The economic climate has caused restaurants
to look more closely at innovation than ever before.
Restaurant margins, which have always been razor thin, face
increasing pressure. Innovation is a key way by which
restaurants are cutting costs without sacrificing quality.
Chili's new $100 million 'Kitchens of the Future' campaign is
a terrific example of how cost reduction need not equate to
Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:
Eligible costs include employee wages, cost
of supplies, cost of testing, contract research expenses, and
costs associated with developing a patent. On January 2, 2013,
President Obama signed the bill extending the R&D Tax
Credit for 2012 and 2013 tax years.
Restaurants operate on tight profit margins and now face increasing cost pressure from a number of sources, including employee wages and rising healthcare, shipping, and food costs. The Affordable Care Act requires companies with 50 or more employees to provide health insurance for any employee working 30 hours or more.
Restaurants are hiring more and more part-time employees due to the increasing healthcare costs associated with full-time employees. In 2012, CKE Restaurants Inc., which owns the Carl's Jr. and Hardee's chains, began hiring more part-time workers instead of full-time workers and subsequently increased their workforce.
In addition, many states are considering raises to the minimum wage, including the wage of tipped workers. Meanwhile, fast food workers in cities like New York have staged protests and walk-outs regarding issues of compensation. The ability to reduce labor needs through machine innovation is therefore a major way restaurants can continue to maintain margins.
The escalating cost of ingredients is another cost pressure confronting restaurants. McDonalds, for example, forecasts a rise in the cost of its food from 2.5% to 3.5%. Kitchen science enables restaurants to be more creative with their menu offerings and to make dishes more efficiently. This helps restaurants from having to pass on the rising cost of food to their customers, and potentially losing business.
Burger King, for example, offered a 55 cent
hamburger promotion in December 2012. It is impossible for
restaurants to offer promotions such as these and maintain
their margins without constant innovation to their kitchen
Chili's has invested $100 million to overhaul the kitchens at 100 of its locations. New equipment will help shave five minutes off between the time a customer orders their food and the time they receive it. For example, combination ovens replace skillets and smokers. By finding efficiencies through innovation, restaurants are able to reduce costs without having to cut portions or reduce quality by using cheaper ingredients.
Using The Middleby Corporation's innovative kitchen equipment, Chili's will be able to cut out 40 hours of labor each week, which amounts to a 75 basis point reduction of those costs. Much of that money has been reinvested in new equipment.
Another benefit of the Chili's Kitchen of the Future is faster processing. Chili's now serves its food five minutes faster than before. Other restaurants have innovated by establishing stations where specific items are assembled. When a customer orders a chocolate shake, for example, the exact ingredients for the shake appear on a screen in front of the person in charge of making that particular item.
Versatility is another major feature of the Kitchen of the Future. Chili's can now make more bakery-related products such as pizza and flatbreads thanks to its conveyor-belt ovens. The investment is key to remaining competitive with fast-growing fast casual dining restaurants like Panera Bread and Chipotle.
Figure 1 below illustrates the R&D spend of the leading kitchen equipment companies.
** Rational AG and GEA Group R&D Expenses are reported in EUR million and were converted to US Dollars using 1.236 EUR/$ in 2012, 1.337 EUR/$ in 2011 and 1.274 $/EUR in 2010.
** All employee figures
include worldwide employees.
Restaurants are incorporating today's innovative technologies to simplify various tasks in the kitchen. In addition to multi-tasking conveyer-belt ovens, Keurig coffee systems are being increasingly used in the restaurant industry.
Green Mountain Coffee Roasters, Inc. introduced the Keurig B300SE and the Keurig K150 Commercial Brewing Systems, both certified for foodservice. These brewing systems alleviate the need to prepare multiple coffee pots (regular, decaffeinated, and flavored brews) and create process efficiency as tea, hot cocoa, or iced beverages can be brewed using the same machine. Green Mountain's Commercial Brewing Systems also create less waste and clean-up.
A unique feature of these Commercial Brewing Systems is the ability to program brew temperatures and select multiple cup brews. The K150, in particular, has interactive touch screen and is now National Sanitation Foundation (NSF) certified.
In late 2013, Green Mountain will make
commercially available its new Keurig BOLT Carafe brewing
system. As Green Mountain undergoes pressure from single-cup
brewing competitors, innovation and expansion are increasingly
important. The BOLT Carafe system is the first Keurig machine
capable of brewing a full pot of coffee with the use of one
'K-cup' pod and is developed to make an eight-cup coffee pot
for a larger outputs.
The introduction of Coca-Cola's new 'Freestyle' soda dispensing machine has revitalized the traditional fountain soda systems. The Freestyle machine operates with a user friendly touch screen and can dispense over 100 drink choices, as opposed to traditional dispensers that typically offer between six and eight choices.
Instead of using large boxes of syrup, Coca-Cola's machine works by "leveraging small cartridges of micro-dosed ingredients to create a multitude of choices" and the machine is able to identify when cartridges need to be replaced. This innovative technology allows customers to create and combine flavors that aren't available anywhere else, such as Diet Raspberry Coke, and is also much more time and cost efficient than traditional machines.
Moe's Southwest Grill locations in Florida,
Georgia, and North Carolina saw a 9% jump in sales after
testing the Coca-Cola Freestyle and the machine is being used
in additional Moe's restaurants as well as Burger King, Five
Guys, Wendy's, and BurgerFi.
In April 2013 Starbucks began testing their
new handcrafted soda beverages in Seattle, Atlanta, and
Austin. Offering lemon ale, ginger ale, and spiced root beer
using a new carbonation machine, Starbucks is aiming to expand
their market and increase customer traffic during off-peak
times. The SodaStream-like machine allows for quick
carbonation of beverages and may be the innovation Starbucks
is looking for to vamp up afternoon and evening traffic and go
further into the non-coffee market.
Companies like PepsiCo are working on ways to create healthier versions of their products while maintaining signature flavors. Senior vice president of PepsiCo R&D, Greg Yep, states that the challenge is "to have a great-tasting product without as much salt, fat, and sugar". This is especially true considering the national obesity epidemic.
PepsiCo researchers have improved the nutrition content in products like Quaker Real Medleys (without adding sugar) and Lay's potato chips (with reduced salt) through exploring different ingredients and seasonings. Part of the same effort, more restaurant chefs are deploying different techniques to substitute for ingredients that add salt, fat, and sugar. Chefs incorporate parsnip and chestnuts in place of cream and butter, kelp and fresh herbs to replace salt, and fruits in place of added sugar.
PepsiCo researchers utilize "flavor
fibers", small chemical sensors, in the test kitchen to record
chemical releases during the food preparation process. Using
these flavor fibers, researchers can better understand what
gives food its flavor and develop healthier substitutes.
On March 31, 2013 the Obama Administration and the Department of Energy set new energy efficiency standards for microwaves that will start in 2016 and will save Americans billions in energy bills and significantly reduce carbon emissions.
In 2009 the Department of Energy partnered with manufacturers to establish new standards for over 40 different appliance products and in conjunction with the recent microwave energy standards, consumers will save an estimated $400 billion and reduce emissions by 1.7 billion tons by 2030.
Companies like General Electric are taking steps towards creating innovative appliances that will be consistent with the new energy efficiency standards. GE's Brillion appliances are designed to allow for communication between networked appliances and the energy grid, allowing users manage energy usage on a whole-kitchen scale.
Manitowoc's Countertop Impinger 1300 and
2500 oven series now feature smoke, grease, and odor emitting
capabilities with an updated catalytic converter. With this
new feature restaurants will no longer need separate
ventilation systems. Companies engaging in research and
development activities in efforts to make appliances more
efficient can qualify for Federal tax incentives.
The number of accredited culinary institutes has been growing nationwide, up 43% since 2009, which goes hand in hand with the big changes in food preparation and presentation and the more demanding, educated customers. Joliet Junior College in Illinois has dedicated a new $50 million college facility to their kitchen science program. In the same effort, Kendall College in Chicago will be introducing a new molecular gastronomy course, which focuses on transforming food using science, technology, and natural enzymes.
As part of a new culinary science program, students from the Culinary Institute of America (CIA) in New York have been experimenting with traditional food preparation. Using special ovens to control moisture levels, students experimented with roast chickens and discovered that the inside of normal ovens vary greatly in moisture levels and temperatures because of the evaporated water from the cooking food.
On the goals of CIA's new program, Provost
Mark Erickson says "deeper knowledge of science allows a chef
to be more creative, more exacting and more effective in what
they do". Students at the Culinary Institute of America also
experimented with the basic procedure of making soup stock and
discovered that it tasted better when simmered at 99 degrees
as oppose to the traditional knowledge of 85 degrees.
Kitchens and restaurants dispose of large volumes of food waste each day. In an industry where location, location, location is crucial for many popular food offerings, storing waste while awaiting trash pickup is extremely expensive. New systems that utilize enzymes and microorganisms are able to reduce water content and shrink waste volumes to a fraction of their raw state. In addition to reducing the expensive real estate space needed, this waste treatment eliminates odors and greatly reduces sanitation removal charges.
Food2Water is one of the companies that provide this innovative food waste reduction technology. The revolutionary Food Waste Liquefier turns kitchen waste into water through an organic process using microorganisms to break down protein and fatty oils in food. The aerobic process can take 15 minutes to 24 hours depending on the type and amount of waste.
The hands-free process breaks down the food waste into city complaint water that is washed down the drain, which means less time and money spent on waste management. Waste elimination systems offer a quick return on investment and have major positive impacts on the environment. The process lowers garbage bills by up to 70%, decreases odors and related critters and in one year of use, one Food Waste Liquefier prevents 443,000 lbs of carbon dioxide emissions and significantly reduces greenhouse gases.
EnviroPure (EP) has also developed novel food waste elimination systems that can produce either a water or solid byproduct. The EP system uses an all natural 'BioMix' formula of natural nutrients, these nutrients are utilized by the bacteria in food waste products and the decomposition process is accelerated. The EP Wet System breaks down food waste into water and the EP Dry System breaks down waste into nutrient rich composting material, both systems utilize the BioMix formula.
As more restaurant food products are manufactured and processed centrally by machine, particularly for hybrid restaurants and food processors that have production facilities, there may be some IRS Section 199 Domestic Production Activities tax deductions.
Examples of hybrid restaurant/production facilities that may present opportunities include:
Pure retail restaurants are not considered
manufacturing facilities. Food manufacturing facilities and
restaurants that have food processing facilities on premises
may be eligible for section 199 deductions. These situations
are very fact and circumstance specific, therefore food
industry taxpayers should utilize tax professionals
knowledgeable about section 199.
To offset the pressure of increasing operating costs, restaurants are able to incorporate today's innovative kitchen science technologies and become more cost efficient and environmentally friendly. Federal and State tax incentives are available to support companies engaging in kitchen science R&D efforts.
Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.
Andrea Albanese is a Manager with R&D Tax Savers.
Charles G Goulding is a practicing attorney with experience in R&D tax credit projects for a host of industries.
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