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COVID leaves permanent mark on restaurant industry’s operations, strategy

As restaurants look beyond pandemic, some twists, turns, adjustments will be permanent

With restaurants facing losses in sales of over $255B, the Restaurant Revitalization Fund program has come at an opportune time. The RRF grants provided $28.6B in relief to eligible bars, restaurants and related foodservice businesses, and signal a long-awaited turning point for the restaurant industry. As restaurants enter the recovery phase, signs abound of the gradual resumption of business-as-usual; however, there are also indications throughout the industry that some aspects of restaurant operations have changed permanently.

Delivery brings operational challenges

Restaurant delivery had already taken hold pre-pandemic, as more consumers adopted technology and the convenience of food delivered at home. Complexities have arisen as restaurant workers have juggled order fulfillment from several different channels and third-party providers at one time. Managing the queue–balancing tickets from both off-premises and on-premises orders–can be a challenge.

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While delivery has proven to be a sales-preserving “pivot” as potential diners stayed away from restaurants during 2020 and the initial recovery that began in 2021, it’s also fraught with challenges. For one, it is not fully tethered to profitable business models: third-party restaurant delivery companies haven’t proven to be fully profitable. Even marketplace iterations (that help restaurants self-deliver) are losing money. Grubhub, for example, lost $52.5M on revenue of $550.6M in the quarter that ended March 31, 2021 (Q1).

The third-party delivery model can also be prohibitively pricey for restaurant operators, with commissions paid to third-party fulfillment companies sometimes exceeding 30%. Many restaurants are not at break-even currently, and fulfilling orders—some of which are not incremental to existing channels—can be unprofitable. DoorDash recently changed its commission structure, reducing delivery commissions to as low as 15%, and pickup order commissions to 6%.

Notwithstanding the pizza and Asian-style eateries that have been delivering hot food for decades, self-delivery of food to consumers within minutes of their order or requested delivery time–while their food is still hot–can be an elusive task for restaurants. Many restaurant operators find delivering an unprofitable venture, as did Panera Bread, when it quietly discontinued self-delivery, according to Restaurant Business Online.

Is delivery here to stay?

Restaurant chains sought to capitalize on consumers’ desire for convenience in the recent past, but the COVID-19 pandemic brought a new sense of urgency for convenience. Consumers all across the country demanded quick trips and no contact with other diners. This accelerated adoption not only of digital ordering (via mobile devices or online), but also of on-demand pickup or delivery of food. Delivery constituted 43% of
all off-premises sales in the latest quarter.

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Gross domestic product (GPD) increased 6.4 percent during the first quarter of 2021. In addition, 379,000 jobs were added in February, 916,000 in March and 266,000 in April, according to the Bureau of Labor Statistics. The recovery is underway, albeit tempered. More employment plus economic stimulus payments equals more discretionary income, and restaurants will be among the benefactors. Although consumers may well return excitedly to on-premises dining, many during the past year-plus have also become more skilled at and accustomed to ordering for delivery.

The largest restaurant chains are quite bullish on off-premises sales continuing at a mix similar to what has been trending during COVID, and are framing on-premises dining as a layer of sales on top of that. The Cheesecake Factory is one such chain. On a recent earnings call to discuss Q4 2020 financial results with analysts, David Overton, The Cheesecake Factory chairman and CEO commented, “We also see that for example, the average delivery guest’s order rate in the quarter is twice what our historical average on-premise guests was coming in for. And so, the stickiness there is also clear. I mean, two times the level is pretty strong. So, I think that we are seeing data points again, I am not saying that we keep all of it. But there’s definitely a stickiness to a good percentage of it.”

Space allocations

Some restaurant companies have set their sights on smaller-footprint stores, projecting that the historical consumer gravitation toward off-premise dining will continue. Fast casual restaurants have been advocates of this movement. In New York, Chipotle Mexican Grill is working on a smaller, digital-only store that is built on order-ahead and pick-up. In Washington, DC, Chinese-Korean fusion chain Chiko installed a pick-up window in a restaurant built in DC’s Dupont Circle neighborhood.

Chinese-Korean fusion concept Chiko is designing stores for a to-go future. Photo by Eatery Pulse Media.

But some industry observers note that COVID has generated the opposite outcome for some operators. Amir Mostafavi, chief executive of South Block Juice notes that due to COVID, stores like his Old Town, Alexandria, Va. location, which was built for the true sip-and-linger experience of a coffee house, will be well-suited to the future of the consumer on-premises experience. “More space will be better,” he says.

Thus, the days of the chic, trendy, elbow-to-elbow crowded new restaurant in the neighborhood may be numbered. In the same way that restaurants with outdoor dining space—patios, terraces and decks—have been at a premium during the pandemic, larger restaurants, bars and eateries with a more expansive design may see more customers, as they emerge to dine on-premises.

Sanitization

Restaurants that have focused on cleanliness and sanitization during the pandemic have engendered the goodwill of customers, forming a symbiotic relationship. Customers have been looking to patronize restaurants that focus on keeping customers safe. Data from research firms Datassential, Black Box and consultancy Technomic all identify safety as something that will add to the value proposition of restaurants.

Proper food handling, employee cleanliness and environmental sanitization have been hallmarks of the business during COVID. Now, these same attributes will help restaurant operators build up their businesses and elevate their brands in a post-pandemic world.

Expansion models

Saladworks is leveraging ghost kitchens and non-traditional real estate for growth. Photo by Saladworks.

With so much at stake, large restaurant chains are looking beyond the traditional franchise to grow their businesses. The ghost kitchen model has surfaced as a platform to accelerate restaurant chain expansion. For Saladworks, this was an easy answer: last May, it partnered with REEF Kitchens to use turnkey, digital, mobile hubs, expanding its presence in key markets: Miami, Atlanta, Houston, Austin, Dallas, Chicago, New York, Nashville, San Francisco, and Los Angeles.

By tapping into REEF Technology, Saladworks can expand capacity at a “fraction of the cost,” said Kelly Roddy, the chain’s then chief executive. Over the following year, the fast-casual chain partnered with Ghost Kitchen Brands and franchise development firm Combo Kitchen. The Ghost Kitchen Brands Agreement will put Saladworks locations in Walmart and expand its non-traditional locations. The deal helped it enter South Carolina, Iowa, Idaho, Kansas, Louisiana, Missouri, Oklahoma, Oregon, and Washington. In Canada, Saladworks will debut in Ontario, Quebec, and Alberta.

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Through a new agreement, Saladworks will expand through a virtual model that franchises the brand with independent restaurants. Combo Kitchen allows franchisees to use underutilized kitchen capacity to serve food from well-known brands, as in the case with Saladworks and Frutta Bowls. Franchisees can maintain or reduce expenses while adding revenue from these concepts by utilizing their dark kitchen space.

Steamed-dumpling chain Wow Bao adopted a similar franchise model last year. It now serves its product in 24 states and Washington, DC, helping independent restaurants increase revenue at a time when they might see reduced demand for their own menu items. By the end of 2021, Wow Bao plans to have 1,000 of these dark-kitchen powered locations operational.

COVID has impacted the US restaurant industry in numerous ways, both temporary and permanent. As they move forward during the recovery, restaurant executives, operators and analysts will need to reevaluate and reassess frequently.

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