Five reasons to be bullish on restaurants’ future

Despite closures, bankruptcies and uncertainty, the industry has proven to be more resilient than expected, says RB’s The Bottom Line.
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The Bottom Line

Much of the restaurant industry remains in shambles right now. For most of the country, capacity is limited. Chains are filing for bankruptcy. Independents continue to close, including some old and popular local concepts.

What’s more, the coming cooler months aren’t looking all that good: The virus appears to be increasing again; the president himself has come down with symptoms, and it’s rather difficult to effectively stage a patio when it’s below freezing outside. Oh, and there is this matter of the economy. A lot of people are out of work right now.

Nevertheless, I’m as bullish about restaurants as I’ve been in some time. Here are five reasons why:

Consumers really like restaurants

The U.S. consumer really likes to eat restaurant food and they demonstrated that quickly into the pandemic.

In mid-April, restaurant sales spiked shortly after people received stimulus checks, and they continued to increase through July, where they’ve remained at a relatively stable level. Fast-food sales have ranged from up 12% to up 24% since then, according to weekly sales data from the financial information firm Facteus.

Customers flocked to drive-thrus. They threw support to favorite local restaurants, even investing in some cases.

Consumers really need restaurants

But it’s not just a want. Consumers need restaurants. That became readily apparent back in March and April.

Before the pandemic, restaurants accounted for 53% of the combined restaurant-grocery store spending. In March it declined to 38%, and then to 32% in April. It has returned to 46% in August, according to federal retail sales data.

But go back to March and April and remember how difficult it was to find certain items in grocery stores, to the point that restaurants became makeshift retailers to meet consumer demand. The simple fact is that the U.S. consumer has become dependent upon restaurants for much of their food supply.

The industry now has a seat shortage

Closures of independents and small chains are awful, not just for the small business owners who operate them along with their employees, but for the communities that lose a key part of the neighborhood.

At the same time, however, the closure of so many restaurants, and the seat restrictions throughout the country, have put the industry into a shortage situation just months after it was probably oversupplied with seating.

This leaves an opening for entrepreneurs in the coming months to open new locations and meet this demand, and not just large chains but also local operators with a good idea and the wherewithal to build new locations.

The industry proved far more resilient than expected

As we noted earlier this week, some 18 restaurant companies declared bankruptcy during the pandemic, from small regional concepts to giant companies like NPC International, California Pizza Kitchen and CEC Entertainment.

And yet, as we stand here, six months into quarantine, that is far fewer than expected. We expected, as did many others, a parade of bankruptcies over the summer. While the industry is not remotely out of the woods—there are a lot of struggling companies out there—it has been able to withstand a summer with steeply declining sales.

Fast-food companies recovered quickly. Dine-in restaurant chains quickly cut costs and found new sales avenues to improve profitability, which has helped them make it through these few months. What’s more, nearly all of the companies that did end up in bankruptcy had clear problems going into the pandemic.

The industry has also been creative

This weekend, my colleague Peter Romeo will detail some of the creative strategies casual dining chains are using to improve capacity at a time when seats are hard to come by. It’s only the latest example of an industry that has tapped into its creativity to fend off its sales challenges.

Indeed, restaurants turned on a dime to offer takeout services, as Texas Roadhouse and many other casual diners did. They created virtual brands to meet customers’ delivery demands and, though I have questions about the long-term viability of such brands down the line, it proved to be a good method for keeping kitchens busy and for generating incremental sales.

We certainly expect more challenges to hit the industry in the coming months, especially if the virus spikes again. We also expect elements of the industry to face specific challenges if the U.S. consumer changes permanently, as we fully expect.

But we also expect restaurants to adapt to this quickly. That, as much as anything else, will be restaurants’ saving grace.

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