RBI: From Darkness Comes Light
By: Jack Kenny & Marc Macaulay
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Restaurants in Recovery
While the COVID-19 pandemic has impacted all industries, quick-service restaurants (QSR) were one of the most affected. Restaurant Brands International (RBI), the parent company of global brands Tim Hortons, Burger King, and Popeyes has been no exception, with a year-over-year revenue decline and a plummeting stock price that has yet to fully recover. In the third quarter of 2021, RBI’s revenue reached $1.50 billion, slightly short of analyst estimates of $1.53 billion.
Despite these short-term challenges, RBI maintains lofty goals. RBI runs its restaurants using a franchise and corporate-owned model and is known for its cost-cutting tactics, strong brand management, and aggressive expansion. As of 2021, RBI operates 27,000 restaurants in over 100 countries, with the goal of opening 13,000 new restaurants over the next 7 to 9 years. RBI stores also generate over $34 billion in sales worldwide. Although these qualities will propel RBI forward in its post-pandemic recovery, the operational environment of the QSR industry has evolved with its own set of challenges.
No Man’s Land
Labour shortage was a growing concern prior to the pandemic, but COVID-19 exacerbated the crisis within the QSR industry. Recent statistics from the U.S. Department of Labor shows that 5.7 percent of restaurant employees quit their jobs in June 2021, more than double the overall rate for the U.S. Additionally, QSR’s employee turnover rate is the highest among any industry in the U.S. at 150 percent, with a study by the National Restaurant Association finding that 75 percent of restaurant owners agreed that hiring staff was their biggest concern. According to the US Bureau of Labor, the food and beverage serving industry has projected growth of 17 percent over the next decade. This will result in around 1 million job openings in the serving industry each year as current workers leave the industry. However, incentivizing these positions and allowing QSR to continue expanding operations will be very challenging because of the current labor crunch.
The root causes of the QSR labour shortage stem from pre-pandemic issues: poor working conditions, low wages, lack of benefits, and worker shortage within the overall economy. Workers also face a lack of flexibility to take time off, unpredictable scheduling, physically demanding work, and 62 percent of workers cited abuse from customers.
QSR pay, which is typically in-line with local minimum wage, has stagnated in the last few decades. The U.S. federal minimum wage has remained at $7.25 since 2009, while the cumulative price increase from 2009 to 2021 has been 29 percent, and the living wage stands at an estimated $16.54 per hour. Given that the inflation rate is outpacing minimum wage growth, many workers are forced to pursue more lucrative opportunities to sustain basic living requirements.
Although the labour shortage is a global issue, its impact has been strongly felt within restaurants as they rely on employing a large rotation of workers. As a result, RBI’s revenue growth has significantly declined, which can be mainly attributed to staffing crunches at its Tim Hortons and Popeyes restaurants, forcing the company to reduce operating hours and limit service models at select locations.
A Solution Lurking in the Shadows
RBI can address its worldwide labour shortage by opening shadow kitchens. Although the shadow kitchen concept is not new, its novelty means existing operators have not fully capitalized on the concept. Through cutting operation costs, shifting demand to off-site kitchens, and helping fulfill greater demand for delivery orders, shadow kitchens can help RBI mitigate labour shortages.
Implementing Shadow Kitchens:
In contrast to brick-and-mortar restaurants’ all-inclusive dining experience, shadow kitchens differentiate themselves by offering reduced menus that cater exclusively to food-delivery customers. Without communal seating areas, these kitchens can better utilize their space to maximize production and meet rising delivery demand, effectively introducing new growth avenues for RBI despite the labour shortage. Moreover, while the pandemic was the leading cause behind labour supply challenges, booms within the food delivery sector have created opportunities for RBI to capitalize on a rapidly growing space. With the U.S. food delivery industry more than doubling in size throughout the pandemic, RBI has the opportunity to capture additional market share through the implementation of shadow kitchens.
By avoiding in-person ordering and dining, shadow kitchen workers will not be required to perform standard traditional customer service and maintenance of dining areas; they will only be needed for the preparation of food and coordination with delivery services. This may aid in attracting potential workers who had poor experiences interacting with unruly fast-food customers or cleaning frequently unsanitary washrooms at previous workplaces.
This operating model will enable RBI to cut operating costs in its expansion as shadow kitchens do not require seating areas, furnishings, or interior design. RBI shadow kitchens can also lower rent expenses since a prime, high-traffic location is not necessary. In areas where the labour shortage is most prevalent, shadow kitchens can help sustain and supplement RBI’s planned expansion. Instead of opening Popeyes, Tim Hortons, and Burger King brick-and-mortar locations, following the Multi Brand Ghost Kitchen Model, a single shadow kitchen would be capable of servicing the delivery and pick-up demand for all three brands while lowering overall operational costs through decreased labour and maintenance expenses.
Synergy Within Brands:
RBI differentiates itself from other QSR players by owning multiple brands under the same corporate umbrella which synergies would play well into the shadow kitchen strategy. Pure-play shadow kitchen operators, such as the Canadian company Ghost Kitchen Brands, must solicit partnerships and supply agreements with existing restaurants. Companies that launch shadow kitchens without these partnerships in place will find it difficult to unseat established brands on delivery apps. While Ghost Kitchen Brands carries brands such as Quiznos and Lola’s, the majority of its offerings are specialty stores like Jamba Juice and Cinnabon, or even consumer packaged goods such as Campbells and Nescafe. Alternatively, some chain restaurants have developed specialized shadow kitchen brands such as Denny’s Burger Den and Chili’s It’s Just Wings. However, these specialized sub-brands do not enjoy the brand equity of their parents, which have been built over multiple decades at great expense.
Meanwhile, RBI will be able to launch with a reduced menu from globally-recognized fast food brands like Popeyes and Burger King. RBI brands are already highly established, and a consumer using a delivery app would simply see the usual marketing assets and branding. The variety of food between RBI’s three (soon to be four) brands also complement the shadow kitchen concept, enabling one location to capture the demand from multiple customer profiles. In general, RBI and its franchisees would be a structurally superior operator of shadow kitchens compared to standalone operators and chain restaurants.
Into the Shadow Realm
RBI should begin implementing shadow kitchens by establishing corporate-owned locations and converting existing franchise licenses to shadow kitchen equivalents. The corporate locations would begin as pilot projects to validate the concept in locations with particularly acute labour shortages. However, the franchise model remains key to RBI’s expansion plan and should not be supplanted by a large increase in corporate-owned stores, which may be seen as a threat by owners. To that end, after a few months of operation, impressive financial data from the trial kitchens can be shared with franchisees to secure their buy-in.
An offer can then be extended to franchisees to convert poor-performing locations into shadow kitchens. In particular, franchisees whose stores are serving a large amount of delivery orders or experiencing severe labour shortages are more likely to opt to convert their restaurants. New franchisee applicants can also apply for an RBI shadow kitchen if their proposed location meets the low labour supply benchmark. In the medium-term, RBI can also consider derisking and recouping its investment by auctioning off the initial set of corporate-run shadow kitchens to franchisees, which would provide the buyer a proven business at steady-state.
However, shadow kitchens are not a replacement for regular storefronts. As the world reopens following COVID-19 lockdowns, walk-in dining will once again become the preferred channel for many patrons. Expansions into high-foot traffic areas in the absence of a severe labour shortage would still better be accomplished with traditional franchises, with shadow kitchens being a supplemental option to fill in coverage gaps. Above all, the shadow kitchen concept uniquely provides RBI with an effective mitigation strategy for the current labour crunch, made possible by its strong portfolio of brands.