- The National Restaurant Association says the industry has closed roughly 110,000 restaurants.
- In 2021 operators will expand digital channels to meet the needs of convenience-hungry consumers, while adopting automation to help with labor shortages.
- M&A and SPACs are expected to increase in 2021 as multi-unit operators and private equity firms look to scale operations and grab market share.
- Visit Business Insider's homepage for more stories.
When Gary Stibel, a veteran restaurant industry consultant, looks back at how restaurants reacted to the pandemic he boils the responses down to two paths.
"You either panicked or you pivoted," said Stibel, founder and CEO of New England Consulting Group.
And going into 2021, those two paths still apply as thousands of restaurants hang by a thread with COVID-19 cases escalating across the US.
The end-of-year winter surge is prompting tighter restrictions for restaurants who are forced to, once again, rely heavily on delivery, carryout, and drive-thru orders to survive. And an estimated 110,000 restaurants have not survived, according to the National Restaurant Association.
Insider interviewed several industry experts to get their take on what lies ahead for 2021. Most said next year's playbook looks like an accelerated version of 2020. Operators will leverage technology to meet the needs of convenience-hungry consumers. Temporary menu slashes will become permanent. More consolidation is expected as private equity firms and multi-unit operators look to scale operations and grab market share.
"There's clearly going to be more M&A," said Stibel. "Smart money will do what smart money has been doing for a while, which is creating a lot of value by sharing resources across multiple concepts."
Expecting more M&A, SPACs, and consolidation
The industry is undoubtedly in a crisis.
But in a crisis, savvy companies look for opportunities to increase market share by taking advantage of closures or buying solid brands found flatfooted during the pandemic. According to a recent Cowen report, restaurant closures will leave about $39 billion of sales up for grabs between 2020-22.
One chain looking to quickly expand its market share in the fast-casual space is Saladworks, owned by New York-based private equity firm Centre Lane Partners LLC. On Tuesday, Saladworks bought Garbanzo Mediterranean Fresh, an emerging fast-casual brand out of Colorado and smoothie concept Frutta Bowls.
Terms of the deal were not disclosed.
The 110-unit Saladworks and the other two brands now fall under the newly created holding company, WOWorks, which looks to snap up more health-focused concepts.
Other mergers in the works: Flynn Restaurant Group, the largest multi-unit operator of chain restaurants in the country, could double in size if its bid is approved to buy nearly 1,300 Wendy's and Pizza Hut restaurants from bankrupt franchise operator NPC International. Boston-based PPX Hospitality Group, owner of The Smith & Wollensky Restaurant Group, is expected to close a deal on the purchase of Legal Sea Foods.
Then there are SPACs or so-called "blank check" companies that raised $73 billion in proceeds year-to-date, according to Goldman Sachs.
"There's been over $60 billion raised this year for these SPACs, and some of it in the restaurant space," said Roger Lipton, restaurant chain analyst and founder of New York-based Lipton Financial Services, noting OPES Acquisition Corp.'s recent formation to take 125-unit BurgerFi International public.
Reckoning with the third-party delivery
In 2020, the pandemic forced restaurants to rely more heavily on third-party delivery, including restaurants that avoided such partnerships due to high commission fees.
But operators learned to find workarounds.
Some brands launched their own delivery fleets, others inflated menu prices on delivery apps or partnered with disruptive companies that drive traffic to their own branded channels.
Expect chains to be more assertive in reclaiming their digital business in 2021, experts told Insider.
"The smart restaurant chains are realizing that they can do direct delivery a lot easier than they thought," said Stibel, referring to chains and independent restaurants that have redeployed servers as delivery drivers during the pandemic.
A recent Cowen note states: "We expect a greater focus from the restaurant industry in 2021 on owning the customer ordering experience and using third-party delivery providers strictly for fulfillment purposes."
TJ Schier, a Which Wich Superior Sandwiches franchise who also works as a consultant for operators looking to increase their off-premise revenue, said he advises clients to think more cooperatively when it comes to dealing with restaurant delivery companies.
He said third-party delivery companies like DoorDash, Grubhub, and Uber Eats are one-stop shops for diners looking for a convenient way to find a good meal. Those habits are hard to break and underscore why delivery transactions are maintaining their momentum even as dining rooms have reopened across most of the country, at limited capacity.
According to The NPD Group, delivery in November represented 10% of restaurant industry transactions, up from about 3% two years ago.
"Third party's not going away," said Schier, president and founder of Incentivize Solutions and S.M.A.R.T. Restaurant Group based in the greater Dallas area. "Everybody is saying you have to get the customer to order directly from you. Everybody says that but changing a customer's behavior is very difficult, especially if you're a smaller chain."
That's prompted some operators to take a hybrid approach when it comes to optimizing their off-premise business.
Fast-casual chain Taziki's Mediterranean Grill uses its own fleet of drivers in markets where the brand is well established but relies on third-party delivery apps in new markets. Inspire Brands-owned Jimmy John's, which said it would never work with third-party delivery, recently partnered with DoorDash to boost orders.
Jimmy John's is now listed on the delivery company's vast marketplace, but the chain fulfills the delivery with its own drivers.
Schier said chains that inflate pricing on delivery apps might also see that strategy backfire in 2021. Many chains including Del Taco, Taziki's, Salata and Noodles & Company have inflated menu prices on delivery apps ranging from 10%-15% to offset high commission fees.
The strategy is catching on with bigger chains. Chipotle Mexican Grill began testing inflated pricing in late 2020.
Schier said cash-strapped consumers might start to balk at inflated delivery pricing.
"At some point, the consumer will push back," he said.
But according to Deloitte's new Restaurant of the Future report, consumers are still willing to pay an average of 14% more on their online delivery orders.
Embracing technology and automation
From Chipotle's Brian Niccol to Chris Kempczinskiof McDonald's, every CEO of a major publicly-traded company has preached giving consumers frictionless access to their brands.
That proved to be invaluable during the pandemic, and will have lasting impacts in a post-vaccinated world, according to industry forecasts and experts.
"We believe digital and operational initiatives offered to promote safety during the pandemic such as third-party delivery and digital ordering for curbside pick-up, will be en vogue post pandemic due to consumer desire for convenience," according to a November research note from Cowen.
Schier, the off-premise consultant, said brands are scrambling to improve websites and apps to accommodate contactless ordering and curbside pickup.
"Everybody's trying to figure out how to make it easy for the customer to order from wherever they are. That's what you're seeing in the technology space right now," Schier said.
Brita Rosenheim, a partner at tech-driven innovation firm Culterra Capital, said she's been "proselytizing" in the food-tech space for two years. Now, she feels like she's preaching to the choir when it comes to the industry's adoption technology.
"A lot of operators still didn't have websites up until recently. You can't really survive now without some type of digital interface," she said.
Adoption of automation in 2021 is also expected to rise as the industry deals with labor challenges including turnover and shortages.
Some chains are already moving in that direction. White Castle is expanding a one-restaurant test of Flippy the fry robot to 10 stores in 2021. Papa John's recently began testing AI-powered voice bots to handle phone orders. Chipotle Mexican Grill uses automated voice assistants to process orders for bowls and burritos.
Bay Area-based Bear Robotics and key investor SoftBank also plan to scale Servi, an autonomous food runner. Demand for the robot has grown 10 times since the onset of the COVID-19 pandemic, Juan Higueros, chief operating officer, told Insider.
He said Bear Robotics, in partnership with SoftBank Robotics Group, is accelerating the rollout of thousands of robots at well-known casual dining brands in the U.S., as well as adoption in Europe, Japan, Korea, Singapore, and Australia.
Making menus cuts permanent
During the pandemic, restaurant chains such as McDonald's, Taco Bell, Applebee's and Red Robin Gourmet Burgers trimmed their menu substantially to streamline operations and food costs.
Turns out, leaning into leaner menus was a good way to maintain profit margins while operating with fewer staff members, said Trevor Boomstra, director of restaurants, hospitality and leisure practice at global consulting firm AlixPartners.
With the exception of Taco Bell, whose fans are still bemoaning the loss of Mexican Pizza, most consumers haven't batted an eye about the axed items.
Boomstra said operators are finding that "business was still coming in" even with fewer items on the menu. That trend will likely give operators permission to make permanent purges in 2021, he said.
McDonald's, for example, has brought back some items. But salads have remained off the menu with no sign of returning. Red Robin removed 55 items from its menu.
Greg Flynn, a veteran multi-unit operator who owns 1,250 Taco Bell, Panera Bread, Arby's, and Applebee's restaurants in 33 states, said he's been wanting to trim down the menu at his restaurants for years.
Applebee's, for example, cut about one-third of its menu.
The streamlining has made each concept more efficient and helped profit margins.
Slim menus are here to stay for him.
"Those better practices are gonna stick," Flynn said.
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