Food sales are in a crisis. Chain restaurants’ growth formula of selling hamburgers, fries and soda at promotional prices has hit a profitability wall. Promotional pricing continues to spike sales but at the cost of eroded profit margins.
Another part of the chain restaurants’ revenue crisis is that they are having limited success selling healthier food. McDonald’s points to the successful launch of “Premium McWraps” as causing a slight uptick in same store sales. However, McDonald’s eliminated Chicken Selects and Fruit & Walnut Salads due to poor sales results. Industry-wide, research by the Hudson Institute found an increase in sales of low calorie menu items at chain restaurants during the same five year time period that higher calorie menu items suffered decreased sales. But the sales growth in healthier foods is not sufficient to compensate for lower margins created from selling higher calorie items at promotional prices.
Healthier chain restaurants are industry’s revenue-growth leaders
Chipotle and Panera Bread are two national chains that have figured out how to achieve sustained sales growth by convincing customers that their food is healthier and that their businesses are operated in a more sustainable manner. Chipotle points to the sourcing of half of their beans from organic farms and their implementation of a buy local plan as two examples of their growing adoption of sustainable best practices. This commitment has successfully connected with the millennial generation most especially through Chipotle’s award-winning short movie called “Back To The Start” that has over 7 million YouTube views. This success connecting with the millennial generation has enabled Chipotle to triple sales since 2006. One Chipotle executive summarizes their sales growth strategy as “Good Food Wins!”
“Living in the United States of Food Waste” is how Bloomberg Businessweek defined the scale and cost of food wasted annually. America wastes 40 percent of its food supply at an estimated cost of $250 billion annually. It is a cost that is unsustainable in the low margin food service industry. Professional estimates are that a restaurant can achieve at least a 10 percent cost savings from implementing a food waste management system.
Restaurants are also the most energy-intensive commercial buildings in the United States. It is estimated that the restaurant industry consumes three times the energy of an average commercial building. Cooking equipment, refrigeration appliances, HVAC systems and lighting are restaurant cost centers and a major element of their environmental footprint. It is estimated that the bottom line profit for a restaurant that reduces energy costs by $1 is equal to selling $12.50 in food at an 8% profit margin.
Moms’ focus upon restaurant air quality
There is also an emerging awareness over chemical use by restaurants and their impacts upon indoor air quality led by Concerned Caregivers. The top five things these EcoAware Moms are using more of are:
A food revolution is being led by the millennial generation and moms in rebellion against the growing health impacts tied to eating industrially manufactured food. The millennial generation was born into a national obesity and diabetes epidemic. Today, one-third of millennials are overweight. In response, they are rejecting McDonald’s and patronizing Chipotle and Panera Bread. While McDonald’s is the largest U.S. restaurant chain, they do not even rank in the top ten chain restaurants for millennials.
Moms are also revolting against chain restaurants due to their health impact fears tied to fast foods. Research by the Center For Science In The Public Interest (CSPI) found that 97 percent of the nearly 3,500 chain restaurant meals they offer do not meet the CSPI’s nutrition criteria for four- to eight-year-olds. A viral mommy-blogger posting, Empty Calories = Empty Messaging, summarizes their outrage at Coca-Cola.
One demonstration of children’s activism is when nine-year-old Hannah Roberson, along with her mother Kia Roberson, attended the McDonald’s 2013 annual shareholders meeting where she confronted McDonald’s CEO Don Thompson saying, “It would be nice if you stopped trying to trick kids into wanting to eat your food all the time.”
Affordable authenticity: Cancun Sabor Mexicano Restaurant
Jorge Saldana is the owner of Cancun Sabor Mexicano Restaurant in Berkeley, CA. His restaurant sets the performance bar for affordable, tasty and authentic food. He brings organically farmed produce and eggs harvested from his farm that morning to the restaurant every day. He proudly (and justifiably) lists his fresh ingredients on a chalkboard that hangs above his serving line to enable his customers to choose the freshest ingredients.
The restaurant and food service industry is in crisis. Fifty-five percent of consumers believe American food production is on the wrong track. The chain restaurant business model has hit a wall of flat revenues with evaporating profit margins as these chains battle for market share through price wars. The industry’s revenue growth challenge is tied directly to the desire held by more than 80 percent of consumers for companies to sell healthy food that tastes great and fits into their budget.
A growing nexus of restaurant and food service entrepreneurs are filling this gap between chain restaurants’ product offerings and consumer expectations. These pioneering restaurants, caterers and bakeries are winning customers and maintaining profit margins by offering food that is both authentic and affordable. This is the first of a six article series profiling examples of these pioneers and their best practices.
Ford CEO Alan Mulally defines business sustainability as “…your company continues.” The restaurant and food service industry confronts a sustainability crisis defined by these five trends:
Property Assessed Clean Energy (PACE) financing of clean technologies is making a comeback by targeting commercial properties. At the end of 2012, San Francisco became the first city to finance a project using commercial PACE. In conjunction with San Francisco’s milestone financing, 14 California counties and 126 cities have launched the nation’s largest commercial PACE program called CaliforniaFirst.
PACE is a financing program where cities or counties allow property owners to pay the financing cost for upgrading their building with clean technologies through property taxes. Qualified improvements covered by PACE include installation of efficiency lighting retrofits, energy/water saving systems and clean tech onsite generation including solar and fuel cells.
PACE was a hugely successful residential program before it was stopped in its tracks when the Federal Housing Financing Authority, along with the Office of the Controller Of The Currency, issued guidance that a PACE program was an involuntary subordination of a mortgage. This guidance effectively threatened the mortgages underwritten by the FHFA for homes that also had PACE financing.
Investing in clean tech – successfully – is still a work-in-progress. Numerous publications have recently pronounced clean tech investing in renewable energy, bio-fuels and green chemistry to be dead due to a 34 percent decline in venture capital investments in solar and clean tech.
But, the growing price competitiveness of clean tech suggests that such declarations are off base. If the price of oil had dropped at the same rate that solar panel prices have fallen since 2007, we would be paying $10 per barrel of oil! Similarly, higher efficiency lighting continues to win price competitiveness due to manufacturing economies of scale and technology improvements. Re-lamping a building with higher efficiency lights offers returns on investment of two years or less. But even with clean tech winning price competitiveness, the investor path to monetizing clean tech investments remains challenging. The successful IPOs of ENOC, Tesla and Solar City are still more the exception than the norm.
While the horsepower buzz at the North American International Auto Show was the absolutely stunning Corvette and the Cadillac ELR all-electric coup was standing room only for the press, I thought the most important vehicle was hidden in the far corner. It was Via Motors’ cargo van built for Verizon Wireless. What made this van unique was that it is an electric plug-in with extended range achieved through a gasoline motor that is a generator to the van’s battery system. Think Chevy Volt for a business van that is primarily driven in a lot of stop and go urban traffic.
Business van solution to higher (and higher) diesel and gasoline prices
At every business coaching session I have facilitated over the last two years, at least one business owner has asked me for a sustainable solution to higher pump prices. There are two ways this van can save a business owner money:
Imagine cars as “cool” as an Apple iPad or iPhone where you play games that generate real cash rewards or that can connect you with that hot-looking person driving next to you. That is the future I saw at the 2013 North American International Auto Show (NAIAS). Almost every manufacturer at this show was launching new cars equipped with electrification technologies that will turn driving into a digital engagement delivering value by saving money at the pump, reducing tail pipe emissions and potentially hooking you up with your future significant other.
Farmville for a dashboard?
Unlike past car shows, the biggest trend at the NAIAS wasn’t about horsepower. It was about morphing the dashboard into a game center experience. Think Farmville or Angry Birds next to your digital speedometer. This digital engagement will influence how safely or fuel efficiently you drive, rewarding your efforts with real money saved through lower fuel consumption and, probably some day soon, insurance rates. Or even imagine driving by your favorite retailer and having your car search for special offer sales!
Find me someplace romantic
How far could this go? Ford is now following the digital mobile world and opening their SYNC® central-console computer to third party app developers. Beyond today’s GPS map displays, this screen will offer voice-activated app searches. “The future has arrived” with enabled Ford car owners now being able to perform searches like “What are some good date ideas nearby?” through a third-party-developed app called BeCouply.
KPMG’s recent research, tellingly entitled The Transformation of the Automotive Industry, observes that, “The global automotive industry is undergoing a fundamental transformation due to increasing consumer preferences toward vehicles with a lower carbon footprint.”
This growing consumer focus upon carbon emissions is now being reported from Beijing to the Jersey shore. China has seven of the top ten most polluted cities in the world because of their growing fleet of fossil fueled urban vehicles and their use of coal to generate 75 percent of their electricity. A reported dark joke among Beijing citizens is that the measure of a day’s air quality is whether you can see your feet when you step outside.
American consumers are increasingly linking weather volatility events like Hurricane Sandy to the higher air and ocean temperatures created by human emission of green house gases. Today, approximately 65 percent of citizens between the ages of 18 and 65 view climate changes as a serious or somewhat serious problem. In search of solutions, governments and consumers are looking at automobile manufacturers for answers.
Auto industry climate change strategy
The auto industry is pursuing the following three-part strategy for making price competitive, lower emissions cars and trucks:
Business Insider recognized Ford Motor Company as one of the world’s top-ten “hottest brands.” Ford’s peers in this ranking include Google, Kindle and YouTube. Tellingly, no other car company made this list. This branding success has helped Ford to sell 2+ million Ford-branded vehicles in the U.S. for the second year in a row.
Ford’s marketing research published for the first time
For the first time, Ford has published the market research upon which they are crafting this brand leadership success. Their view for winning brand leadership is based upon this analysis:
The social contract as we know it has been broken; mistrust of corporations, governments and media is rampant. Weary of misinformation, people are reappraising their relationships with companies and brands, making integrity a new
form of competitive advantage.
Ford: Go Further
Go Further is Ford’s branding response to this changed competitive landscape where consumer trust is won through integrity, not advertising hype. Ford’s Go Further program seeks to build customer loyalty by delivering cars and trucks that are fun to drive, price competitive, are leaders in fuel economy and also support achieving lower tailpipe emissions. Go Further is Ford’s path for delivering on consumers’ search for value and values in the products they buy.
During the North American International Auto Show, I had the opportunity to meet with Ford’s Chairman Bill Ford and CEO Alan Mulally to discuss Ford’s business strategy and the role sustainability plays in it.
Ford Motor Company’s business strategy reflects Bill Ford’s passion to continue his grandfather’s legacy of “making people’s lives better.” Before climate change was a national topic, Bill Ford was recognized as an environmentalist. A measure of true leadership is the ability to hold to your values in the face of criticism. In 1988, when he joined the Ford board of directors, Ford received harsh ridicule from his business peers because of his view that business success is linked to environmental and corporate responsibility. Bill Ford has declined any opportunity to say “I told you so” and instead continues to lead from the front by guiding Ford Motor Company to design and sell products that win competitive advantage on value and values.
Ford’s sales success
Bill Ford’s vision and courage to hold to his values has been validated. Ford Motor Company is setting sales records selling cars and trucks designed around fuel efficiency that achieve lower tailpipe emissions while being fun to drive and price competitive. 2012 marked the second straight year that Ford Motor Company sold more than two million Ford branded vehicles in the U.S. Ford is the only automotive brand to top two million U.S. sales since 2007. The Ford Focus remains the best-selling global vehicle nameplate.
A recent Wall Street Journal article questioned whether this the end of the soft drink era. The answer is: yes. The following 2013 megatrends are pushing sugary soda back to being a special treat rather than a beverage consumed at almost every meal.
Moms fighting obesity
Moms increasingly believe their loved ones are being endangered by industrial and fast foods including the “Super Size Me” sugary beverage. Obesity is now one of their major health issues with almost one of three Americans being overweight. Obesity is fueling a national diabetes epidemic with the CDC projecting a 50 percent increase in Type 2 diabetes among children. Confronted with this health threat, moms are responding by buying fewer sugary drinks for themselves and their loved ones.
Being fat is not cool to the Millennial generation
The Millennial generation is rejecting sugary sodas in favor of water, coffee and energy drinks. They are rejecting the boost they get from sugary drinks because it comes with the price of gaining weight. Overall, the Millennial generation is turning away from fast foods as being unhealthy. They might eat it because of its lower price, but their preference is to eat healthier food. For the Millennial generation “good food wins.”
Will 2013 see the global sale of more sustainable goods and services reach $2 trillion? 2011 was a milestone year for sustainability with the sales of (more) sustainable goods and services reaching $1 trillion globally. My economic forecast is that in 2013 we have the potential to double that, achieving $2 trillion in global sales of (more) sustainable goods and services. These record sales will be driven by three consumer and business mega-trends:
1.Business Nakedness – You are naked! Get buff!
The C-suite is embracing this reality in today’s digital and connected world.
Nothing a business does goes unnoticed or unreported by consumers, workers or investors. Whether it is a deadly garment factory fire in Bangladesh, pink slime or the BP oil spill, the evidence is overwhelming that corporations are facing unprecedented global public exposure. Getting your business “buff” means re-engineering it to focus on the authenticity and transparency expectations of your customers, investors and workers. This re-focusing is a company’s most prudent and cost-effective course of action. The C-suite understands this imperative. In 2011, 38 percent of businesses surveyed by SCA had a sustainability initiative. Today that number is 64 percent.
2013 will see an acceleration in the investing attractiveness of companies embracing sustainability. The three drivers behind this investment trend are:
Emerging sustainability accounting standards. The world’s 3000 largest companies face over $2 trillion in liabilities created by their environmental impacts. This is equal to 50 percent of their EBITA profits. The accounting industry is now exploring how to instruct corporations to report this off-balance sheet liability in their 10K. The growing awareness of this accounting change has begun to influence equity investment analysis.
C-suite engagement. There is growing awareness among CEOs, COOs and CFOs on how the solving of root cause problems with sustainable best practices will grow profits through lower costs and increased competitiveness. The result is the greening of the global supply chain and a focus upon product designs that “cost less, mean more.”
The consumer search for “In me, on me and around me” solutions. Consumers are increasingly focused upon being smarter, healthier and greener. Consumers are moving past endearing ads about polar bears. They are increasing their focus upon how a product impacts their lives.
Based on these drivers, here are five industry megatrends that every investor should consider running from, running toward or embracing:
There are three drivers that are pushing sustainability into an investment megatrend in 2013.
Driver #1: Emerging sustainability accounting standards
One of these drivers is the accounting industry’s investigation into accounting policies and practices that will account for the financial liability of a company’s environmental impacts. KPMG, in their “Expect The Unexpected” white paper, reported that in 2008, the world’s 3,000 largest public companies by market capitalization were estimated to be causing $2.15 trillion of environmental damage.