Restaurant leaders have heard about inflation, the K-shaped economy, and the power of artificial intelligence (AI) ad nauseum these last few years as the global economy fights to recover from the Covid-19 pandemic.
But leaders may not truly understand the extent to which these crises — and to other degrees changes in the climate, agriculture, transportation, and population growth — could have both from a geopolitical and macroeconomic viewpoint.
So argued Mark Blyth, Professor of International and Public Affairs at Brown University and author of the new book, “Inflation: A Guide for Users and Losers,” at this week’s Global Restaurant Leadership Conference held in Cannes, France.
Blyth used the analogy of a gray swan to identify the problem. If a white swan represents a predictable outcome and the black swan is the unpredictable event with devastating consequences, then a gray swan is an event with some predictability and uncertain consequences that gets less attention.
“The things that you know you should pay more attention to, but you don’t,” he said.
The K-shaped economy, Blyth said, is a great example today of a gray swan. The stock market has continued to climb even as consumer sentiment has tanked, presenting two different directions on a line graph that create a K shape.
Blyth said that the top 20% of U.S. consumers account for 40-60% of all spending. And that chunk of the consumer base is not the core customer for chain restaurants.
“Where do chain restaurants pull from in the income distribution?” he said. “You pull from the 30th percentile to the 80th percentile. So that means you’re in a fragile position, because ultimately the people who are driving it are not the people who are driving into your stores or into your restaurants. It’s the people who are employed by those people who are shopping [at your restaurants].”
He added that trying to lower that range into the 20th percentile through value or elevating the range into the 80th percentile through quality has not proven to have very meaningful success. That means restaurants have a delicate balance going forward.
“If there’s a 5% inflation and [the consumer’s] budget is already stretched, one of the things that they’re going to do is basically cut back on discretionary spending, of which restaurants is one of those categories,” he said.
Inflation, Blyth said, is a “white swan with shades of gray.” While most understand the basic tenets of inflation, he suggested that business leaders must think about inflation differently.
“What if inflation is now more about supply and less about demand?” he said.
Blyth noted that supply “shocks” — for example, the gas shortages that have resulted from Iran shutting down the Strait of Hormuz — are becoming more common. And climate change is making agricultural output all over the world much more volatile.
The solution to supply-side inflation is to expand supply or find alternatives, both of which require time and money, Blyth said.
He added that supply side inflation is harder to overcome because, unlike during previous seasons of inflation, central banks have little control over it.
“You can push up interest rates, but that’s going to do absolutely nothing about the price of beef in the United States,” he said.
Therein lies the problem for restaurants today and for the foreseeable future: Cost demands continue to increase on the supply side, with little signs of relief. Yet angry consumers are pulling back on their spend until they see restaurants being a better value.
Could AI be the solution? Blyth isn’t so sure. He calls AI a “black swan hiding in plain sight.”
“The one big unstated assumption of AI is AI’s predictive learning technology is smarter than the humans. It replaces much of what humans do,” he said. “Therefore, to work, it must destroy more jobs than it creates.”
He pointed to White Castle’s recent Crave & Go vending machine innovation as a good use of automation, but one that, if replicated across the industry and at scale, could destroy the labor market.
“What’s individually rational for any firm or even any sector might be collectively disastrous if we all embrace it at once at the same time,” he said.
This isn’t just bad for the labor pool, he added. It’s also bad for business because it drives down demand.
Blyth recalled a famous story from the 1950s, when Ford Motor Company’s Henry Ford II demonstrated a new factory robot to United Auto Workers president Walter Reuther and said, “Walter, how are you going to get these robots to pay union dues?” To which Reuther replied, “Henry, how are you going to get them to buy your cars?”
He said a similar situation in restaurants could create a “displacement spiral” where workers are replaced, spending softens, and demand craters. That situation is “really hard to break out of because the solution is the problem is the solution is the problem is the solution is the problem.”
So what should restaurant operators do? To start, Blyth said, think more strategically about the supply side.
“Think about your inputs and how you can make the most flexibility on this,” he said. “The solution is to grow the supply side by substitution and diversification. However, recognize that key inputs such as agriculture and transportation are challenged by climate change, making this in itself a challenge.”
