Back in April we at Fridge surveyed the state of the American food and beverage industry at a time when restaurant industry job loss was nearing its peak so far. We predicted the pain would be deep, and it has been. The industry finished 2020 nearly 2.5 million jobs (or 20%) below their pre-coronavirus employment level. After starting out positive, 2020 turned into a devastating year for the restaurant workforce. Restaurants were hit harder than any other industry during the COVID-19 pandemic, and still have the longest climb back to pre-coronavirus employment levels.
A summer hiring surge helped return employees to payrolls, but the industry’s employment recovery stalled in November when weather began to impact outdoor dining. In December plunging sales forced restaurants to cut 372,000 jobs. The shortfall was nearly three times larger than the next industry.
Resilience & Reopening
Yelp’s Q3 Economic Average Report shows that COVID-19 has tested businesses tremendously, but there are still a significant number of entrepreneurs opening restaurants and food businesses at this point in the pandemic. Opening a restaurant at any time is no easy feat. But Yelp data indicates that openings are increasingly more in line with 2018 and 2019 volumes.
Pandemic-optimized restaurants seem to be the order of the day, featuring large patios, spaced out tables, order-ahead menus, curb-side service and efficient service cuisine. There were only 100 fewer new restaurant openings in September of this year, compared to September 2019. New restaurant openings in Q3 are only down 10% compared to Q3 2019. States that showed the most resilient third quarter for restaurant and food-related business openings include North Dakota (39 openings), Washington D.C. (108 openings), Rhode Island (69 openings), New Hampshire (103 openings), and Wyoming (34 openings) — all with at least 2X the openings in Q3 compared to the previous quarter. States with the largest total number of new openings in Q3 tend to be larger and heavily populated, including California (3,279 openings), Texas (2,002 openings), Florida (1,542 openings), New York (1,420 openings), and Washington (561 openings).
Taking a Toll
According to a statement released by the Independent Restaurant Coalition, an estimated 1 in 6 restaurants have been forced to close. Even classic restaurants that withstood Prohibition and the Great Depression, like New York City’s 21 Club, have closed their doors. Beloved restaurants in every state have succumbed to the “restaurant apocalypse,” including the late celebrity chef Paul Prudhomme’s K-Paul’s Louisiana Kitchen in New Orleans.
Fast food and quick service restaurants have been hit hard too. Pizza Hut and Dunkin each closed or are closing 700 locations. IHOP is closing 150 locations. Starbucks is closing 500 in the U.S. and another 300 in Canada. They are, however, opening 850 new locations focusing more on carryout and pickup. McDonald’s is slated to close 200 locations. Ruby Tuesday has or will close 185, and for IHOP it’s 150. In addition, there are reports of existential trouble at The Cheesecake Factory, Denny’s, Dave & Buster’s, Outback Steakhouse and Applebee’s (same corporate owner as IHOP).
The far-reaching impact of such staggering, industry-wide losses — everything from iconic, one-of-a-kind restaurants and bars to thousands of fast food locations — can’t be overstated. But ten months into the pandemic, we can also look back and see that there are some unexpected bright spots, showcasing something else we predicted back in April: the extraordinary resilience of the industry.
Adaptation, Survival, Success
In April, we noted immediate and drastic changes in consumer habits, namely increasing demand for curbside service, drive-thrus and delivery. CNBC reported in September that a survey from The National Restaurant Association found nearly 70% of restaurants had added curbside delivery and third had added third-party delivery service. We knew flexibility and innovation would be key, and indeed early industry shifts into off-premise sales allowed some businesses to evolve and thus survive, or even thrive, while new ventures have started up to seize on new markets.
Our April post also touched on the conflict we saw developing between third-party delivery services and restaurants, and clearly that relationship is still being negotiated. Meanwhile, the delivery services are clear winners in the pandemic marketplace. According to Restaurant Business, DoorDash, the food delivery industry leader with a market share of 50%, recorded a $23 million net profit in the second quarter, up from negative 190 million a year before. Their sales nearly tripled (to $879 million in Q3) in less than a year, and they’ve now set a price for an upcoming IPO. Elsewhere in the delivery service sector, Grubhub has been sold to Just Eat Takeaway and Uber Eats has purchased Postmates. These big moves come after revenue for Uber Eats increased 190% in Q3, softening pandemic-related losses in its ride-sharing business and showing how major losses in some areas have, in some cases, been recouped by major gains in others.
This boom for the delivery services could be good for the restaurant industry as a whole, but the consolidations of the players could mean less bargaining power for the food vendors. Recently Washington sought to address the power differential by capping delivery fees at 15%, becoming the first state to do so. In retaliation for Denver’s City Council’s 15% cap on delivery commissions, however, DoorDash slapped a flat fee of $2 on Denver deliveries, showing the back and forth negotiations taking place between restaurants and delivery services still playing out in different ways all across the country.
“We knew takeout and delivery was going to be part of our business. But we didn’t think that it would become the biggest portion of it.”
— Robert Villanueva, Petite Peso, Los Angeles (bon appetit.com, November 23, 2020)
In addition to building pandemic adaptations like outdoor dining and delivery into existing brick and mortar restaurants, owners and entrepreneurs are exploring a new, or at least newly energized, trend: the ghost kitchen. Also called cloud kitchens or dark kitchens, the concept involves housing multiple restaurants within a single kitchen, offering a delivery-only menu. Variations on the theme take many forms, and some use the term for any delivery-only restaurant. Eater reports that some brick-and-mortar businesses are expanding to create virtual-only brands, and notes that one market research firm has estimated that delivery-only enterprises could be a $1 trillion business by 2030. Writing in Entrepreneur, however, Dan Rowe, CEO of Fransmart, urges caution, predicting that 80% of ghost kitchens will fail. He warns franchisors off the trend of leasing space in a ghost kitchen and instead advises them to invest in their own ghost kitchen or off-premise platform.
A Year to remember
How long the preference for outdoor consumption and delivery continues will depend on whether or not consumers ever return to pre-pandemic comfort levels vis a vis indoor dining. But it’s reasonable to assume not all of the pandemic-optimized entities will fall by the wayside when the health threats eventually lesson.
Overall, restaurateurs have lived up to their reputation as a hardy and inventive bunch. Individual losses have been enormous, leaving millions without livelihoods, crushing dreams and ending centuries-old traditions as establishments that survived the Great Depression and World War II yielded to the economic pressures of 2020. But the stories of survival and success are also mounting. After a sharp drop in April, Yelp reports that fourth quarter new restaurant openings as a whole are only down 10% compared to third quarter 2019. While the challenges remain (especially with the third surge in cases and local market disruptions taking place sporadically throughout the country), the restaurant sector has clung on to a remarkable level of viability throughout an intensely challenging time.
Fridge is committed to being a valuable agency no matter what 2021 brings. Please don’t hesitate to contact us for support as we all navigate this together.
Emily Carlson, Vice President