Restaurant operators have been walking through a deep, dark tunnel since March, when the pandemic appeared to change the industry forever. Locations closed. People lost jobs. Owners lost livelihoods and companies they built working 80-hour weeks.
But with the light at the end of this tunnel getting brighter, thanks to the vaccine and easing state restrictions on dine-in service, those that make it could find an environment considerably better than the one they operated in early last year.
Customers will be more eager to eat out than before. There will be fewer locations. The pandemic has also provided an education for many brands on the ability to do takeout. Customers learned how to order from an app or a delivery service. New business models emerged.
“I feel like we’re facing the Roaring '20s,” Greg Flynn, founder of giant Applebee’s and Arby’s franchisee Flynn Restaurant Group, said on a recent panel discussion for the Restaurant Recovery Summit, sponsored by Restaurant Business and parent company Winsight.
Go back to before the pandemic. The industry was widely considered to be in a state of oversupply, as a decade of aggressive expansion by chains, a flurry of new independent concepts and a burgeoning group of fast-casual restaurants, filled neighborhoods, retail areas and commercial districts with dining locations.
That expansion was taking a toll on full-service restaurants in particular. The number of locations operated by full-service restaurants in the Technomic Top 500 had dropped for three straight years through 2019 after years of expansion. Consumers, who had been shifting more of their dining to delivery and takeout, were shying away from full-service chains at a growing clip—opting to either get dine out at independent restaurants or take their food to go.
The pandemic has changed that arrangement. States in March started requiring restaurants to close their dining rooms, which had a predictable impact on an industry where many companies operated on thin margins as it was. Dozens of chains filed for bankruptcy. Tens of thousands of restaurants closed their doors.
The industry lost much of its sales last year. Technomic, the sister company of RB, said industry sales declined by more than a quarter last year, a loss of about $267 billion in sales.
Employment paints a similar picture. Restaurants had 2.4 million fewer workers in December than they had a year earlier, according to data from the U.S. Dept. of Labor. One out of every five restaurant jobs disappeared, in other words.
In short, the pandemic has made an oversaturated industry undersaturated. “For those still in business, I think it’s going to be a very favorable demand-supply shift in their favor,” Flynn said.
Barry McGowan, CEO of the Brazilian steakhouse chain Fogo de Chao, said in an interview that the “supply imbalance” will help companies emerge from the pandemic in a strong position. “The demand is there,” he said. “A lot of that is unfortunately due to supply imbalance. We’ll be in position to recover in the second half of the year.”
Numerous restaurant companies are already taking steps to put themselves in a strong position for what’s expected to be an improved real estate environment. The result could be a period of strong growth for big chains—while independent operators could find some good deals to create their own concepts.
Restaurants that are in operation will likely find a customer base eager to use them.
“Everybody is sick of cooking at home,” former Yum CEO Greg Creed said on the Restaurant Recovery Summit webinar.
This is increasingly a consensus view in the restaurant industry. Numerous executives of both limited service and full-service chains have echoed those comments both in presentations and in interviews. The general view: After a year’s worth of eating takeout either at the table or in the car, people are yearning to get back into restaurants.
Brian Niccol, CEO of Chipotle Mexican Grill, said he recently asked a customer why he decided to eat inside one of the chain’s restaurants in Houston. “I’m tired of eating in my car,’” Niccol quoted the man as saying. “He wanted an occasion to sit down in the restaurant.
“Over time, those occasions will come back. Eating is a social event. That’s why they keep shutting down restaurants because people like to mingle over food.”
Chipotle has been as aggressive as any other chain in finding new ways for customers to access its restaurants—and recently opened a restaurant near the West Point military academy in New York where customers can only order through an app. Yet the chain has continued to focus on building restaurants with seats, believing that this dine-in service will make a comeback.
Indeed, according to Technomic, 68% of consumers said that they are “very excited to dine in” at restaurants again once they feel it’s safe.
Experiential brands in particular are counting on this. “Our brand is now rebounding and we are confident we will emerge in an even stronger position,” Dave & Buster's CEO Brian Jenkins said at the recent ICR Conference.
Technomic expects restaurant sales will grow by 20% this year. Patrick Noone, executive vice president with the research firm, said at the Restaurant Recovery Summit that sales should pick up particularly strong during the second quarter as warmer weather takes hold and more people are vaccinated.
Yet it’s also worth noting that Technomic believes it will take a while longer for the industry to fully recover: Sales this year are forecasted to be $146 billion lower than they were in 2019.
Nevertheless, much of that will be due to a lack of locations rather than a lack of interest, executives believe. Fewer locations and pent-up demand could make dining out at a restaurant particularly popular once the pandemic ends.
That likely won’t happen all at once, Darden Restaurants CEO Gene Lee said, but he nevertheless said he expects his company’s full-service restaurants, including Olive Garden, Cheddar’s and LongHorn Steakhouse, will recover lost dine-in business.
“I do think it’s going to be gradual,” Lee said. “I don’t think we’re going to wake up one day and we’re up 30%.”
All that said, the economy will have something to say about all of this in the end—unemployment remains elevated, for instance, and personal income data suggest that stimulus payments’ impact on consumer finances were wearing off toward the end of 2020.
But Americans were provided with a new round of payments this month, and the election of Joe Biden as president likely increased the chances for another round. That could give consumers ammunition to dine out at restaurants once the economy reopens.
OK so what about all of this takeout?
Consumers have spent the past several months learning how to use restaurant smartphone apps and delivery providers. They’ve discovered curbside services and takeout. Many operators believe they’ll keep at least some of this business in the future.
“We truly intend off-premise to be incremental,” McGowan said of Fogo’s takeout business, which has blossomed during the coronavirus.
Many restaurant operators point to the summer, when dine-in business reopened and many full-service chains kept much of their takeout sales.
“Our guests are trained on off-premise,” Flynn said. “When half our dining rooms were closed, we took off-premise from 12% to 55% of pre-COVID sales. When dining rooms reopened over the summer, you hold onto a lot of that off-premise. If we get back to normal and recover much or most of our dine-in, we’ll hold onto so much of that off-premise.”
Manny Hilario, CEO of The One Group, owner of Kona Grill and STK Steakhouse, believes that delivery can help his concepts expand beyond capacity limits on busy Thursday, Friday and Saturday nights. “In January (2020), delivery was not mission critical,” he said in an interview. “A year later, it’s now critical for our long-term growth.”
Not everybody believes that the takeout business that took off in 2020 will remain that way once consumers do return to dining rooms. “This off-premise dining is not going to be as sticky as everybody wants it to be,” Lee said at ICR. Consumers are “tired of eating restaurant food in their homes. They want to get back out and socialize with their friends.”
Still, to many operators, the post-pandemic environment appears to be one where consumers will be eager to eat out again. They may well have some cash in their pockets to spend at restaurants. There will be fewer locations, so the dining customer will have fewer options and expansion-driven chains will have more opportunities. And after years of fits and starts, the industry has figured out takeout and technology.
Add it all up, and it could be a good several years for the restaurant industry once the pandemic is over.