The US food industry is facing a labor crisis and needs technology solutions to help solve it

Bluestein’s Take

• The food industry is strained from multiple forces, including heightened expectations from both customers and employees (e.g., wage increases, gig economy) as well as macro-economic pressures (e.g., inflation, supply chain constraints).

• At the same time, the industry is ripe for automation due to consumers being more comfortable engaging with technology, expecting a seamless experience between online and offline channels, and accelerated advancements in technology (e.g., reduced costs, improved integrations), which can help scale and lead to more growth.

• These drivers make us excited about the potential for technology solutions to help solve the industry’s problems. In scoping out the market landscape, we’ve divided the space into three areas: labor automation, labor optimization, and the future of work. We’re particularly interested in labor optimization solutions that can help improve the employee experience and reduce turnover.

The Details

At Bluestein, we lead with a consumer-first investment strategy. We start with how consumer behaviors are shifting and get excited about startups that are enabling the new consumer. The labor automation space is no different; shifts in consumer behaviors have a downstream effect on how the food industry must evolve. 

Today’s consumers have high expectations. They’re regularly toggling between both online and offline channels and expect a seamless customer experience across all platforms; in fact, 56% of in-store shoppers use their phones to shop or research when making a purchase.¹ Consumers have high standards for a brand’s online presence and make purchasing decisions based on their digital experience. For example, company websites that don’t load quickly, aren’t mobile optimized, or have a clunky payment process will result in a negative brand image or even a lost customer.

At the same time, both consumers and employees have become more comfortable engaging with new technologies -- especially if said technology improves the overall experience. Today digital experiences such as order-ahead, kiosks, or mobile payments have become table stakes across the industry. As the digital experience continues to evolve, we expect that consumers will be excited to rapidly adopt. In fact, NRA’s State of the Industry Report states that only 24% of adults think that restaurants are using too much technology.² Employees are consumers themselves and have high expectations for their own experience, so they’re likely to be similarly comfortable adopting new technology, and companies should therefore not be concerned with overloading either the consumer or the employee with too much technology. The focus should be on how new tools can complement – and most importantly, enhance – the overall experience.

The food industry is facing pressures to automate from all sides

The pressure to automate stems from shifts in consumer behaviors but is further emphasized by a multitude of macro, technological, and labor influences. The below graphic illustrates the key drivers we have identified that are leading to the need for automation advancements in the food industry.

Companies are under extreme pressure to recoup margins amongst rising prices

Companies across the food industry have been squeezed by the increasing macro-economic pressures across the globe. In fact, the U.S. Consumer Price Index reported that grocery prices have risen by 12.2% over the past 12 months.³ Rising inflation and ongoing supply chain constraints have led to drastic increases in direct costs; according to the NRA report, 9 out of 10 operators say their total food costs are higher than they were prior to the pandemic.⁴

Given the magnitude of increased costs in the food industry, it’s imperative that companies look to technology that helps minimize costs, improve operational efficiencies, and ultimately protect margins.

Employees are burnt out – and some are leaving the industry entirely

It’s no secret that working in the food industry throughout the pandemic has been especially challenging. Food establishments have had to quickly pivot their strategies and operations to meet evolving local regulations, fluctuating demand, and changing consumer needs. Not to mention, frequent layoffs and shift reductions due to pandemic-related closures meant many employees left the industry for good or had to find second jobs to make ends meet. According to the NRA report, there is still a 6% reduction in the industry’s workforce compared to pre-pandemic levels.⁵

In addition, turnover rates, which are traditionally high among low-skilled workers, have reached a 144% average in the fast-food restaurant industry.⁶ Hiring and onboarding activities to fill roles are both timely and costly; The Center for Hospitality Research at Cornell estimates that the average cost of replacing an employee is around $5,864 per person.⁷ Wages are increasing as well; according to the NRA report, 8 out of 10 operators say labor costs are higher than they were before the pandemic ⁸ and the Bureau of Labor Statistics estimates that service workers wages have increased on average by 7.8% this past year. ⁹ A fun anecdote: my local ice cream shop in Chicago has a “we are hiring” sign on its door. The salary? $20-$30 per hour. Food establishments must be willing to pay the price to meet their labor needs.

As the food industry bounces back to a more stable, pre-pandemic operating model, job openings have reached an all-time high. However, companies are struggling to staff back up; 78% of restaurant operators say that their restaurants do not have enough employees to support customer demands. ¹⁰ Companies, therefore, need technology to either reduce their labor requirements and / or attract and retain employees by improving the overall employee experience.

Technology is rapidly advancing

Over the past decade, technology has advanced at an accelerated pace that has only continued to compound, leading to further innovation in the space. To meet consumers’ high expectations, companies have initially prioritized investing in consumer-facing solutions such as Shopify, Toast, and Square. These solutions have equipped companies with the foundational technologies on which to build the infrastructure to expand their tech stack to include back-end solutions, both quickly and seamlessly. This new infrastructure has enabled even more innovation, as it has spurred new technologies to emerge that plug seamlessly into these aggregators.

Technology has also become cheaper, more accurate, and easier to integrate. Many solutions have introduced a recurring monthly SaaS fee, eliminating the need for buyers to pay thousands of dollars upfront. As a result, small- to mid-scale companies are able to test out new technologies and invest in solutions that were previously only affordable to enterprise clients. This increase in buyer conviction and ability to pay for new technology enables more startups to enter and eventually be successful in the industry.

It's time for an automation refresh

While automation can replace the need for an employee in certain circumstances, in most cases, it works best alongside employees to improve their experience. By using technology, companies can eliminate the need to manage repetitive tasks (e.g., flipping burgers, cleaning, creating schedules), allowing employees to focus on higher value activities. Drastically reducing mundane activities is a key driver in reducing high turnover rates.

In addition, by investing in technology, employers are sending a clear signal to their workforce that they value employee contributions and want to improve organizational culture. For example, investing in a hiring tool removes the need for managers to spend hours sourcing, interviewing, and hiring employees. Reducing the time associated with completing hiring tasks improves the overall experience for both managers and new hires -- and communicates to employees how valuable their time is to the company.

Finding the right digital technologies in a crowded space 

Though leaders increasingly understand how important it is to invest in technology, the number of options can be overwhelming. To better illustrate the evolving landscape, we created a market map of key players in the industry across three categories: labor automation, labor optimization, and the future of work.

1. Labor optimization: Labor optimization solutions work alongside employees to remove tedious, labor-intensive activities from their workload so that they can focus on value-add activities.

2. Labor automation: Labor automation solutions replace the need for an employee to execute a specific task. Whether through a robot or a tool, companies can implement solutions that eliminate the need for a human to complete a certain job -- saving time and increasing efficiency and accuracy.

3. Future of work: Future of work solutions help improve ways of working for both corporate and front-line workers. As a result of COVID, there has been an increase in burnout and hybrid workers. These solutions aim to improve both new ways of working and employee experiences as well as tackle hiring and onboarding challenges.

The area that we’re most excited about is labor optimization. Solutions that allow for employees to focus on value-add activities, not only aim to improve the employee experience but also provide a better overall experience for the consumer -- which is ultimately the most important. Establishments that have optimized operations run smoother and therefore better serve the consumer. We believe that labor optimization solutions provide the food industry with the tools needed to best serve the evolving needs of the consumer.  

As we continue to dig into solutions in the labor optimization space, we have identified a few areas that improve the employee experience:

• Staffing solutions: More accurate staffing solutions that account for employee schedule preferences to provide a better work-life balance. These solutions not only respect employees’ shift preferences, but also cut down on the time managers spend manually creating and updating schedules outside of the workday.

• Communication tools: Solutions that enable employees to seamlessly switch shifts, share words of encouragement with each other, and easily understand each day’s list of tasks to complete. These tools create a stronger sense of community among employees and increase ease around day-to-day activities.

• Hiring solutions: Tools that allow for managers to expand their recruitment pool and streamline interview processes. These solutions enable establishments to have access to a stronger and wider recruitment pool and improve the end-to-end hiring process.

• Onboarding and training solutions: Tools that streamline and improve onboarding and training processes can reduce the amount of time required for employees to increase productivity. There has been a surprising decline in labor productivity in the economy with strong employment growth happening simultaneous to declining GDP. One hypothesis to explain the phenomenon is labor dislocation; as employees sought new roles during the pandemic due to layoffs, shift reductions or safety concerns, productivity levels may have declined with the natural lead time that exists to get employees fully trained with new tasks. Tech solutions that speed up the time for training could be a huge unlock as the economy resets.

Winning solutions

The next question: how to evaluate whether a solution is a winner? We’ve identified the following criteria to assess investment opportunities in this space:

1. Buyer conviction: Are buyers seeking a solution in this space or does the company need to gain buyer conviction? How are buyers assessing and prioritizing the value that the solution offers over what they’re currently using? How strong is the traction?

2. Measurable impact: How is the solution creating value for the buyer? Can the company track and quantify the impact of the solution? What is the ROI of the solution?

3. Onboarding to rollout: What does the onboarding process look like? What steps are required to onboard, pilot, and rollout the solution? What are the dependencies?

4. Ease of use: Once the solution is fully implemented, how is the solution managed? How easy is the technology to use? What are the change management requirements? How does it fit into the buyer’s current tech stack?

This is an incredibly exciting and dynamic space, and we’re just at the first inning. There’s so much room for innovation. If you are building a startup in labor automation space or want to challenge our thinking - let’s chat! You can reach us at info@bluesteinventures.com.

A big thank you to our MBA intern, Rebecca Grosser, for her deep analysis on this space!

1. https://www.thinkwithgoogle.com/consumer-insights/consumer-trends/online-shopping-beheavior-statistics/

2. https://restaurant.org/research-and-media/research/research-reports/state-of-the-industry/

3. https://www.grocerydive.com/news/grocery-prices-soar-inflation-hits-four-decade-high/627177/

4. https://restaurant.org/research-and-media/research/research-reports/state-of-the-industry/

5. https://www.cnbc.com/2022/07/17/customer-service-suffers-at-short-staffed-restaurants-as-covid-takes-toll.html

6. https://www.businessinsider.com/what-its-like-to-work-restaurant-industry-fast-food-statistics-2021-8

7. https://decisionlogic.co/restaurant-employee-turnover-cost/

8. https://restaurant.org/research-and-media/research/research-reports/state-of-the-industry/

9. https://www.bls.gov/opub/ted/2022/compensation-costs-for-service-workers-increased-7-8-percent-from-march-2021-to-march-2022.htm

10. https://restaurant.org/research-and-media/research/research-reports/state-of-the-industry/