RH Staff

As restaurant years go, 2006 was not a bad one. Sure, the effects of Hurricane Katrina will be felt in Louisiana and Mississippi for years to come, but, overall, the foodservice business pressed ahead. Even some big scares with foodborne illness in the fall and winter were quickly handled and sent packing. This industry proves it's a top performer, despite what's thrown at it. In fact, the National Restaurant Association is predicting a 16th consecutive year of real sales growth.

The NRA forecasts annual sales of $537 billion this year, which is a 5 percent gain over last year's sales. When adjusted for inflation, that translates to a 2.1 percent gain. The increase suggests that consumers' real disposable personal income will continue to rise along with their desire for freshly prepared food away from home. Restaurants are no longer a luxury; they have become a way of life.

That's certainly the case with full-service restaurants. Sales are projected to reach $181 billion, which is a 5.1 percent increase over last year. When you take into account the effects of inflation, the "real" growth rate will be closer to 2.1 percent. According to Hudson Riehle, senior v.p. of research and information services at the NRA, full-service restaurants will be aided by continued gains in consumers' real personal disposable income, particularly among baby boomers in their peak earning years. Full service also will be fueled by the demands of restaurant-savvy customers who seek out sophisticated cuisines, new flavors and healthful options, while socializing in a sophisticated environment, he says.

As usual, one of the top challenges in this very competitive environment will be recruiting and retaining employees, says Riehle. Nevertheless, an NRA survey of full-service operators concludes that a clear majority believe business will be better this year than last. Fine dining operators are particularly optimistic.

Just how good 2007 will be remains to be seen, says Bob Derrington, an equity research analyst at Morgan Keegan & Company. "It will be a real interesting year because the industry faces some operating cost headwinds it hasn't seen in years." One of those headwinds will come in the form of increasing commodity costs, particularly with beef, pork and chicken. The price of corn, which is a major source of feed for beef, poultry and pork, is at a 10-year high, he says. The soaring cost of feed will likely lead to lower production of the major proteins, which means the price of those proteins will go up.

Another pressure full-service operators face is rising labor costs, which will come on the heels of minimum wage hikes that the Democratic House and Senate are pushing for. Complicating the issue, says Derrington, is that when minimum wage hikes are approved, hikes in tip wages will likely follow in at least half of the states.

"When commodity and labor costs rise, what naturally follows are menu price increases, which operators have resisted for some time," says Derrington. "But to protect profit margins, menu price increases may be necessary."

The good news, he says, is that utility rates, such as natural gas, have come down substantially in the last year and major increases are not expected in the year ahead.

Derrington sees the fast-casual segment doing very well in the year ahead because it nails the sweet spot of a better quality food and service coupled with a quicker service style and moderate prices. On the other end of the spectrum, upscale operators, particularly those that have tapped into ethnic cuisines, will thrive if they can deliver the quality experience customers expect, he says. That's not always a given.

In the case of L.A.-based Innovative Dining Group, it pretty much is a given. The company operates three conceps——Sushi Roku (4 units), Katana (1 unit) and Boa (an upscale steakhouse with 3 units). According to partner Lee Maen, the company broke the $51 million sales mark last year, which represents a 12 percent increase over the previous year. Part of that success came with the company's decision to enter the Las Vegas market, where Sushi Roku was up 20 percent over its sister units, while Boa posted a 35 percent sales increase over its California units.

Those are impressive increases, particularly when you consider that the Boa unit in Santa Monica registered sales of $8 million. Maen attributes some of that success to a simple wine promotion. "Sundays were very slow at the Santa Monica unit, so we implemented a Wine Lovers Night. On that night every bottle on our list is half price," he explains. "We thought it would kick start business a bit, but it has exceeded our wildest expectations. We are packed on Sunday nights."

Maen has high hopes for the year ahead. Plans are in the works to open a Sushi Roku for a hotel project in Scottsdale and another one in a hotel in Waikiki. A second unit of Katana (a robata and sushi bar concept with sales of $9 million) is slated for Las Vegas, while an entirely new Japanese concept is in the works for L.A.

His biggest concern is finding quality labor, particularly in L.A. where many of those seeking jobs see the restaurant industry as a temporary stop on the way to another career (in the movie industry). Because the minimum wage is well above the national average in California, Maen says federal mandates are not a concern. He is worried, however, about any attempts to increase wages for tipped employees, which he says [increases] are unfair.

Keep your eye on minimum wage, rising commodity costs and other business issues, but keep one thing in mind, says New York City consultant Clark Wolf—it's all about the food.

"It is beginning to dawn on Americans that one of the most important topics in their life is food," he says. "We have convinced ourselves over the years that because food is plentiful and cheap it is good. We are now beginning to see that the quality of the food we eat contributes greatly to the quality of one's life."

It's all about health now, says Wolf. That's why there's a growing movement for organic and natural; for artisanal ingredients; for sourcing products close to home; for sustainability. "Hey, when Disney says its getting rid of trans fats from its menus, you know there's a movement taking hold," Wolf notes.

With that said, Wolf says that one of the big rules of the game—serve the largest portions you can—will change on many levels. It's why the small plate/tapas trend is taking hold, he says. "Many people would rather eat smaller portions of good, healthy food than large portions of bad food that will eventually kill you."

Whether the small-plate trend takes hold in a big way is debatable, but there's little doubt that when it's offered by a chef of Ryan Poli's talent, it's a very good thing. Poli is a Restaurant Hospitality Rising Star and the chef of Butter, a Chicago eatery that Esquire magazine declared one of America's Best New Restaurants in 2005. Poli said he had an amazing year at Butter last year, but is moving on for new opportunities.

Discussing the economy as a whole gives one a big-picture perspective, but Poli says the city in which you work often dictates the tenor of one's business. "I love Chicago, but it's a cut-throat restaurant city where older chefs have a stronghold that makes it tough for younger chefs to thrive."

Scottsdale, AZ, on the other hand, is a young, fast-growing city that is hungry for chef-driven restaurants. Poli and investors will open a new place there later this year that will feature new American cuisine with Spanish and Mexican influences. And, yes, part of the menu will feature small plates.

"A lot of people like the small-plate idea, particularly when it's offered by a creative chef," he says. "It's a fun way to experience lots of tastes for those who are adventurous."

The ethnic influences Poli will bring to his cuisine add even more excitement to the meal and will help differentiate his yet-unnamed concept. He is right on track, based on a list of hot trends Ron Paul sees on the horizon. Paul is president of Chicago-based Technomic Inc., a restaurant consulting company. Globalization, he argues, will accelerate this year. By that he means American companies will seek opportunities outside the country and international brandswill make a stand here. One such company is Pollo Campero, a 200-unit Guatemalan chickenconcept that's finding great success in Los Angeles, Houston, Washington and New York. "Expectto face more international competition in the year ahead," says Paul.

He says chef-driven restaurants, including chains, will proliferate as well. As a growing group of consumers notch up their casual-dining habit to the new upscale casual category, it's a logical transition to then move up one more notch to chef-driven chain restaurants, says Paul. "Celebrity chefs continue to represent highly attractive opportunities for branding or cobranding of restaurants and food products."

He agrees with Clark Wolf that health and wellness are growing concerns for consumers and that higher demand for natural and organic foods is a natural progression. "Even as the obesity crisis weighs heavily on our thoughts, it would be a mistake not to recognize the concurrent slow but steady increase in consumer acceptance and usage of foods perceived as good for you."

Nevertheless, don't underestimate Americans' desire to indulge themselves, which explains why burgers are back in a big way. "From snack-sized miniburgers to luxurious Kobe beef burgers, numerous operators are taking burgers beyond the mass-market fast-food tradition," says Paul. He points to fast-casual burger chains such as Burgerville and The Counter and full-service chains such as Cheeseburger in Paradise and Cheeburger Cheeburger.

Perhaps the most important thing you can do this year is to understand that convenience will be the number one consumer driver, he says. "Maximizing customer convenience in ways appropriate to a particular concept is a subject that deserves a great deal of time, attention and investment in systems, equipment and technology." Operators that exceed others in making their restaurant experience convenient for customers will be rewarded, adds Paul.

Here are some other trends to deliberate in 2007, according to the NRA:

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