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Suddenly, there are not enough restaurants

Large numbers of closures have drained much of the industry’s supply, even as demand has remained strong, says RB’s The Bottom Line.
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The Bottom Line

Remember when there were too many restaurants?

Going into the pandemic, an oversupply of restaurants had caused a lot of strain. It drove up lease costs, made it harder for some operators to find workers and put pressure on unit economics and traffic. The intense level of competition put some chains into bankruptcy even as others surged.

The coronavirus has turned that entirely on its head. Now, the industry is seemingly headed for a period in which it doesn’t have enough supply to meet consumer demand. In other words: In just five months we’ve gone from too many restaurants, to too few.

“The demand created by the consumer is rising at a higher rate than the increase in open restaurants,” Don Fox, CEO of Firehouse Subs, said on this week’s edition of the Restaurant Business podcast “A Deeper Dive.”

Fox was explaining why his sandwich chain hit 12 straight weeks of record sales, both same-store sales and total sales, despite the pandemic.

And such stories have become commonplace. Fast-food chains sales have largely normalized. Chains like McDonald’s, Wendy’s and Burger King have seen positive sales of late. Popeyes returned to its record-breaking pace. Checkers is generating strong sales. Casual dining chains like Cheesecake Factory and Texas Roadhouse are generating positive cash flow at open restaurants.

The numbers from these chain restaurants are in stark contrast to the gloomy depths we hear from independents, which are permanently closing left and right, while numerous restaurant chains are declaring bankruptcy, including California Pizza Kitchen and CEC Entertainment. Ruby Tuesday, Steak ‘n Shake and others are closing stores.

That’s the key point. All of these closures, coupled with a 50% reduction in seating capacity at full-service restaurants in most of the country, has limited the overall industry supply. Restaurant Business sister company Technomic is predicting that 15% of locations will close by the end of 2021. Estimates of that number vary, but it’s clear that there will be a lot fewer restaurants once all is said and done.

To be sure, a lot of this is predicated on the pace of the economic recovery. With seemingly little agreement in Congress over the next round of stimulus, that appears to be problematic at the moment. A potential for weaker demand changes this equation considerably.

For now, however, that demand appears to be higher than the supply of restaurants, and the issue is particularly acute at the types of restaurants consumers are able and willing to go to right now: Those with easy forms of takeout.

Total industry sales are recovering. Sales rose 5% in July from June’s weak levels, according to newly released federal data. But they remain far below normal, down 19% from July 2019.

That recovery, by the way, will take some time. Technomic is expecting sales to rebound quite nicely in 2021: Its latest forecast suggests 21% industry sales growth next year, based on its “middle case” scenario of the pandemic recovery. Even at that level, however, restaurants will be far below normal, with sales 11% below pre-coronavirus levels.

With 15% fewer units, of course, those locations that are open will be in far better shape. And by far the biggest beneficiary will be those that never closed, even temporarily. “For those brands that have managed to stay open throughout the worst period, brands like ours, are probably benefiting proportionally,” Fox said.

What does all this mean? Well, that’s evident already in the comments from several industry executives at chains who now view the pandemic, and the resulting closures, as an opportunity to pick up real estate sites.  

And the restaurant industry has, and always will, have its share of entrepreneurs willing to take a chance because people have to eat, after all. We would expect a lot of expansion once things return to normal as people see opportunity to fill demand.

They just have to return to normal.

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