase sales is to invest in the existing operation. Performing basic repairs and maintenance, improving cleanliness standards, and conducting regular quality audits can lead to fast same-store sales gains. Remodeling and refurbishing, if done correctly, has been shown to create average sales lifts of between 3 and 10 percent.

Embracing technology: With some of the highest smartphone usage rates in the world, GCC guests, especially the mobile savvy younger generation, are increasing turning to mobile apps in ordering food. Restaurants that invest in innovative technologies such as mobile ordering apps, self-service kiosks, predictive analytics and automated kitchens, are likely to gain more market share than those that rely on foot traffic alone.

Delivering convenience: Increasingly guests are turning to convenience and privacy when dining out, with many spurning bustling malls for quiet local dining experiences. Rather than open full-fledged services in rent-heavy newly opened malls, operators should look at delivery-only locations, pop-up kitchens, food halls, and other non-traditional formats that create new dining experiences and offer another way for brands to stand out.

In this era of massive disruptions, food service operations that cling to the old way of doing things will find it difficult to survive, let alone thrive. It is time to invest and innovate, to build food service systems that can thrive in the new normal and compete successfully with operations from all over the world.