There is little question that 2020 will go down as one of the most challenging years restaurant operators will ever face and will transform virtually every aspect of the restaurant experience.
The restrictions imposed during the pandemic have accelerated shifts in consumer attitudes regarding digital ordering, delivery, drive-throughs, health and wellness, and dining-in experience.
R J Hottovy, consumer strategist for Morningstar, writes on how consumer behaviour changes will reshape the dining business. Though written for the U.S. market, the insights are worth noting.
- Fine dining restaurants that may still be closed, operating under restricted guest counts, and/or do not offer delivery/to-go options remain most pressured. They will probably see only a gradual improvement over the next several months as macro pressures start to replace COVID-19 concerns and consumers still navigate some apprehension about dine-in experiences.
- Casual dining operators struggle with in-restaurant dining restrictions in certain markets. However, many of these operators have taken their time to develop takeout and delivery options, with some now posting strong relative growth.
- Specialty coffee has been hit hard by the increase in work/school from home and its impact on morning commuters and informal business meetings and “hanging out”.
- Breakfast quick-service restaurants are trending ahead due to drive-through capabilities but lag traditional QSR (quick service restaurant) peers because of the decline in morning commuters. We expect this group to continue to lag the broader industry but with an acceleration across the back half of the year due to new value offerings.
- Traditional QSR and fast-casual concepts saw same-store sales growth bottom out in the negative low to mid-20s and now run in the positive low- to mid-single-digit range for many operators. For several players, drive-thru represents 60%-70% of transactions and recent investments in delivery and mobile ordering are paying off in improved engagement among newly acquired customers.
- Pizza QSR companies continue to take significant share in this environment, with many posting comparable sales growth in the high teens to low 20s. Consumers operating under social distancing and other quarantine measures have gravitated to pizza QSR chains because of developed digital ordering platforms, consistent delivery capabilities, and attractive value propositions.
The worst may be yet to come
While we believe that most publicly traded restaurant companies will survive COVID-related disruptions, we still believe that the worst may be yet come for the broader industry.
According to Yelp’s second-quarter 2020 Economic Average Report, almost 16,000 U.S. restaurants have closed permanently since March 1, which represents about 2.5% of the 654,000 restaurants that existed at the end of 2019 (based on estimates from Euromonitor). A September 14 report from the National Restaurant Association projects that at least 100,000 restaurants will close in 2020.
While our 2020 restaurant closure estimates are more conservative, we do expect closures to continue during the back half of the year and into 2021. With uncertainty regarding small-business and consumer stimulus efforts, elevated unemployment, and fewer opportunities for outdoor dining, we expect guest traffic to remain under pressure for the balance of the year for most restaurant categories (with pizza QSR and traditional QSR the notable exceptions). Coupled with reduced landlord concessions and incremental safety and operating expenses, we expect U.S. restaurant closures to continue into the third and fourth quarters of 2020, with 20,000-25,000 locations likely to close permanently by the end of the year.
We believe 2020 will be the first of multiple years of restaurant closures, with as much as 15% of restaurants in the U.S. presently at risk for permanent closure. Full-service restaurant chains are the obvious category at risk, but we also expect closures among smaller specialty coffee chains (chains under five units) and urban-focused fast-casual chains.
Some of the vacated real estate will be replaced by surviving chains that have the financial flexibility to accelerate new openings as well as new restaurant formats like delivery hubs, ghost kitchens, and pickup or express formats. This suggests that it’s unlikely that reported gross restaurant closures will reach 15%, with mid- to high single digits likely to be the number of net closures reported when industry trends stabilize. In addition, some restaurant closures will be voluntary, as restaurants try to optimize and shift their store base to more suburban locations as consumers increasingly work from home.
We expect permanent restaurant closings to accelerate to around 30,000 net locations in 2021. We also expect net closures in 2022, but by this point, we expect those chains that have outlasted near-term headwinds will accelerate unit growth plans and open non-traditional locations.
After a nearly 10% decline in 2020, we expect the overall U.S. restaurant industry to resume growing in 2021 at a mid-single-digit clip and then a low-single-digit clip thereafter. As we project restaurant units continue to decline through 2022, our forecast implies that restaurants will post greater productivity out of existing locations in 2021 and 2022. We expect much of the productivity to come from changing consumer behavior, including digital ordering, improved delivery functionality, new to-go platforms for casual dining chains, and enhanced restaurant formats. Ultimately, we expect the industry to return to 2019 sales levels by 2023.
Consumer behaviour will reshape the industry
We see similarities between the restaurant industry during coronavirus-containment efforts and what happened to the retail industry coming out of the Great Recession in 2008-09, where consumers were quick to gravitate to online retail and many traditional brick-and-mortar retailers were slow to adapt to the changing environment. In the case of restaurants, we believe accelerated adoption of new digital ordering, delivery, and drive-thru advances will likely continue after the pandemic and require several changes from restaurant operators. We think it would be a mistake to assume that dining-in trends ever fully return to pre-pandemic levels.
Delivery is making headlines, but drive-thru and takeaway changes are likely to be more significant.
Full-service operators are likely to see a much more pronounced shift in transaction type in 2020.
Digital ordering is likely to surpass in-person ordering.
Work-/school-from-home situations have affected restaurant daypart sales trends, but operators have started to adjust. One of the more debated questions regarding consumer behaviour in a post-pandemic environment is the future of the morning commute. Based on estimates from Morningstar’s U.S. economics research team, work-from-home employees peaked at 45% of the workforce in 2020. This shift to work-/school-from-home situations has disrupted a number of breakfast-focused restaurant concepts and will likely continue through the back half of 2020. However, what does the morning commute look like after 2020? Employees have already started to return to the office (though not always through pre-COVID forms of transportation), but it’s unlikely that the U.S. ever returns to the 9% of the workforce that worked from home before the pandemic. However, by the end of 2021, Morningstar’s U.S. economics research team forecasts that work-from-home employees stabilize in the low double digits as a percentage of the overall workforce, which bodes well for the breakfast-oriented companies we cover, including McDonald’s, Starbucks, and Dunkin’ Brands.
Even if we’re correct that the number of employees working from an office returns to somewhat normal levels by the end of 2021, we don’t necessarily think that consumer behaviour will automatically return to pre-COVID levels with respect to different dayparts, given changes in commutes (staggered work schedules, office relocations), office operating restrictions, and family/group ordering trends.
Restaurant formats will look different after the pandemic. These new format prototypes share several features, including smaller dining rooms, multiple drive-thru lanes or pickup windows (some reserved for mobile orders), as well as parking spaces reserved for third-party delivery. While these new restaurant formats will require up-front capital from operators and franchisees, we think they are ultimately aligned with evolving consumer preferences.
Rivalry with online grocers is likely to intensify. Packaged foods and beverages sold directly to consumers by manufacturers and traditional grocers, will loom as a competitive threat.
What can we expect going forward?
We don’t expect the pizza QSR category to sustain 20%-plus comps over the balance of the year as nationwide lockdown measures ease, but we believe high-teens growth is a realistic expectation for the full year.
Companies that have invested in new technologies, digitally-enabled restaurant formats, and more efficient operational procedures are poised to gain market share at the expense of smaller independent players, many of which are unlikely to survive.
