The COVID-19 crisis has forever altered most functions of the restaurant industry–how we forecast supply, how we schedule labor, how we configure our kitchens to meet off-premise demand, how consumers access restaurants in general.
Even when things started to feel somewhat “normal” again in the summer, with capacities and customers trickling back, things were different. And they will stay different.
So what does that mean for 2021 and beyond?
Well, the good news is that pent-up demand is huge. Data from the National Restaurant Association shows that 83% of adults say they are not eating on the premises at restaurants as often as they would like–up from 45% pre-pandemic. Baby boomers especially miss eating out, with 90% reporting they would like to dine at restaurants more frequently.
The not-so-good news is that there continues to be a significant amount of closures, about 17% of all U.S. restaurants and counting, and those closures are disproportionately independent concepts. That number is expected to grow as winter weather compromises the outdoor dining lifeline and as coronavirus cases tick up again.
This will, at least in the short term, create a deeper schism between the haves and the have-nots. As such, large, well-capitalized chains are circling emptying real estate parcels like vultures. Consider commentary from the last round of earnings calls as a glimpse of what’s to come:
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- “Definitely the real estate market is favorable for Wingstop
, given the unfortunate circumstance of this pandemic … we are seeing plenty of sites available, our solid banking relationships and generating cash flow from our restaurants is fueling further development.” – Wingstop CEO Charlie Morrison
- “Our teams are taking a look at the real estate opportunities that are presented by the fact that there are quite a few other restaurant and retail businesses that are closing out … I do believe that the shakeout and turmoil is going to create opportunity for us to further take share and continue to grow. Our teams are out there every day, looking for real estate opportunities that are opening up as a result of the pandemic.” – Domino’s CEO Ritch Allison
- “The real estate opportunities we see opening up across regions reinforces our excitement about the brand’s long runway for development in the U.S.” – Restaurant Brands International CEO Jose Cil
- “You see a number of brands that are either bankrupt or struggling and there’s going to be a lot of sites available. We want to make sure we go after the best … I think this is a great moment to be in the market and being a buyer.” – Shake Shack CEO Randy Garutti
And so on and so forth.
Most industry watchers might agree a bloated 2019 restaurant space was due for a retrenchment, but not likely for the sake of a chain-heavy landscape.
That’s not to say it’s time to write off innovative mom-and-pop concepts all together, however. Real estate costs will likely come down enough for ambitious entrepreneurial types, especially in devastated metro markets desperate to get that bustling vibe back.
There are also fresh opportunities for those not willing to hand over such a big chunk for occupancy costs, as virtual concepts have very much proved their viability in this crisis. They allow operators to start a concept from scratch by using existing (yet underutilized) kitchen space. Brinker International started doing this in the summer with its “It’s Just Wings” concept and predicts the brand will exceed $150 million in its first year–enough to secure a spot in the top 200 restaurant brands.
There seems to be quite a bit of runway with these virtual concepts, whether supported by a major restaurant company or not. Ordermark recently secured $120 million in funding and will use much of that to grow its burgeoning virtual restaurant business, Nextbite, for example. And you may have heard of YouTube celebrity MrBeast (you should have heard of him by now, he has nearly 49 million subscribers). Earlier this month, he launched 300 delivery-only restaurants, called MrBeast Burger. The virtual concept quickly became the most downloaded app on both iTunes and Google Play.
The idea of circumventing typical rent and labor and equipment costs to leverage such a concept is huge, and plenty of independents that faced closures have found a lifeline through the ghost/virtual kitchen space. In fact, the number of eateries using these concepts grew from 15% pre-pandemic to 51% in May, according to Technomic data. That momentum will continue.
Enabling this momentum is the triple-digit growth in delivery since the onset of the pandemic. Those numbers will no doubt correct themselves a bit in the year ahead as dine-in capacity returns to normal levels, but the behavioral shift to off-premise is complete. What that means for 2021 is (hopefully) a more harmonious relationship between third-party delivery companies and the restaurants they serve. Despite ongoing complaints over high commission fees and questionable practices, there are reasons to be optimistic here, including a collaborative set of guidelines created by the National Restaurant Association in partnership with DoorDash, Grubhub
Delivery is just one piece of an off-premise landscape made particularly relevant by the pandemic as droves of consumers sought safety and convenience with the aid of their mobile phones (mobile app usage is up 88% this year, according to Bluedot data, creating a consumer data goldmine for brands).
What we will see as early as Q1 is a product of this shift, as chains from Burger King and Taco Bell to Wendy’s, KFC and El Pollo Loco
That said, curbside and carryout are also very much here to stay, as they fulfill that safety/convenience demand and are less costly for both the consumer and the operator. Technomic research shows that 40% of Americans took advantage of takeout and curbside delivery (at both fast casual and dine-in) during the pandemic and about two-thirds of those said they would continue using these services even if restrictions are lifted. As the demand for off-premise business stays elevated, expect more bells and whistles to support such channels, like geolocation technology or artificial intelligence at the drive-thru.
Of course, those bells and whistles will require investments and more operators seem to be willing to open their wallets accordingly. A new report from Panasonic found that operators have increased their sense of urgency to adopt transformational technologies because of the pandemic, while another study from TD Bank found that 72% of franchisees have implemented enhanced delivery services, online and mobile ordering since March. Perhaps because of this urgency, digital sales are now expected to make up more than half (54%) of limited-service and quick-service business by 2025–a staggering 70% increase over pre-COVID estimates.
Beyond real estate opportunities and digital adoption, a number of other key trends have emerged and accelerated that will have an impact on restaurants in 2021 and, very likely, beyond:
- As the virtual restaurant segment grows, chicken wings seem to be the menu item of choice. We’re seeing dozens of brands pop up in the chicken/wing category, like Smokey Bones’ The Wing Experience, Nathan’s Famous Wings of New York, It’s Just Wings, Neighborhood Wings by Applebee’s, Bad Daddy’s Bad Mama’s Chicken, Bloomin’ Brands Tender Shack and so forth. There’s plenty of reason for this–chicken and chicken wing consumption is growing materially and plenty of existing kitchens already have the equipment necessary (ovens or fryers) to execute a separate menu dedicated to the protein. Still, chicken wings are a volatile commodity, so a sort of virtual shakeout may just happen.
- Human capital is a bigger deal than ever. The incoming Biden administration has prioritized an increase in the minimum wage in the coming years and we’re already seeing brands like Starbucks
and &pizza promise $15/hour wages. This will have a major impact on the industry, as labor is about 30% of most companies’ income statements, according to Nicole Miller Regan, managing director of Piper Sandler. However, she said most companies are already offering well above the minimum wage as it stands today and, structurally, the industry should be focused on offering an entire benefits package for employees–including career opportunities and work/life balance. “They’re getting great at understanding, ‘What does the employee want?’ They want opportunity and that comes in many forms,” she said during a recent webinar hosted by Revenue Management Solutions.
- Of course, a shift in labor dynamics could very well lead to more automation in the restaurant space and we’re starting to see plenty such examples. Spyce in Boston launched a new delivery and pickup kitchen in the fall featuring an automated kitchen, for example. Blendid recently announced a new partnership with Jamba for the debut of the first co-branded kiosk at Walmart. And, White Castle plans to roll out Flippy the Robot in more restaurants.
- Plant-based offerings seem to be here to stay. For some reason, the global health crisis has us adopting more of a plant-based diet and restaurant chains, from Pizza Hut to Jack in the Box to KFC, are responding. The global plant-based meat market size is expected to reach $35.4 billion by 2027, a compound annual growth rate of 15.8%.
- Value will become even more critical as consumers await a federal stimulus agreement and as the economic forecast for the early part of 2021 remains gloomy. As such, chains like Taco Bell and Wendy’s are doubling down on their value messaging and Burger King even brought back its dollar menu.
- Breakfast will make a strong comeback. About 60% of employees expect to be back in the office by the end of Q1, according to data from CREtech. That number will jump post-vaccine, toward the end of the year. This means commuters will return to the roads and many of them will be grabbing their morning meals from a drive-thru window on-the-go.
- Chains will separate themselves by personalizing their messaging, which means loyalty programs will become table stakes. There is a reason Chipotle and Starbucks have recovered relatively quickly, as both have strong loyalty programs. It’s also why chains like McDonald’s
and Taco Bell are prioritizing their new loyalty programs–they drive both traffic and higher digital orders, and they provide brands with deeper consumer insights to effectively keep them engaged.
It may be awhile until we fully understand just how much impact this crisis has had on this massive industry, but the high-level impacts have become quite clear in just 10 months. Essentially, consumers miss dining out and they’ll return. But their behaviors have changed and they’re not changing back. That means restaurants are going to have to master the art of balance now more than ever.