JANUARY 2025
DINERS TAP THEIR INNER CHILD AS RESTAURANTS DIVE INTO DIPPING P. 34
HTTPS://WWW.YOUTUBE.COM/WATCH?V=HWZIWORU2IE
JONATHAN MAZE EDITOR-IN-CHIEF RESTAURANT BUSINESS
Restaurant Business Editor-in-Chief Jonathan Maze is a longtime industry journal- ist who writes about restaurant finance, mergers and acquisitions and the economy, with a particular focus on quick-service restaurants. He writes daily about the factors influencing the operating environment, including labor and food costs and various industry trends such as technology and delivery. Jonathan has been widely quoted in media publications such as the New York Times and the Washington Post and has appeared on CNBC, Yahoo Finance and NPR. He writes a weekly finance-focused newsletter for Restaurant Business , The Bottom Line, and is the host of the weekly podcast “A Deeper Dive.”
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RESTAURANT BUSINESS JANUARY 2025
CONTENTS JANUARY 2025
FINANCE WHY BAJA FRESH NEVER BECAME CHIPOTLE .......................................................40
SPECIAL REPORT CLIMATE CHANGE IS AN EXISTENTIAL THREAT TO THE RESTAURANT INDUSTRY .04 COVER STORY DINERS TAP THEIR INNER CHILD AS RESTAURANTS DIVE INTO DIPPING ............34
MENU THE TOP 10 LIMITED-TIME OFFERS ARE OOZING CHEESE ......................54 LEADERSHIP FOR INDUSTRY ANTAGONIST BILL MARLER, FOOD SAFETY IS PERSONAL ........................58 EMERGING BRANDS HOW FAT SAL'S WAS DESTROYED BY FIRE, THEN REOPENED WITHIN 48 HOURS ..........62
PRIVATE EQUITY SNAPS UP ANOTHER MAJOR RESTAURANT CHAIN .....................44
OPERATIONS MEET THE CHICAGO FAMILY BEHIND 7 OF AMERICA'S TOP-GROSSING INDEPENDENT RESTAURANTS ..............................................47
INSURANCE RATES ARE PROVING THE HARD COST OF CLIMATE CHANGE .............08
A HOTTER PLANET PUTS THE RESTAURANT SUPPLY CHAIN AT RISK ................................14
CAVA'S CEO: HERE'S HOW WE'LL REMAIN BEST IN BREED ..............................................50
LIFE AFTER DIVORCE FOR THE PARENT OF MAPLE & ASH ...............................................64
HOW RESTAURANTS ARE WORKING TO KICK THEIR ENERGY HABIT ...................................20
REDUCING FOOD WASTE IS KEY IN BATTLE AGAINST CIMATE CHANGE ..........................26
FROM OUR COLUMNISTS
TECH CHECK: THE YEAR OF RESTAURANT LOYALTY PROGRAMS ENDS WITH A WHIMPER ........12 REALITY CHECK: WE NEED A LEASH ON THE NLRB ................53
THE BOTTOM LINE: HERE ARE 4 IDEAS FOR SUBWAY'S NEXT CEO .......................................................38 BEHIND THE MENU: A RESTAURANT'S CHEESE SAUCE MAKEOVER LEADS TO RETAIL LINE ...........56
Cover Photo by Panera
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JANUARY 2025 RESTAURANT BUSINESS
SPECIAL REPORT
CLIMATE CHANGE IS AN EXISTENTIAL THREAT TO THE RESTAURANT INDUSTRY
OPERATORS AND MANY INDUSTRY EXPERTS AGREE THAT RISING TEMPERATURES, INCREASING WEATHER-RELATED DISASTERS AND OTHER LOOMING ENVIRONMENTAL CONCERNS POSE HUGE RISKS TO RESTAURANTS. HERE’S WHAT THEY’RE DOING ABOUT IT. BY HEATHER LALLEY
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ILLUSTRATION BY NICO HEINS/MIDJOURNEY
C limate change represents an existential threat to the restaurant industry, especial- ly to independent restaurants. That’s not hyperbole, said Dan Jacobs, co-owner of Milwau- kee’s EsterEv and DanDan. “If things aren’t changed, we are going to see the end of independent restaurants,” Jacobs said. “Inde- pendent restaurants are the fabric of our communities.” Rising temperatures, unpre- dictable and destructive weather events, wildfires, a looming water crisis and more have the potential to disrupt nearly every aspect of a restaurant’s operations. In recent weeks, restaurants were wiped out by Hurricanes He- lene and Milton in the Carolinas, Florida, Georgia, Virginia and Ten- nessee. That’s a headline-making impact of climate change. But climate change is leaving its mark on virtually every aspect of the restaurant industry: • Earlier this year, Phoenix recorded 113 consecutive days over 100 degrees, putting a damper on outdoor dining and driving up energy costs to keep restaurants cool • A Thai chef in Los Angeles reports that the soil is too warm to grow cilantro root, an essential ingredient in curry paste, forcing her to substitute ingredients and compromise on flavor • High temperatures require refrigerator compressors to work overtime, leading to more equipment breakdowns • An inconsistent supply chain can lead to elevated prices which, in turn, can drive diners away • Employees may need to miss work to deal with a home hit by flooding or children out of school due to soaring temperatures “There’s a very clear and direct link between climate change and the economic health of restau- rants,” said Anne McBride, vice
president of programs at the James Beard Foundation (JBF). For the next five days, Restau- rant Business will look at the ways the industry is being shaped by the changing climate, and how some operators and advocates are fight- ing to stem the losses. We’ll ex- amine the promise of regenerative farming, how some are combating food waste, innovative ways restau- rants are saving energy, the impact of soaring insurance rates and more. “There’s a real urgency,” Mc- Bride added. “And when you see things like what happened in North Carolina, for example, in Asheville, seeing that kind of destruction, seeing the number of closures … [Or] the number of restaurants that have closed in places like Colora- do. When there’s less snow, people don’t come skiing. And you already have a very short season … So, that’s happening across the country. These extreme weather events are impacting restaurants.” BOTH VICTIMS OF CLIMATE CHANGE AND CAUSES OF IT For restaurants, in particular, cli- mate change is especially complex. And that’s because restaurants are both a victim of natural disasters,
rising temperatures and water scar- city and they’re also a cause of it. “Chefs and restaurants are, let’s say, charismatic victims of climate change,” said Barton Seaver, an award-winning chef who is now a sustainable seafood educator and advocate. “There’s the flipside of this which is where how are driv- ers of climate change? And not in a finger-wagging, sort of traditional environmental vantage point which is ‘bad human, bad.’ Restaurants are participants, willing or not, in a system that has been built for ef- ficiency and lower cost rather than actual, measured and considered outcomes … How do we both gauge and come to grips with our role in creating the system, as well as use our levers as drivers of change to make it what we want?” Entrepreneurs like to open restaurants and other business- es in areas with rapid population growth. In the U.S., that means the South and West, places like Flor- ida, Phoenix, Houston and Dal- las-Fort Worth. But those are also the areas at greatest risk for climate change-fueled weather disasters, according to a recent analysis by The New York Times. And that growth can strain infrastructure
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JANUARY 2025 RESTAURANT BUSINESS
ILLUSTRATION BY DIMITRI MORSON/MIDJOURNEY
CLIMATE CHANGE IS AN EXISTENTIAL THREAT TO THE RESTAURANT INDUSTRY CONTINUED...
SPECIAL REPORT
such as roads and electrical grids, amplifying the damages of severe weather. Just over 4,200 natural disasters were recorded from 1980 to 1999, according to a 2020 United Nations Office for Disaster Risk Reduction report. But that number rose to 7,348 natural disasters from 2000 to 2019, with a 232% increase in ex- treme temperatures, 46% jump in wildfires, 134% increase in floods and 40% rise in storms, the report said. And those numbers have con- tinued to climb in the last several years. Rising temperatures are also sup- pressing the supply chain. With ev- ery 1.8 degrees Fahrenheit increase in global temperature, “extensive losses” occur in the production of wheat, rice, maize and soybeans, the staple grains that account for two-thirds of the world’s caloric in- take, according to “The Climate Re- ality for Independent Restaurants,” a report published earlier this year by the James Beard Foundation and the Global Food Institute (GFI) at The George Washington University. A reduction in crops will drive up prices, and extreme weather can roil the supply chain, increasing transit time and disrupting distribution. “Climate change is an urgent
threat that significantly affects our food supply chain, and this impact ripples through communities, econ- omies, farmers, the fishing industry and restaurant owners alike,” the James Beard-GFI report stated. “As climate change disrupts tradition- al weather patterns, alters growing seasons, intensifies extreme weath- er events and leads to biodiversity loss, agricultural productivity and stability are jeopardized … This un- certainty affects the consistent and reliable sourcing of ingredients for restaurants.” For Minneapolis-based Chef Sean Sherman, owner of Owamni and a member of the Oglala Lakota Sioux tribe, solutions lie in return- ing to indigenous food systems. For Minneapolis-based Chef Sean Sherman, owner of Owamni and a member of the Oglala Lakota Sioux tribe, solutions lie in return- ing to indigenous food systems. Sherman, widely known as the Sioux Chef, recently earned a spot on the Climate 100 list published by the U.K.-based newspaper The Independent for his work to “source local, wild and heirloom ingredients and follow the sustainable practices that Indigenous communities have used for generations.” Colonizers devastated the land
through logging, mining and other destructive practices. Sherman is working to counteract that by ed- ucating people about indigenous foodways that are more sustainable. “It’s important to understand that, as we kind of crawl into some really devastating climate change issues and are facing major things like water crisis here in the United States, that strengthening our local food systems is really a must for us, especially from a restaurateur point of view, but just as a human in gen- eral,” Sherman said. “If we look at it from an indigenous lens, we can understand how to better utilize the landscapes around us and under- stand how we should be protecting a lot of our natural resources in- stead of endangering them.” These are huge issues, to be sure, but Sherman is addressing them with a local approach. Owamni, which comes from the Dakota word for turbulent water, whirlpool or eddy, is part of Sher- man’s nonprofit organization North American Traditional Indigenous Food Systems (NATIFS), which works to create a food system that “generates wealth and improves health” in Native communities. The operation includes the Indigenous Food Lab in Minneapolis, with a
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RESTAURANT BUSINESS JANUARY 2025
ILLUSTRATIONS BY DIMITRI MORSON/MIDJOURNEY
retail space to sell indigenous prod- ucts like maple syrup, wild rice, fro- zen meals, housemade tortillas, as well as a hot bar, tea bar, commer- cial kitchen and education studio. “It’s one thing if I give somebody two pounds of dried corn, but will they know what to do with it in their home?” he said. His award-winning restaurant (named the best new restaurant of 2022 by the James Beard Foundation among other accolades), with Satur- day dinner reservations booked out for about a month, is the engine for Sherman’s broader vision. Owmani serves intensely regional and sea- sonal dishes, focusing on ingredi- ents like wild rice, sweet potatoes, bison and elk. “Our restaurant does very well,” Sherman said. “We make quite a bit of sales throughout the year. A big chunk of that is food costs, and a big chunk of that food cost is be- ing spent directly on indigenous producers … Owamni really serves a purpose. It creates skill sets of hir- ing. We have 100 people working at Owamni throughout the year, and about 70% of our staff is identifying as indigenous. Because of our inten- tionality of purchasing from indige- nous producers, we’re just moving a ton of money towards indigenous producers.” For his next act, Sherman is looking at replicating his operation around the country, starting in Boz- eman, Montana, and Anchorage, and expanding from there. “There’s no purpose to live in fear,” Sherman said. “So, the best thing we can do is at least try to make the next generation stronger.” MAKING THE CASE ON CAPITOL HILL Individual operators like Sherman, and larger restaurant chains, can no doubt have an impact on climate change and related issues. But lobbying elected officials for systems change is the most effective way to make process on these global issues, experts agree. The James Beard Foundation
launched its Climate Solutions for Restaurant Survival campaign ear- ly this year to mobilize restaurant owners to push their representa- tives in D.C. to slow the impacts of climate change. The group has been holding roundtables with chefs and law- makers around the country this year to highlight the economic impacts of climate change and will host a congressional briefing on Dec. 5. Specifically, JBF is fighting for a version of the Farm Bill to in- clude conservation funding for climate-smart agriculture and it is seeking to protect the $20 billion in climate-smart agriculture funding provided by the Inflation Reduc- tion Act. Climate-smart agriculture addresses some of the problems caused by climate change through practices focused on building resil- ient systems by adapting growing operations to climate conditions. “There’s not one solution,” the JBF’s McBride said. “There’s not one miracle, one miracle solution to solving anything having to do with climate change or its economic im- pact on restaurants … [We’re] focus- ing on the big picture of legislative change and also giving them oper- ation-level solutions that are much more immediate.” COMMUNICATING THE CAUSE TO DINERS Getting diners on board with issues related to climate change is another story, though. But as the crisis intensifies, it may be up to restaurant operators to explain why meals cost more or why certain ingredients may no longer be on the menu. A consumer-facing campaign is next on the JBF’s agen- da, McBride said. “Diners don’t want to think about climate change when they’re going out for dinner,” she said. “They really don’t, so it’s very hard for them to understand why they’re suddenly paying a lot more for their dinner. They think chefs are lining their pockets. We know that’s any- thing but the truth.”
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JANUARY 2025 RESTAURANT BUSINESS
SPECIAL REPORT
INSURANCE RATES ARE PROVING THE HARD COST OF CLIMATE CHANGE
RESTAURANTS ARE GETTING HIT WITH BIG UPSWINGS IN THEIR PREMIUMS, EVEN IF THEY’RE NOT IN THE PATHS OF DESTRUCTION.
R estaurants that have never lost as much as a roof panel to climate change are learn- ing you don’t have to be in the path of a hurricane or tornado to catch some of the financial dam- age. A sharp reminder comes every quarter with the insurance bill. Mother Nature’s ailments are turning the once relatively stable price of property and casualty (P&C) coverage into a cost that’s climbing like a SpaceX rocket. “Most people’s rates have gone up by a minimum of 20% and to a maximum of 60%,” said David DeLorenzo, owner and CEO of two insurance firms—Am- bassador Group and Restaurant and Bar Insurance—that specialize in restaurant coverage. He’s also been an investor in 13 restaurants. “It’s crazy.” The wallop is particularly painful for a new property buying its first policy, no matter how far from the coasts or a tornado alley it might be. The foundation of the insurance business is the concept of a pool. BY PETER ROMEO
Premiums pour into a reservoir of funds from which damage reim- bursements are taken. Since right before the pandemic, the outgoing flow has been surging, in no small part because of environmental is- sues. That’s prompted insurers to keep hiking their prices—or to stop offering policies to high-risk cus- tomers like restaurants. Those drains on the pool aren’t merely high-profile catastrophes like Hurricanes Helene and Milton. According to Next Insurance, a new breed of insurer whose business model is based on a constant feed of data gleaned from claims, the fourth most-common reason for a reim- bursement in the $100,000-and- above range is water damage. With temperatures knocked out of whack by nature’s wobble, the cause could be a pipe that freezes and bursts, or water pooling inside from a heavi- er-than-usual rain, or snow melting faster than the ground can absorb the runoff. The costs for fixing those impair-
ments at a single restaurant can run as high as $1 million, according to Next.
THE BLEND THAT BURNS Insurers’ pools are also being drained at a faster clip today for rea- sons that have little if anything to do with weather or climate. Build- ing materials and the wages of con- struction workers have soared, so the cost of replacing a roof or fixing an entryway has climbed accord- ingly, significantly hiking damage payouts. “Anything related to P&C has accelerated significantly in the last few years, and the prime cause is inflation,” said Next Chief Product Officer Effi Fuks-Leichtag. “Every- thing costs more,” and the higher prices are being passed along. “No one is making extra money out of it.” The wallop is amplified for restaurants because many opt for the convenience of what the in-
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ILLUSTRATION BY NICO HEINS/MIDJOURNEY
surance business calls a BOP, or a business owner’s policy. It’s the insurance world’s equivalent of a sampler plate, combining some property and casualty insurance with a dollop of liability coverage and maybe even some protection from a data breach. Awards in liability lawsuits, as well as the sheer number of suits, have been soaring, according to in- surers, hiking the rates for those all- in-one policies. “If someone hit a pothole in your parking lot, there was probably a time when you could just buy them dinner and everything would work out,” said John Cassetta, sales man- ager for the insurance giant AON. “Now we could probably sing three jingles from memory of law firms looking on TV for liability clients.” Because of that dynamic, the in- creases have been particularly steep for places that serve alcohol. “Insurance is probably still going to be less than 1% [of sales],” said insurer and restaurateur DeLoren- zo. “If you’ve had a couple of DWIs or an assault, it might be in the 3% range.” THROWING IN THE TOWEL Operators in Florida and California have the added burden of far fewer insurers now serving those markets. Two behemoths of the busi- ness, Allstate and State Farm, have stopped offering commercial prop- erty and casualty insurance in Cali- fornia, saying they couldn’t keep up with escalating construction costs and the surge in claims from wild- fires. Operators there have also seen insurance rates elevated by insur- ers taking crime risk into account in setting the charges for a prospective client interested in a BOP, accord- ing to a spokesperson from the Cali- fornia Restaurant Association. Assault of a customer or employ- ee is the third most-common rea- son for an insurer to pay out at least $100,000 on a claim, according to Next’s data. Five major insurers, including
big names like Farmers, AIG and Progressive, have pulled out of Flor- ida. Two others, Southern Fidelity and Weston Property and Casualty, ran out of money and had to stop taking customers. All cite the same factors for their exits: Soaring payouts in liabili- ty lawsuits, and the damage that's been done to the nation's south- ern-most state by Mother Nature. You can still get insurance for a restaurant there, said Nick Valen- ti, the former president of Patina Restaurant Group and a longtime veteran of the business, but the price is steep. He did not reveal how much he’s paying to cover Simply Capri, his restaurant in Winter Park, Florida. Elsewhere, the number of mid- and smaller-sized insurers is drop- ping because the financial viability isn’t there, said DeLorenzo. Most of those heartland companies have a pool of less than $100 million, “and that’s nothing,” he said. “You don’t have a surplus of car- riers looking to insure restaurants,
because they’re risky,” DeLorenzo said. “They’ll just pull out of the market. Why bother?” With the disappearance of so many providers, the pricing lever- age of the survivors grows accord- ingly. The insurance industry hasn’t seen construction costs ebb signifi- cantly as inflation has eased, so it’s not expecting a return to the rates of pre-pandemic times. And then there’s the wildcard of climate change. “There is no doubt it’s having a significant impact,” said AON’s Cassetta. “It’s forcing people to look at things differently.” A KEENER ASSESSMENT The increased risk present in some zip codes has made insurers that much keener and hardnosed in as- sessing risks, be it to extend a policy or initially price it. “They’re look- ing at structures, and saying, ‘Gosh, when you look at these things, they need all kinds of improvement,’” Cassetta said.
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JANUARY 2025 RESTAURANT BUSINESS
ILLUSTRATION BY DIMITRI MORSON/MIDJOURNEY
INSURANCE RATES ARE PROVING THE HARD COST OF CLIMATE CHANGE CONTINUED...
SPECIAL REPORT
do not buy the right coverage, or, God forbid, they do not have any coverage at all,” said Next’s Fuks- Leichtag. “I would advise operators to go through a company that can really evaluate the risk for a restau- rant. ‘Am I covered for tornados, am I covered for a flood?’” DeLorenzo believes operators will soon find relief through tech- nology, though he acknowledges having a stake in that possibility. He’s launched a product that es- sentially monitors all pockets of an activity within a restaurant via camera. With proof of what actual- ly happens, spurious liability claims won’t have a shot, and that helps BOP rates. The surveillance can also weed out bogus weather-relat- ed claims that tap an insurer’s pool, like claiming a walk-in’s contents have spoiled when a visual record shows no loss of power or physical damage. All of the insurance executives stressed the importance of having a relationship with an insurance broker or carrier’s agent. “I’d rath- er deal with Bill, who’s known me for 20 years and can get me on the phone on a Sunday if he has a fire,” said DeLorenzo. “I know him, and he knows me.”
That intensified look also ex- tends to operations. “If it’s a place that has $100 bottles of wine, you look at it differently than you do a place where employees are lugging up buckets of Buds from the base- ment,” he said. But there are ways of offsetting Mother Nature’s impact, he and other insurance executives con- tend. “When things become so cost prohibitive that you have to look at things differently, you find the solu- tions,” Cassetta said. For one thing, they advise restau- rateurs to look beyond a BOP. Be- cause the policies are a combination product, there’s not a direct correla- tion between the risk of weather damage and what operators pay to cover their properties from that sort of setback. A fight between custom- ers over a hotly contested game on the bar TV can significantly hike what they pay to ensure storm dam- age can be repaired. Operators are better off dealing with policies that are focused, ide- ally from brokers that specialize in policies for the restaurant business. “Are you going to go to a brain sur- geon to have work done on your heart?” Cassetta asked. “We see many restaurants who
“If they don’t know you, it can be a tougher sell,” agreed Cassetta. Even if they’re unacquaint- ed with you, they may know your brand, which affords chains an ad- vantage in insurance hunting and claim resolution. “If I call ‘em up and say ‘It’s a Jimmy John’s, they know exactly what that place is like if they’ve insured a Jimmy John’s before,” Cassetta explained. NOT A ROSY OUTLOOK Without regulatory action, opera- tors are unlikely to see their proper- ty and casualty rates reset, in large part because of weather’s unpre- dictability and what meteorologists confirm is a real increase in what were regarded as once-a-centu- ry events. “It’s happening, and it’s real,” said Next’s Fuks-Leichtag. About half the claims (48%) filed by restaurant owners from Decem- ber through February deal with damage from Mother Nature, ac- cording to Next. “What’s going on with the weath- er is having a huge effect on what’s going on with insurance rates, and it’s going to have a huge effect on availability,” DeLorenzo said. “It’s going to get tougher and tougher and tougher.”
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RESTAURANT BUSINESS JANUARY 2025
ILLUSTRATION BY DIMITRI MORSON/MIDJOURNEY
Streamline your menu pricing analysis with price pulse
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JANUARY 2025 RESTAURANT BUSINESS
TECH CHECK
THE YEAR OF RESTAURANT LOYALTY PROGRAMS ENDS WITH A WHIMPER
TECH CHECK: LOYALTY PROGRAMS ARE A GREAT TOOL, BUT RESTAURANTS NEED TO APPEAL TO MORE THAN JUST THEIR MOST FREQUENT CUSTOMERS TO BRING BACK TRAFFIC.
BY JOE GUSZKOWSKI
I t is often said that 80% of a restaurant’s sales come from just 20% of their most loyal customers. This (questionable) stat is frequently used to highlight the importance of loyalty programs. The people who sign up for those programs, the wisdom holds, are likely to drive most of your business. But it turns out that the other 80% of customers matter an awful lot, too. During a year in which restaurant after restaurant has launched, re-launched or updated its loyalty program in an effort to jumpstart sluggish traffic, a parallel theme has emerged: Non-loyalty members who are not being reached by those marketing efforts are taking their business elsewhere. This dynamic has been most prominent at Starbucks. Its Starbucks Rewards program boasts nearly 34 million members and is widely viewed as the gold standard for restaurant loyalty programs. But the coffee giant has been
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in the midst of a monumental traffic slump, in part because it has been paying so much attention to loyal- ty members and generally ignoring everyone else. One of the first pri- orities for new CEO Brian Niccol is to broaden the chain’s marketing strategy. “We’ve been focusing on Star- bucks Rewards customers rather than talking to all our customers,” Niccol said in a video published last month. “And we’re changing that quickly, as you likely have already seen. We’re prioritizing our brand, highlighting the handcrafted prod- ucts customers expect, and show- casing the coffee innovation that sets Starbucks apart.” You may have noticed, for in- stance, that Starbucks has been run- ning TV commericals that focus on the quality of the chain’s coffee and the experience of its cafes. Mobile phones are conspicuously absent, and there’s no parting nudge to sign up or download anything. Starbucks is not the only brand making this shift. At McDonald’s, where customers typically have to download the app to get discounts, the chain has taken a more popu-
list approach with a $5 meal deal available to everyone. That deal, of course, helped spark a flurry of low- priced bundles across the indus- try—no loyalty account necessary. “It’s not that loyalty programs are wrong. It’s just that they’re nec- essary but not sufficient,” said Noah Glass, CEO of online ordering pro- vider Olo, in a recent interview. “You can’t just do loyalty. It needs to be couched in a guest engagement strategy that can be a net that cap- tures all the guests.” That could mean broad, brand-focused messaging like we’ve seen from Starbucks. It could also mean the opposite: One-to-one marketing that uses technology to tailor messages for specific custom- ers, whether they are loyalty mem- bers or not. Breakfast-and-lunch chain First Watch is one of the companies taking the latter approach. First Watch does not have a traditional loyalty program. Instead, it’s using data gathered from digital orders to appeal to individual customers in hopes of boosting traffic. Execu- tives said they saw a small increase in average check last quarter as a re-
We’ve been focusing on Starbucks Rewards
customers rather than talking to all our customers."
—BRIAN NICCOL, CEO, STARBUCKS
sult of their tests, though traffic was still down more than 4% compared to last year. This isn’t to say that loyalty pro- grams aren’t necessary or even that they aren’t effective. Red Robin, for instance, has celebrated the ear- ly returns from its revamped Red Robin Royalty club, and tests of a program at The Cheesecake Facto- ry are exceeding the company's ex- pectations. But the programs, aimed as they are at such a small, hyper-engaged slice of a restaurant's audience, can be distracting at a time when opera- tions should be working to attract as many people as possible. Whether those people come back will depend on the food, the service, the experience. If those things aren’t on point, a loyalty pro- gram won’t matter, as Starbucks has learned. “That rewards program is a valu- able tool,” Niccol told analysts on an earnings call last month. “It's not the only tool, but it's a valuable tool that I think we could make work harder for us if we put it in concert with marketing that has more broad reach.”
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JANUARY 2025 RESTAURANT BUSINESS
SPECIAL REPORT
A HOTTER PLANET PUTS THE RESTAURANT SUPPLY CHAIN AT RISK
T he market for beef is hot right now. Beef prices are up 22% this year. And the U.S. consumer is apparently undeterred by those prices, snapping up steaks at Texas Roadhouse and prime rib at the grocery store. All of which should provide considerable incentive for the nation’s ranchers to ramp up beef production. Farmers and ranchers traditionally increase production when prices are high, to take advantage of the market while they can. The problem? Grass . RAISING ANIMALS AND CROPS TO SUPPLY RESTAURANTS AND GROCERS IS BOTH A CONTRIBUTOR TO CLIMATE CHANGE AND A CASUALTY OF IT. DROUGHT AND DISASTERS ARE ONLY MAKING MATTERS WORSE. BY JONATHAN MAZE
Drought conditions in South- ern plains states such as Oklahoma mean there isn’t enough grass for cattle to graze upon. So even if they could ramp up production, they can’t because the grass just isn’t there. So, they’ve liquidated herds and now hope for better weather down the road. All of which adds up to high pric- es that won’t likely abate anytime soon. “This is a multi, multi-year prob- lem,” said David Maloni, a supply chain consultant and restaurant owner in Florida. He estimates it will be 2030 before beef gets back
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PHOTOS: SHUTTERSTOCK
up to the production level of 2022. Climate change affects restau- rants in numerous ways. But the most common, and subtle, is through the supply chain. Weather events, droughts and fires, made worse in a warming planet, ravage cropland and drive up the cost of what’s available. A global economy means that even a weather event on one side of the world can increase costs on the oth- er side. A drought in Mexico is making it hard for Huy Fong Foods to source enough peppers for its Sriracha hot chili sauce. A wet year in France has spread a fungus that is endan- gering grapes used for wine. A pair of hurricanes in the Southeast U.S. has hammered the orange crop. Hot ocean temperatures are making it tougher to source seafood as fish search out cooler temperatures. But over the long term, global temperature changes will make nu- merous crops less productive. For every 1-degree Celsius in- crease in global average tempera- tures, for instance, production of wheat decreases 6%, rice 3.2% and corn 7.4% by 2027, according to a National Academy of Sciences study. “You cannot find a crop or a spe- cies that is not impacted by climate change,” said Greys Sošić, a profes- sor of data sciences and operations and the E. Morgan Stanley chair in business administration at the Mar- shall School of Business at the Uni- versity of Southern California. By 2027—just three years from now—at least one estimate suggests restaurant industry revenue could start declining as rising costs for food leads to restaurant closures, particularly among independents, according to a report from the James Beard Foundation and the Global Food Institute at George Washing- ton University. And yet while the supply chain and food costs are a casualty of glob- al warming, they are also a cause of it, one that is generating a lot of ac- tion among restaurant chains and their suppliers.
A FRAGILE SUPPLY CHAIN To understand the potential impact of some of these issues on restaurant costs, just look at a pair of different events over the past decade. In the winter of 2011-2012, below-normal snowfall left much of the coun- try without the spring snowmelt, according to the National Weather Service. What snowmelt there was quickly evaporated in March with above-average temperatures, creating dry conditions that would worsen by the summer. By July, much of the Midwest was entrenched in the worst drought since the 1950s. The drought hammered the country’s corn crop. Farmers had their lowest crop yield in nearly two decades, and the lack of supply drove prices skyward. At one point, the price for a bushel of corn that year hit a record $8.31—well over double what it typically is. The price of corn has a substantial impact on food prices, because it’s used as feed for animals, particularly cattle. Beef prices took off the next year, hurting profits for chains like Ruth’s Chris and other brands, and remained elevated for more than two years. But the drought affected many other crops, like wheat, and drove up those costs, too. Drought is certainly not uncommon, hitting the U.S. at least once per de- cade. And much of the food industry has adapted to it. Yet climate change increases the chance for drought worldwide. Much of the U.S. is currently in a drought. The global economy means the impact of these weather events is felt worldwide. A persistent drought in Spain has ravaged the olive crop, produc- ing a shortage of olive oil and driving up prices worldwide. Olive Ventura, a retailer out of Ventura, California, recently raised prices for the olive oil it sells while explaining the prices to its customers on its website. But the fragility of the supply chain was also demonstrated in an event that, in many respects, had nothing to do with climate change. In 2020, a global pandemic shut down much of the worldwide economy as governments took steps to keep people home to stop the spread of COVID-19. As the economy reopened in late 2020 and 2021, production ramped up far more quickly than did people’s willingness to work. The lack of labor made it difficult for many industries, including food pro- duction businesses, to meet demands for their goods. And it drove up global inflation to levels unseen since the oil shocks of the 1970s. The impact of that inflationary period is still being felt, as voters angry
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nia Farm Bureau. “It’s one of those things, even if smoke isn’t right in their backyard, it can still cause damage.” And it’s not just wine. Smoke from wildfires can lower crop yields of California’s almond orchards, ac- cording to a study published earlier this year by the University of Cali- fornia-Davis. That’s a big deal, be- cause California produces 80% of the world’s almonds. Major disasters, from wildfires to droughts to heavy rain, are dis- ruptive to the global supply chain. And the number of disasters has increased markedly in recent years. According to the James Beard/ Global Food Institute report, there were 7,342 natural disasters from 2000 to 2019, up 74% compared with the previous two decades. And natural disasters have only in- creased in frequency since then, with the average number of storms up 19%, wildfires by 29% and floods by 23%. These disasters can hit agricul-
over high prices changed the power structure in numerous countries around the world, including the U.S. with the recent election of Donald Trump as president. “When COVID hit, it showed the vulnerability of the supply chain,” said RC Carter, a rancher in Wyoming. There is at least some good news, however, for restaurant operators. It forced a few lessons. Namely, be careful with sourcing. And those lessons could be valuable in a future in which supplies are more fragile than ever. “Restaurant chains realize, and even in my restaurant, you can’t be single sourced,” Maloni said. “Particularly for your main items, whether that’s a key sauce for a chicken wing chain or a French fry, you can’t be single sourced anymore. You have to be agile.” FIRES AND HURRICANES January and February 2020 were unusually dry months in California. That was followed by an unusually hot summer which, on top of a lack of snowmelt coming down from the mountains, turned much of the state into a tinderbox by August. So, when some thunderstorms moved into Northern California that month, the lightning strikes ignited several fires. Driven by strong Santa Ana winds, the resulting LNU Lightning Complex fires would last more than a month and burn 192,000 acres in the hills surrounding cities like Napa. It also did hundreds of millions of dollars in damage to the region’s crops, particularly the vineyards used to produce grapes for chardonnay or cabernet sauvignon served in restaurants around the country. But it’s not just the grapes that were destroyed. Smoke from wildfires can give grapes a smoky or burnt taste, known as “wine taint.” “It changes the flavor,” said Shannon Douglass, president of the Califor-
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PHOTOS: SHUTTERSTOCK
tural communities and drive up prices. Unusually warm waters in the Gulf of Mexico over the summer fueled the creation of an unusual number of powerful hurricanes. Hurricane Helene formed over the Caribbean Sea and hit Florida as a Category 4 storm on Sept. 26. Hurricane Milton formed just a couple of weeks later and would grow into the strongest tropical cyclone on record this year, with 180-mile-per-hour winds. It hit Florida on Oct. 9. The dual hurricanes wiped out a Florida orange crop already in decline. Orange production in Florida will be down 16% this year because of the hur- ricanes, according to the U.S. Department of Agriculture. And that’s on top of previous declines. Florida’s orange production has fallen 92% since 2003-2004, thanks to a combination of storms and disease. Climate change is also a contributor to crop disease, as warmer temperatures prove to be far more favorable for the growth of pathogens. Farmers have in many ways learned how to adapt. In California, some ranchers have taken steps to protect their cattle from heat. Douglass owns a farm in Northern California that raises beef cattle, wal- nuts, hay and seeds. She closely monitors the soil, test plants and will even have permanent sensors on some of her trees to determine moisture levels. That can help the crops better withstand drought, or California’s tricky water supply issues. “We want to make sure we’re utilizing our water at the most appropriate time,” Douglass said. Droughts and disease in many coffee-producing regions are driving up the cost of coffee beans even as demand soars around the world. Coffee prices are up 42% over the past year, helping send prices for coffee drinks rising— which in and of itself could be contributing the weak sales this year at market leader Starbucks. The Seattle-based coffee giant buys about 3% of the world’s coffee beans. The company’s hacienda Alsacia, its first coffee farm in Costa Rica, has been working on efforts to improve productivity and water use, potentially
mitigating the impact of climate change. Starbucks recently said it is expanding that effort with two new farms in Costa Rica and Guatemala and plans more farms for Africa and Asia. A CASUALTY AND A CAUSE When Carter, the rancher, aban- doned his plans to become a veter- inarian so he could run his family’s Wyoming ranch, he had no idea he’d spend so much of his time thinking about worms. “If you have 10 worms per square foot, you get 2.7 million worms per acre, and they will completely flip and build six inches of soil in three years’ time,” Carter said. “A good habitat for worms affects every- thing.” Worm health is important, be- cause it ensures a healthy under- lying soil, encouraging growth of grasslands for his 2,700 head of cattle at the 40,000-acre Car- ter Ranch, which supplies Carter Country Meats. So, while he didn’t expect to be so into worms, he is now, to main- tain his regenerative ranch, im- prove the ecosystem on his land and ensure that the meats he produces are more nutrient-rich. For Carter, the healthier worms mean the ecosystem on his ranch is more favorable for the cattle. But it also attracts more wildlife, which makes the land more enjoyable for him and his family. “I’m a dirt guy,” he said. “I’m a soil guy. A nature guy. That is my church.” The supply chain isn’t just a casu- alty of climate change but a cause. And raising livestock is a particular problem. Livestock are responsible for 14.5% of greenhouse gas emissions, according to the Food and Agri- culture Organization of the United Nations. Many grasslands have also been eliminated to make way for corn, which is typically used for feed for that livestock, rather than food— which in turn makes that crop vital to the demand-supply equation.
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uses regenerative beef. Chipotle has taken numerous steps to source its products from regenerative agriculture sources. So has Taco Bell, which is working with Cargill and the National Fish and Wildlife Foundation to improve ranchers’ farming efforts out West. “It’s really anchored around environmental protection, species and habitat, some water remediation, some climate and it has an element of making sure rancher livelihood fits in there as well,” said Jon Hixson, chief sustainability officer for parent company Yum Brands. For Yum, which is adding restaurants globally at a breakneck pace, taking steps to strengthen the supply chain is important. “For the planet, for the climate and for the resilience and the capacity of the business,” Hixon said, “it all has to fit together.” There are legitimate reasons for these brands to take these steps that go beyond working to ensure they can source enough product going forward: Customers like it. Each of those aforementioned chains has outperformed average sales results for the broader restaurant industry. Last year, they on average grew at double the rate of a typical restaurant chain on the Technomic Top 500 Chain Restaurant Report. Still, fixing the supply chain remains a long-term issue. Many of the ranchers working the most- sustainable practices have a limited market, and most of the major chains are supplied by larger companies for whom taking those steps is expensive and complicated. Carter Country Meats went to a direct-to-consumer model during the pandemic but next year plans to sell its meats to restaurants and other companies. “The supply chain is not set up to suit them,” Green said of ranchers that Audubon works with, such as RC Carter.
One solution in recent years has been to replace beef and chicken with plant-based substitutes. But that market isn’t there, certainly not in the way it is for those animal proteins. And it’s not entirely evident that plant-based meat substitutes would actually be better for the environment over the long- term. That’s why many advocates believe regenerative agriculture is the answer, by focusing on soil health and restoring balance to the ecosystem. The plants and trees can then draw down some of the carbon dioxide in the atmosphere that is trapping the heat. The ranchers themselves also practice good grazing habits, moving cattle around much in the same way that bison roamed the western plains before overhunting wiped them out. “You can use your animals to increase biodiversity,” said Farley Green, marketing manager for Audubon Conservation Ranching. The program encourages ranchers to use regenerative techniques to improve the ecology of grasslands. Some restaurant companies such as Taco Bell owner Yum Brands have worked with Audubon on the effort, which is largely aimed at restoring the habitat of grassland birds, the population of which has declined 53% since the 1970s—thanks to grassland destruction. But that also helps with the cattle and with climate change. And a growing number of chains are sourcing their beef and other products from farms and ranches that use regenerative methods. Sweetgreen, for instance, recently debuted Caramelized Garlic Steak on its menu, the first time it has added beef to its vegetable-heavy set of offerings. The fast casual believes that sourcing more ingredients using regenerative agriculture will offset whatever carbon is emitted by the cattle. The burger chain Hopdoddy, meanwhile, uses regeneratively raised, grass- fed beef for its burgers. Shake Shack, the New York-based burger chain, also
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RESTAURANT BUSINESS JANUARY 2025
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I f you were tasked with constructing a building that would have a low impact on the environment, you would proba- bly not want to start with a restaurant. Restaurants burn through more energy per square foot than any other type of commercial real estate, according to data from Energy Star. The average dining establishment uses 5 to 7 times more energy per square foot than other commercial buildings. At high-volume fast-food places, that multiple jumps to 10. That’s because restaurants have a lot of energy needs relative to their size. Refrigerators and freezers are electricity hogs. Restaurants have plentiful indoor and outdoor lighting, as well as workhorse HVAC systems keeping hot kitch- ens cool. It doesn’t help that many operations, especially fast-food places, have long hours, with some open around the clock. To put this into further perspective: A fast-food restaurant like McDonald’s or Burger King will use about $20 of en- ergy per square foot, said Al Subbloie, founder and CEO of Budderfly, a company that works with restaurants to lower their energy consumption. A well-run office building will use $2. “Per square foot, how many things plug into or are connected to a circuit that are using energy [in a restaurant]?” Subbloie said. “The density of energy use is ridiculous.” All of that energy use has a real impact on the planet. Electricity generation is the second largest producer of carbon dioxide pollution, a key contributor to climate change. Not only that, but restaurants’ energy consumption is also a drag on their bottom lines. Since 2020, the average price per kilowatt hour has increased nearly 30%, according to data from the U.S. Bureau of Labor Statistics. That said, there are many ways restaurants can reduce their energy use, and virtually all large restaurant chains are making broad commitments to do that. But it’s not something that always comes easily for rank-and-file operators. “I’ve always had a desire to make our stores more sustainability focused, but honestly, I didn’t really know how,” said Spencer Hart, the operator of five Sonic Drive-Ins and two Jersey Mike’s on Long Island. “We know how to run restaurants, but we didn’t really know how to do that.” HOW RESTAURANTS ARE WORKING TO KICK THEIR ENERGY HABIT RESTAURANTS USE MORE ENERGY PER SQUARE FOOT THAN ANY OTHER COMMERCIAL BUSINESS. REVERSING THAT TREND WILL BE CHALLENGING, BUT THERE ARE SIGNS OF PROGRESS. BY JOE GUSZKOWSKI
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PHOTO BY MIDJOURNEY
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For instance, Hart had long viewed Sonic’s unique drive-in can- opies as a perfect place to put solar panels. When he opened his fifth lo- cation in 2021, he was hell-bent on making it happen. The project end- ed up being a lot harder and more expensive than he had planned. Then about two years ago, Hart heard about Budderfly in a newslet- ter sent out by Sonic’s parent com- pany, Inspire Brands. Budderfly’s pitch was appealing: It promised to make restaurants more eco-friend- ly by overhauling their energy in- frastructure—at no cost to the op- erator. In fact, the restaurant would actually save money by signing up. To Hart, it seemed almost too good to be true. But, “it’s really worked out to be everything that they said,” he said. Founded in 2017 by Subbloie, Budderfly calls itself an ener- gy-as-a-service provider. Subbloie saw restaurants’ outdated ener- gy infrastructure as a burden that would be difficult for operators to fix on their own. “They’re in the business of de- livering great food to customers,” Subbloie said. “We created a busi- ness model that made it really easy for restaurants to solve the whole [energy] thing.” With Budderfly, restaurants agree to outsource their energy management to the company for 10 years. Budderfly takes over the restaurant’s utility bill, and the oper- ator begins paying Budderfly rather than its energy providers. Budderfly then works to lower that bill by in- stalling things like energy-efficient HVAC systems and LED lights. It also puts in high-tech thermostats and other devices that can help it pinpoint ways to save more, all on its own dime. For the first three years of the contract, the restaurant is guaran- teed energy cost savings of up to 10%, with Budderfly keeping the rest. This allows Budderfly to re-
coup its costs and reinvest. After the first three years, savings over 25% are split evenly between Budderfly and the restaurant.
thousands of dollars. Budderfly buys HVACs in bulk, so it can get them for 40% less than list price, Subbloie said. A new, en- ergy-efficient HVAC alone can cut a restaurant’s energy use in half, he said. The arrangement with Budderfly is currently saving Hart 3% to 5% per month on utilities, which trans- lates to thousands of dollars back into his pocket, he said. That’s not to mention the money he did not have to spend on solar panels and a new HVAC. “If I did all of this by myself, I would realize some of the savings that Budderfly is keeping, but it would cost me a lot of capital up front,” he said. And, because Hart is not an energy expert, “I wouldn’t know what I wouldn’t know. [Bud- derfly] is gonna keep doing things that I wouldn’t know to do.” In 2024, Budderfly has reduced customers' energy consumption by 43% more than last year, avoiding 219,100 metric tons of carbon emis- sions—equivalent to 560 million miles driven by an average gaso- line-powered vehicle. It currently services about 7,000 locations— mostly restaurants—and plans to add 2,000 to 3,000 a year starting next year.
Things are changing, and I feel like we all have a responsibility to do what we can.” —SPENCER HART, SONIC FRANCHISEE
Because Budderfly’s model hinges on lowering energy costs, it’s incentivized to invest in things that will do that. At Hart’s Sonic stores, for instance, the company footed the bill for solar panels on the other four locations. But the most significant change Budderfly made for Hart was re- placing the HVAC system at one of his Sonics, an update that would have cost the franchisee tens of
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PHOTO COURTESY: SPENCER HART
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