E Source on ESPs and the Restaurant Industry
A recently published E Source study carefully examined the structure of the restaurant industry in order to illuminate how energy service providers can best serve this sector. Entitled "Delivering Energy and Energy Service to the Restaurant Sector," this report thoroughly explores the following seven topics:
- Generalized strategies for providing energy and related services
- The composition of the restaurant industry
- Decision-making entities within the industry (including in-depth interviews with corporate decision makers of McDonald's and other restaurants)
- Energy use and spending
- Negotiations with providers, aggregation, and bundling
- Energy services overview
- Equipment and efficiency services.
E Source defines a restaurant to be any food service outlet that exists in a stand-alone building or is part of a larger structure such as a shopping mall or office building. (Being married to a restaurant manager, I define a restaurant as a place where I can eat and visit my wife at the same time!) More than two thirds of U.S. restaurants are between 1000 and 10,000 square feet in size, and the restaurants that fall within this size range account for the majority of energy consumption within the industry.
By dividing restaurants into submarkets based on their size (i.e., the number of locations across the U.S.), a clear picture begins to emerge with respect to past trends and future needs in the industry. Understandably, an ESP must employ entirely different strategies when dealing with a franchised restaurant such as Wendy's versus a small, family-owned restaurant around the corner. Both sectors provide lucrative opportunities to ESPs; large chains obviously represent enormous national accounts, yet both regional and independent restaurants represent unexplored niches for ESPs.
E Source identified three restaurant industry submarkets: global giants, regional packs, and lone wolves. Global giants, as their name suggests, are the large chain operations such as McDonalds. As a whole, this portion of the industry is more aware of, and responsive to, ESPs because many have employees that manage energy and energy company related issues. Consequently, global giants tend to have higher expectations and are more demanding of their ESPs.
Regional packs are the mid-level operations, composed of between 3 and 50 restaurants, and they represent the most promising market for an ESP to pursue. In general, these restaurants to not have corporate energy managers, and many are in search of trusted sources (such as trade associations) to assist them in making energy-related decisions.
Small operations, consisting of only one or two restaurants, are identified as lone wolves in E Source's study. Lone wolves are the least informed of the three submarkets with respect to issues surrounding energy services. The geographically diffuse nature coupled with the minimal focus on energy related issues of lone wolves presents a challenge to ESPs. However, E Source found that lone wolves are most likely to show interest in energy services such as packages combining telecommunications, energy information services, and equipment maintenance. In addition, lone wolves show a much larger demand for indoor air quality services and on-site generator maintenance than global giants and regional packs.
From personal experience with various mom-and-pop restaurant owners, I know that these lone wolves are also acutely conscious of costs. The restaurant business is one of the most competitive commercial businesses. Competing for what E Source calls the "share of stomach" can be a cut-throat endeavor. Even if a lone wolf gains success and survives its first year of operation (a key milestone for these enterprises), their continued prosperity is continually threatened by new neighbors, the smallest slip in food quality or customer service, and a variety of seasonal variations.
Past Energy Use and Energy Spending in the Restaurant Industry
Overall, restaurant energy use accounts for approximately 6% of energy consumption in the commercial sector. Energy-related costs for an individual restaurant or chain are between 2 and 12% of the total operating costs, dwarfed by the budget for food and employee salaries (30% of total operating costs). As a whole, U.S. restaurants spend about $5 billion annually on energy commodity–with nearly 80% dedicated to electricity.
Despite these rather low numbers, the inherently narrow profit margins in the restaurant industry enhance any fluctuations in energy company costs. Cost-conscious operators are therefore interested in reductions in the cost of energy and related services. However, in most cases, cost savings must be coupled with other offerings that reduce labor pressure or increase customer comfort.
I know from my extensive sampling of San Francisco Bay Area restaurants that a successful restaurant must combine several elements to prosper: good quality food at a reasonable price; courteous, responsive customer service; and a pleasant atmosphere in an accessible location. (In my book, they also must allow my wife to bring home good food for me to eat on a regular basis!) Missing the mark on any one of these key ingredients can be disastrous for a restaurant. I am sure that any restaurant would be interested in ESP offerings that help them meet these goals.
Energy Services Interest in Restaurants
E Source rated the relative potential of thirteen representative energy services by combining past usage information with a survey that quantified possible future interest. Across the entire industry, encompassing global giants, regional packs and lone wolves, equipment maintenance, energy information, and telecommunications were among the most important energy services to the restaurant industry. As a whole, restaurant operators are least likely to request HVAC remote monitoring services, performance contracting, and on-site generator maintenance. Services that fell somewhere between include indoor air-quality services, consolidated billing, turnkey equipment programming, and store inventory management. Although this analysis provides important insight into the industry's overall needs, the E Source report stresses the ultimate necessity to break down the industry into global giant, regional packs, and lone wolves, for ESP opportunities vary significantly depending on which submarket they feel qualified to target.
Clay Fong, E Source project director, authored this E Source report entitled "Delivering Energy and Energy Services to the Restaurant Sector." Based in Boulder, Colorado, E Source provides information services to over 350 electric and gas utilities, government agencies, large energy users, and energy services companies worldwide. In June 1999, the Financial Times Group, a division of Pearson plc, acquired E Source.
Let me know what you think of the potential to provide better-tailored energy services to the restaurant sector by emailing me at steve@hoffmanpubs.com.
Steve Hoffman is President of Hoffman Publications, Inc. (www.hoffmanpubs.com), a California-based firm that specializes in writing for the energy industry. His column appears every Monday on ElectricNet. (Back to top)