X Team Restaurant Sector Trends

Restaurant Sector Trends

Covid Impacted Restaurant Industry Forever; Innovation Bridges to a “Great Reset”

The “Great Reset” is underway now that the U.S. is shifting away from a period of economic uncertainty that was caused by the health pandemic in 2020. The restaurant industry was as hard hit as any over the past year, yet those who survived have found ways to thrive through innovation. Their strategies and proactive initiatives focused on new ways to navigate the turmoil even as the market appears to be moving toward brighter skies and more clarity. 

The myriad challenges restaurants faced included learning how to adopt and follow the government guidelines that were in a state of flux throughout the year. The rules impacted how they served customers as well as what they could expect from employees. Now, restaurants are dealing with a shortage of labor and rising construction costs that are soaring upwards of 20-40%. The industry is also working to find solutions for leases that were signed before the pandemic hit and now must be worked through in a vastly different environment.

X Team Retail Advisor’s Nelson Wheeler, of member firm Strategic Retail Advisors (SRA) in Newport Beach, Calif., said, “the restaurant industry was horribly impacted by the pandemic. Overall, the retail and theater sectors were hurt the most, but the restaurant sector was a close third.”

A key reason for the pain was the fact that independent restaurant operators typically only have 17 days of available cash on hand. Wheeler notes independent retailers tend to have 35-40 days of cash flow. Yet, both of those segments likely required landlord participation to sustain them through the pandemic, whether that be rent relief or other considerations, he points out. That’s not surprising given the fact that the industry tends to operate on a lower cash reserve basis. 

Advancing Innovation

Among the innovations that advanced over the past year encompassed introducing or enhancing outdoor spaces so customers could spread out and restaurants could serve people, since many dining rooms were closed or operating at limited capacities.

A paramount strategy was to focus on outdoor patios when permitted. Cities worked with restaurants to find solutions to maximize revenue opportunities because they recognized the importance of seeing them survive. Cities and government agencies became more flexible with restaurants during 2020 to facilitate outdoor patio service. Not only was it the right thing to do to ensure owners sustained their livelihoods, employees had income and to keep sales tax revenue flowing to cities. 

X Team Retail Advisors’ Julie Solomon of the Trilogy Group in Atlanta notes a common refrain heard from restaurant CEOs is the fact that they can’t find labor and that is likely to result in more restaurants going under.

“Creative approaches are required to sustain customers,” Solomon said. “Restaurants added take-out options and beyond the soaring construction costs, they are also facing supply issues for such items as chicken, pickles and even cups.”

The ways restauranteurs changed to try to survive may have been anchored on outdoor patio service in 2020, but they also turned to online ordering as another important component. Customers placed an order then picked up their food at the store or utilized an online food delivery service such as DoorDash or Uber.

Best Practices

The strategies employed over the past year that were met with better results tended to include drive-thru options. The chains that offered long drive-thru queues helped them perform better, too. “It is not surprising that some restaurants experienced a 20-25% sales increase during the pandemic because they adopted improved online ordering and pick-up options,” said SRA’s Wheeler. Chipotle is an example of a restaurant chain that performed well during the pandemic, largely as a result of it rolling out an exclusive drive-thru lane for online ordering and pick-up customers.

But Wheeler also notes one of the most difficult aspects for restaurants to navigate this past year was the inconsistency of regulations. “One city might have a standard for occupancy and the state or county adopted a different standard, which wreaked havoc on restaurant operations,” he said.

Another challenge was understanding and anticipating when a restaurant could be open and at what capacity during the pandemic. For example, some state regulations were set to allow restaurants to open up on a certain date but then a day before the decision would be made to remain closed because it wasn’t safe. That meant restaurant opening plans were delayed, which often presented significant challenges to ordering food as well as retaining employees, who required more job stability than was often found in the restaurant sector in 2020.

Wheeler says, one of the big impediments now for restaurants is getting employees to return to work, rather than relying on unemployment benefits or stimulus money. In some cases, they can make more by staying home than returning to work. That is not just impacting the restaurant industry, other industries are suffering such as delivery services like Uber, he notes.

Moratoriums, Regulations & Relief

The main considerations driving the restaurant sector today pertain to navigating the fallout from decisions made over the past year. That starts with eviction legislation and unraveling how the moratoriums and other government actions will be interpreted. Initial drafts of legislation included provisions to defer rent rather than abatement. 

Retail landlords are facing significant issues with tenants. SRA’s Wheeler notes he heard of one regional mall owner that was forced to renegotiate 6,000 leases. While the requests are coming from the tenant side, savvy landlords closely monitored tenant performance and proactively took action when they saw the impending storm. “Good landlords knew how tenants were doing ahead of time and likely understood how deep a tenants’ resources were to survive,” indicates Wheeler. But he also notes the experiences were “all over the map” in terms of how a landlord or tenant dealt with the impact of the pandemic. Some landlords took hardline approaches, while others worked with tenants to try to find solutions, he notes.

Questions that needed to be answered included determining what happens when the entrances to a mall were closed due to federal regulations? Would rent interruption insurance kick-in or would insurers decline? In most cases Wheeler says those clauses didn’t apply though he notes many sophisticated leases have pandemic language. He notes, “In my experience, landlords for the most part, offered two to three months of abated rent for a market renewal, especially if they liked and wanted to retain the tenant.”

Growth Prospects

The retail industry had been softening and feeling the effects of internet sales even before the pandemic hit, especially in the soft goods category. But that wasn’t the case for the grocery sector. Grocery sales in Southern California were up between 12.5% and 25% or even 30% in some cases. The restaurant sector realized new growth in the takeout and delivery business, which is up roughly 55% compared to pre-pandemic levels.

Wheeler points out that some of the gains were given back since restaurants had to make investments to meet protocols such as adding Plexiglas dividers, or stepping up efforts to wash, clean and sanitize areas where customers ate. Yet the pandemic has taught consumers different ways to get the restaurant food they desire. They now know ordering online and picking up food at a store can be a viable alternative to dine-in meals. Just like they found out it is easy to stream movies in the comfort of their home, the pandemic and internet intrusion have combined to change the retail and restaurant industry permanently,” said Wheeler. He points to the shift to more ready-to-eat food at grocery stores as another way consumers are adopting to a new world.

SRA’s Wheeler predicts the market will see more shopping center parking lots dedicated to short-term parking spots or pick up only parking areas. He said, “The Chipotle model will become even more prevalent going forward. Drive-thru restaurants are here to stay and the longer the queue the better.” He expects to see drive-thru’s shift from a typical eight-car stack in the past to now operators seek the highest volume possible. That means expanding drive-thru’s to include 13 or more car stacks or double lane drive-thru’s.

To accommodate that growth, cities will need to adjust zoning and perspectives. Solomon points out that in the Atlanta market, it can be “challenging for restaurants to add drive-thru and pick up areas because the city tends to frown on allowing more drive-thru stacking and considers these now vital restaurant elements eyesore issues.”

The past year has taught restaurants the value of welcoming change or face the prospect of becoming irrelevant or shutting down. As the “Great Reset” continues to unfold, look for more successful restaurant operators to introduce innovative measures in an effort to capture market share and increase sales.