10 Things You Need to Know about the Restaurant Industry Midwest Foodservice Expo March 13, 2017 | Milwaukee, WI Annika Stensson Director, Research Communications National Restaurant Association astensson@restaurant.org @WeRRestaurants /RestaurantDotOrg Restaurant.org/Research /NationalRestaurantAssociation

Agenda 1. The restaurant industry is big 6. Job growth ahead 2. Sales growth varies 7. Technology is gaining acceptance 3. Consumers are poised to spend 8. Consumers are more engaged 4. Tailwinds are offset by headwinds 9. Trends are becoming idea-based 5. Recruitment is top challenge 10. Top menu trends include nutrition, sourcing, global flavors

The restaurant industry is big

DEFINITION: “Restaurant Industry” “Food Away from Home” All meals/snacks prepared away from home, including all takeout meals and beverages.

$799 billion 14.7 million 1+ million Restaurant Industry 2017 Sales: Employees: Locations: $799 billion 14.7 million 1+ million Source: National Restaurant Association

An Economic Powerhouse Annual sales are larger than 90% of the world’s economies. Sales projected to advance by $33 billion in 2017 – roughly double Hollywood’s annual domestic box office sales.

Sales growth varies

47 Years of Restaurant Industry Sales (1971-2017) Source: National Restaurant Association

Segment Sales Growth Tableservice restaurants Quickservice and fast casual restaurants Managed services Snack and nonalcoholic beverage bars Source: National Restaurant Association

The Critical Role of Demographics in 2017 Region Population Growth Employment Growth Mountain 1.6% 2.4% South Atlantic 1.4 2.1 West South Central 1.3 Pacific 1.0 2.2 East South Central 0.7 1.8 New England 0.5 1.6 West North Central East North Central 0.1 1.2 Middle Atlantic U.S. Average 0.8 Source: National Restaurant Association

Dramatic Consumer Confidence Variations By Region Continue January 2017 REGION INDEX West North Central 147.3 Mountain 124.1 Pacific 130.2 South Atlantic 128.2 East South Central 121.6 East North Central 115.3 West South Central 113.4 Middle Atlantic 111.0 New England 106.9 Source: The Conference Board

Projected Restaurant Sales Growth in 2017 12 Projected Restaurant Sales Growth in 2017 National Average: 4.3% DC 5.5% or more 5.0% to 5.4% 4.0% to 4.9% 3.5% to 3.9% 3.4% or less Source: National Restaurant Association

The Midwest Restaurant sales 2017 (projected) $ Billion Illinois Ohio Michigan Indiana Missouri Minnesota $25.2 $20.1 $15.9 $11.6 $10.5 $9.7 Wisconsin Kansas Iowa Nebraska South Dakota North Dakota $8.6 $4.8 $4.4 $3.0 $1.3 Source: National Restaurant Association

Consumers are poised to spend

Where Do Consumers Spend? SPENDING CATEGORY PERCENT OF TOTAL Housing 33% Transportation 17% Food 13% Insurance/pensions 11% Health care 8% Entertainment 5% Contributions 3% Clothing Other 7% Total 100% Source: Bureau of Labor Statistics, 2015 Consumer Expenditure Survey; National Restaurant Association

Restaurant Industry’s Share of the Food Dollar 1955 Present 1955: 25% Now: 48% Source: National Restaurant Association

Consumers’ assessment of the national economy: 2010 – 2016 Are Consumers Finally Warming up to the Economy? Consumers’ assessment of the national economy: 2010 – 2016 Source: National Restaurant Association, National Household Survey, 2010 – 2016

Consumer Confidence Trended Higher in Recent Months U.S. Consumer Confidence Index Source: The Conference Board

Pent-Up Demand for Restaurants Remains High 27% 45% 39% +12 Percentage of adults NOT using restaurant services as often as they would like 2006 2013 2016 Percentage Point Change 2006 vs 2016 All Adults 27% 45% 39% +12 Source: National Restaurant Association 19

Tailwinds are offset by headwinds

Wholesale Food Prices Declined for Second Straight Year Annual growth in Producer Price Index – All foods Source: Bureau of Labor Statistics

Rising Labor Costs Are Offsetting the Benefits from Lower Food Costs Average Hourly Wages of Restaurant Employees vs. Average Wholesale Food Costs Percent change vs. same month in previous year +4.9% -1.6% Source: Bureau of Labor Statistics

Menu Price Growth Remains Moderate Annual growth in Consumer Price Index – Food away from home Source: Bureau of Labor Statistics; National Restaurant Association projections *Projected

Gap Between Growth in Menu Prices and Grocery Store Prices Continues Menu Prices vs. Grocery Store Prices Percent change vs. same month in previous year +2.4% -1.9% Source: Bureau of Labor Statistics

Potential for stronger growth ahead U.S Economic Outlook Potential for stronger growth ahead INDICATOR 2016 2017 Real Gross Domestic Product 1.6% 2.6% Real Disposable Personal Income 2.7% 2.2% Consumer Price Index 1.2% Total U.S. Employment 1.7% 1.5% 2018 2.8% 2.5% 1.5% Source: National Restaurant Association projections as of February 2017

Headwinds Continue Into 2017 Disposable income growth slowed in 2016. Real household income is rising but remains below pre-recession levels. Gas and diesel prices projected to rise in 2017.

Recruiting is top challenge

Top Challenges Facing Operators JANUARY 2016 Recruiting Employees 27% Labor Costs 22% Sales Volume 12% The Economy 10% Government 9% JANUARY 2014 Food Costs 25% Government 21% Sales Volume 12% Labor Costs 10% Recruiting Employees 9% JANUARY 2015 Government 20% The Economy 19% Recruiting Employees 18% Labor Costs 15% Sales Volume 11% Source: National Restaurant Association, Restaurant Industry Tracking Survey

Economy is Now 7.1 Million Jobs Above Pre-Recession Peak 29 Economy is Now 7.1 Million Jobs Above Pre-Recession Peak 43 States Have More Jobs Than Before the Jobs Losses Started in Feb. 2008 +20% -6% DC 5% or more 2% to 4.9% 0% to 1.9% -0% to -1.9% -2% or fewer +15% National Average: 5.1% More Jobs Source: Bureau of Labor Statistics

Job growth ahead

Restaurant Industry Employment (in millions) Source: National Restaurant Association *projected

Projected Change in U.S. Labor Force by Age 2014 to 2024 (in millions) Source: Bureau of Labor Statistics

Technology is gaining acceptance

Tech Influences Consumers who say availability of technology makes them choose one restaurant over another. Source: National Restaurant Association, 2016

In-Store Tech Usage Have used Willing to use Free Wi-Fi 55% 69% Consumers who have used these options in the last year; consumers who would be willing to use these options in the future when available Have used Willing to use Free Wi-Fi 55% 69% Tableside payment 43% 64% Electronic ordering station (tableservice) 33% 54% Touch-screen ordering kiosk (QSR) 32% 59% None 29% 18% Source: National Restaurant Association, 2016

Restaurant Smartphone Tech Consumers who use smartphones or tablets for these activities occasionally Percent of adults Look up restaurant locations, directions and hours 88% Look at menus 72% Order takeout or delivery 63% Read online reviews 58% Use loyalty programs and rewards 56% Make reservations 46% Look up restaurant nutrition information 44% Pay for meals 34% Source: National Restaurant Association, 2016 – Base own/use smartphone/tablet

Technology Is Growing 66% of consumers say tech options increase convenience 61% say tech options speed up service 56% say tech options increase order accuracy 37% of consumers report technology makes restaurant visits and ordering more complicated Source: National Restaurant Association, 2016

What’s In It for Restaurateurs? 35% of consumers say tech options make dining out more fun 30% say tech options make them dine out or order takeout/delivery more often 26% say tech options make them choose one restaurant over another Source: National Restaurant Association, 2016

Consumers are more engaged

Quality Time Consumers who say dining out is a better use of time than cooking and cleaning up. Source: National Restaurant Association, 2016

Unique Experiences Consumers who say restaurants provide tastes and flavors that aren’t easily duplicated at home. Source: National Restaurant Association, 2016

Food Knowledge Restaurant operators who say their customers have higher expectations for the following than they did two years ago Source: National Restaurant Association, 2016

More Menu Diversity Restaurant operators who say their restaurant offers a wider variety of menu items now than it did two years ago Source: National Restaurant Association, 2016

Trends are becoming idea-based

Options Consumers Say Make Them Choose One Restaurant Over Another Healthy menu items 70% Locally sourced food 66% Environmentally friendly food 60% Diet-specific food 40% Source: National Restaurant Association, 2016

Noticing Healthful Options Consumers who say there are more healthful options on restaurant menus now than two years ago. Source: National Restaurant Association, 2016

Healthy Options = Important Factor Consumers who say they are ordering more healthful options in restaurants now than two years ago. Source: National Restaurant Association, 2016

DIY Health Consumers who say they typically adhere to a specific diet, like vegetarian or gluten-free, when dining out. Source: National Restaurant Association, 2016

Interest in Diet-Specific Food Restaurant operators who say their guests are more interested in diet-specific food now than they were two years ago 49 Source: National Restaurant Association, 2016

Why Local Sourcing? Consumers’ primary reason for preferring locally sourced items Source: National Restaurant Association, 2016 – Base = consumers who say they would be more likely to choose one restaurant over another if it offered locally sourced food

Offering Locally Sourced Food Restaurant operators who currently offer the following Family dining Casual dining Fine dining QSR Fast casual Locally sourced produce 51% 63% 84% 19% 59% Locally sourced meat/seafood 47% 77% 13% 39% Source: National Restaurant Association, 2016

Eco-Friendly Matters Restaurant operators who currently offer food items that were grown or raised in an organic or environmentally sustainable way Source: National Restaurant Association, 2016

Sourcing Matters Restaurant operators who say their guests pay more attention to food sourcing and production than they did two years ago 53 Source: National Restaurant Association, 2016

International Flavors Consumers who say they eat a wider variety of ethnic cuisines now than they did two years ago Source: National Restaurant Association, 2016

Do You Want Eggrolls with That? Restaurant operators who say the following about ethnic cuisine items outside of the main menu theme Source: National Restaurant Association, 2016

Trends Becoming Ideas Restaurant operators who agree food trends are becoming more concept-based than ingredient-based Source: National Restaurant Association, 2016

Top menu trends include nutrition, sourcing and global flavors

What’s Hot in 2017 1. Hyper-local sourcing 6. Locally sourced meat CONCEPT TRENDS 1. Hyper-local sourcing 6. Locally sourced meat 2. Chef-driven fast casual 7. Food waste reduction 3. Clean menus 8. Meal kits 4. Environmental sustainability 9. Simplicity 5. Locally sourced produce 10. Nutrition Source: National Restaurant Association, What’s Hot in 2017 chef survey

What’s Hot in 2017 1. New cuts of meat 6. Ethnic-inspired breakfast FOOD TRENDS 1. New cuts of meat 6. Ethnic-inspired breakfast 2. Street-food dishes 7. House-made condiments 3. Healthful kids’ meals 8. Authentic ethnic cuisine 4. House-made charcuterie 9. Heirloom fruit/vegetables 5. Sustainable seafood 10. African flavors Source: National Restaurant Association, What’s Hot in 2017 chef survey

What’s Hot in 2016 1. Natural ingredients 6. Ethnic condiments LIMITED-SERVICE Restaurants 1. Natural ingredients 6. Ethnic condiments 2. Organic items 7. Grass-fed beef 3. Gluten-free items 8. Locally sourced produce 4. House-made items 9. Local meat/seafood 5. Healthful kids’ meals 10. Eco-friendly food Source: National Restaurant Association, 2016

Movers & Shakers in 2017 Quinoa Poke Sodium-conscious cuisine Trends COOLING DOWN Trends HEATING UP Quinoa Sodium-conscious cuisine Black rice Vegetarian cuisine Vegan cuisine Poke House-made charcuterie Street food dishes Food halls Ramen Source: National Restaurant Association, What’s Hot in 2016 chef survey

Trends to Watch 2017 Local as the new normal?: While still a hot trend, local sourcing is slowly moving toward perennial favorite. Next generation global: Non-traditional ethnic cuisines and flavors becoming more mainstream. Street food getting fancy: Tableservice restaurants are getting in the game of elevated tacos, bao and kebobs. Fun with grains: Quinoa might be trending down, but other ancient grains are trending up. Source: National Restaurant Association

Global Palates 80% of consumers eat at least one ethnic cuisine per month. 17% of consumers eat seven or more cuisines per month. Restaurants are the primary point of access for trying new cuisines, and the source where frequent eaters typically get their ethnic food. Source: Global Palates: Ethnic Cuisines and Flavors in America, National Restaurant Association, 2015

Global Palates 43% say the ethnic foods they like to eat are tied to their family’s ancestry or heritage. 82% typically start with traditional staple dishes when trying a new cuisine. 69% don’t really care if ethnic food is truly authentic as long as it tastes good. Source: Global Palates: Ethnic Cuisines and Flavors in America, National Restaurant Association, 2015

10 Things You Need to Know about the Restaurant Industry The restaurant industry is big. Sales growth varies. Consumers are poised to spend. Tailwinds are offset by headwinds. Recruitment is top challenge. Job growth ahead. Technology is gaining acceptance. Consumers are more engaged. Trends are becoming idea-based. Top menu trends include nutrition, sourcing and global flavors.