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Restaurants are projected to have their worst year on record

Sales could fall 11% to 27% this year, according to Technomic, as the coronavirus shutdown hammers operators and ignites a recession.
Photograph by Heather Lalley

As consumers stay home and states close restaurants to dine-in service, 92-unit Duck Donuts has seen sales decline by about 60%.

“Franchisees are trying to do the best they can to stay afloat,” said Russ DiGilio, the Mechanicsburg, Pa.-based chain’s CEO, said in an interview with Restaurant Business. The chain has shifted to takeout and delivery and curbside pickup to make it work.

Such tales are commonplace these days. Those restaurants that even remain open are doing just a fraction of their regular business, putting the industry on track for the worst year in its history.

According to Technomic, industry sales are expected to decline anywhere from 11.4% this year to 27.1%, based on the length of the coronavirus-related shutdown and the severity of any recession that follows.

“When you’ve basically shut down the system, most of the system, very quickly and expect it to linger, that’s what’s expected,” said Joe Pawlak, managing principal with Technomic, a sister company of Restaurant Business. “The longer-term impact will probably be the recession.”

The restaurant industry has only rarely known periods of decline in modern history, and none that even approach 11.4%, the low end of Technomic’s range.

To put that into perspective, restaurant sales had one such rare decline in 2009, when the credit crisis led to steep pullbacks in business and consumer spending. That resulted in a rare 1.2% dollar decline in sales.

That decline led to numerous bankruptcy filings by restaurant operators.

Technomic is making its estimates based on the potential length of a shutdown. If new COVID-19 cases plateau and decline starting in the middle of the second quarter, dine-in restrictions are lifted and the resulting recession is mild, sales will fall on the lower end.

The firm’s midterm scenario, with cases not declining until late in the second quarter or early in the third with a moderate recession following, sales will fall 17.2%.

The worst-case scenario is based on a second wave of COVID-19 cases appearing toward the end of the year, with the economy in recession for all of 2020, which would result in an industry decline of 27.1%.

Pawlak said the data is preliminary and he expects these predictions to narrow. He said the most realistic scenario is a 12% to 17% decline, which would be “the worst we’ve ever seen” and “devastating” to restaurants.

Same-store sales at full-service brands have declined 74% the past five days on average, meaning the typical restaurant with waitstaff has lost three-quarters of its business over the past week, according to Black Box Intelligence.

The bigger question, even as the industry emerges from the shutdown, is what happens in the aftermath. The country may already be in recession, with 3.3 million people having filed initial unemployment claims last week alone, the most on record, according to federal data released on Thursday.

Pawlak believes customers will come back for a time. “As we come out of it, we’ll see a short-period of pent-up demand, especially in full service,” Pawlak said.

But the industry may also contend with a customer that is dealing with a recession. And then restaurants will need to address consumers’ need for value.

“We’re looking at another period where value from a price perspective is going to be the name of the game,” Pawlak said. “Consumers are going to be looking for deals.”

That could prove to be a big problem for an industry that, in recent years, had focused on premiumization and average check. “In 2009-2010 that’s when you had casual-dining chains offering an appetizer and a meal for $9.99,” Pawlak said. “You’ll see more of that coming in. You’ll see burgers for 99 cents and $1 to drive traffic because consumers are cash-strapped.”

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