The Roaring ’20s? A State of the Industry Report

If its massively disruptive start is any indication, the 2020s will go down in history as among the most challenging of decades for the restaurant industry but also among its most broadly transformative. The pandemic on its own was cause enough for many operators to throw in the towel and today, two years in, stubborn variants and accompanying economic ramifications keep piling up in ways that make developing, staffing, sourcing and operating profitably increasingly difficult.

According to the National Restaurant Association, some 90,000 restaurants have shuttered since the onset of the pandemic, many permanently. Without financial lifelines provided by the federal government’s American Rescue Plan, that number would likely be considerably higher. In a recent appeal to Congress to replenish the plan’s $28.6 billion Restaurant Revitalization Fund, the NRA noted that roughly half of the 177,000 eligible restaurants that missed out on federal aid last year will struggle to stay in business without additional support. Sean Kennedy, executive vice president of public affairs, referred in the NRA’s appeal to a survey of 4,200 restaurant operators in January, mid-omicron surge: “The new data show that the restaurant recovery is paralyzed and nowhere near complete. The restaurant industry is at an inflection point.”

Brooklyn Dumpling Shop Exterior Rendering Courtesy Oscar Martinez

Rocky Recovery Road

Indeed, the NRA’s 2022 State of the Industry Report, released on February 1, shows an industry on a road to recovery, albeit one peppered with potholes and a few blind corners. Real sales and employment remain below pre-pandemic levels, but momentum in both measures is being regained. The Association forecasts inflation-adjusted sales of $898 billion in 2022, almost back to the $899 billion it had initially pegged for 2020, which came in $240 billion below projection. The impact has varied wildly by type of operation and segment, with table-service operators impacted much more negatively than their quick-service counterparts, many of which have thrived as demand for off-premises meal solutions soared.

Further evidence of a recovery in progress, but nowhere near complete: NRA’s State of the Industry data show that during 2021 U.S. eating and drinking places restored nearly 1.7 million jobs to payrolls. That’s the largest calendar-year employment increase on record. In January, the industry added a net 108,200 jobs, according to preliminary data from the Bureau of Labor Statistics, but despite that representing the 13th month of growth, the industry remained nearly 1 million jobs, or 8%, below pre-pandemic staffing levels. What’s more, 7 in 10 operators across all major segments report not having enough employees to support customer demand and roughly half expect recruiting and retaining employees to be their top challenge moving forward. By the end of the decade, the association projects the industry will add an average of 200,000 jobs each year, with total staffing levels reaching 16.5 million by 2030.

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Part of the claw-back in industry sales has come from retaking share from retail grocery, according to Hudson Riehle, senior vice president of the NRA’s Research and Knowledge Group. “Pre-COVID-19, 51% of all spending on food in America was allocated towards the restaurant industry,” Riehle says. “During the depths of the pandemic, that dropped to the high 30% range. It has now reversed itself and has been moving up. Some of that has to do with menu price inflation, but the consumer research is quite clear that Americans love using restaurants in their daily lifestyle, and we’ll continue to shift that proportion of spend back towards restaurants and meal solutions away from home.”

Victor Fernandez, vice president of insights and knowledge at analytics firm Black Box Intelligence, says his company’s data show that from a sales perspective, recovery is, indeed, underway. Same-store sales in 2021 were 3.6% positive compared to 1.8% positive in 2019. “We saw double the growth in 2021 than in 2019. If you look at it from a quarterly perspective, it would have been even better because Q1 of 2021 was very weak,” Fernandez says. “Starting in Q2, growth rates averaged 6.3% in each quarter. ”

While such sales gains seem encouraging, Fernandez cautions that higher average guest checks are a large part of the cause. “We’re seeing very rapid growth in average guest checks — faster than we’ve seen since we started tracking in 2009,” he says. “Menu prices are going up because everything from food and fuel to equipment and labor is significantly more expensive. That inflation is putting a lot of pressure on what at the surface looks like pretty good top-line growth.”

Cost pressures, labor shortages and supply chain disruptions, all exacerbated by the pandemic, aren’t expected to abate any time soon. And in the NRA’s study, more than half of restaurant operators predicted it will be a year or more before business conditions return to normal.

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Conceived before the pandemic hit, Brooklyn Dumpling Shop is a modern automat that leverages technology to delivery hot food fast.

Transformative Times

Normal, however, is no more. While operator resiliency and pent-up consumer demand indicate the industry’s recovery will accelerate as the virus subsides, the 2020s will be a decade of accelerated transformation and even reinvention of restaurants. Already trending as the decade began, the pandemic shoved to the fore game-changers such as virtual brands, ghost kitchens, re-imagined outdoor dining, meal kits, subscription models, alcohol to-go sales, curbside pick-up, third-party delivery and contactless transactions. Much of what in the 2010s was considered emerging and disruptive has become table stakes for the 2020s.

Facilitated by technology and consumers across all age groups quickly becoming reliant on and comfortable with nontraditional access to restaurant meals, such forces have shaped a new normal. Dining rooms may be open again, but off-premises channels continue to generate 80% of total industry traffic compared to 90% during the depths of the pandemic, according to NRA data. QSRs and fast-casuals leveraged existing infrastructure to shift quickly when dining rooms closed, but even segments not built for off-premises altered their mindsets and their models to meet the moment.

“Pre-pandemic, maybe 5% to 10% of a typical national table-service chain’s sales would have been coming from off-premises,” Riehle points out. “Now, it’s not uncommon for those same multi-unit operators to have off-premises sales of 25% to 30%.” As macro transformations go, that’s a big deal. Through investments in technology, packaging, redesign, marketing and partnerships with third-parties, these operators have built strong new revenue streams — serviced from existing kitchens with existing staff — that most will continue to nurture alongside their traditional dine-in business, demand for which research shows remains strong.

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“There’s a lot of pent-up demand for on-site restaurant experiences,” Riehle adds, noting that 51% of adults surveyed for the 2022 State of the Industry Report say they’re not eating at restaurants as often as they’d like. “Dine-in isn’t going away. Overall, however, the typical American restaurant patron continues to, and will continue to, rely extensively on off-premises meal solutions.”

As such, the 2020s will continue to see restaurant footprints shrinking, layouts changed to accommodate off-premises business, and innovation in packaging and temperature control systems, Fernandez notes. And the focus in development will continue to expand from traditional locations to hybrid models and alternative points of access, such as ghost kitchens, virtual brands and drive-thru-only locations. Further, investments in and prevalence of technologies, including robotics, artificial intelligence and automated delivery will increase over the decade as operators work to improve efficiency, reduce labor costs and shift toward next-gen convenience-driven models.

A new study by Deloitte Consulting, The Restaurant of the Future: A Vision Evolves, underscores the notion that many of the fast-tracked changes that rose to prominence in the early 2020s will stick. Jean Chick, co-author of the study, published in late December 2021, says the research found 64% of consumers don’t expect to return to their pre-pandemic dining habits any time soon, and that key areas of permanent change include restaurant digitization and demand not just for convenience but for high-quality convenience.

The study shows 61% of consumers now order from restaurants at least once a week. That’s up from 29% a year ago and 18% pre-pandemic. In addition, three in five customers say they expect the same quality and freshness in delivery and takeout as they do in the dining room.

The great enabler, of course, is technology and digital platforms have forever changed the game. “They’re the new normal, and what consumers expect,” says Chick, principal and U.S. restaurant and food service leader at Deloitte. “Sixty-four percent of respondents say they prefer to order digitally, specifically at QSRs. That number has increased significantly from when we surveyed people back in December 2019. The second component is that the entire industry has enhanced its digital presence. It’s now a consumer expectation that you have an app, a way to order online, that you participate in third-party delivery services.”

Chick suggests that by the end of the decade, automation, AI, data and analytics will bring about even bigger changes in the industry. “There are plenty of options for automation already, but each year it’s getting smarter, faster and more cost-effective,” she says. “A lot of what’s available today is still cost-prohibitive to most operators, but costs will come down and we’ll see a lot more automation. We’ll also see a lot more AI. Some QSRs are already experimenting with automated order-taking in drive-thrus and that will continue to evolve, expand and shift the restaurant experience.”

Voices of Optimism

This post-COVID-19 decade promises to be one of significant and lasting change. rd+d tapped three executives for insights on what it means for their brands, for the broader industry and where they see opportunities for development.

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Stratis MorfogenStratis Morfogen, Owner

Brooklyn Dumpling Shop

HQ: New York City

Concept: Contactless automat serving more than 30 varieties of Asian-style dumplings

Fortuitous foresight: I created this concept in 2019, partnering with Panasonic to create what’s basically a smart-phone-controlled automat. We sold 50 franchises before we opened our first store in 2020. It was good timing, but I didn’t design it for the COVID-19 era. I simply saw the automat as the most cost-effective, efficient way to deliver a product to the consumer. The consumer is 100% in control of the ordering process and, in turn, we can reduce our labor by half. That was important before, but it’s even more important now. We’re also opening two full-service concepts this year — Brooklyn Chop House and Pappas Taverna — which incorporate separate, automat-style lockers accessible from the exterior of the building with the scan of a barcode for fast and easy takeout and delivery order pick-up.

Yes, it’s roaring:  I teach classes on entrepreneurship and called it in May 2020 that the new Roaring ’20s starts January 2022. I believe we’re at the doorstep of seven to nine years of explosive growth. I tell young entrepreneurs not to worry about going out into a market like this. There’s tremendous opportunity right now. If you have a decent business plan and a track record, there are plenty of landlords who will build your restaurant for you with silverware and napkins and glassware on the tables. The big shakeout in the industry has been sad. But it has also opened up huge opportunities for entrepreneurs. We’ve gotten multiple, incredible deals on great Manhattan locations that would never, ever have been available to a small guy like me in 2019.

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Steve FigliolaSteve Figliola, Chief Development Officer

Plant Powered Fast Food

HQ: Encinitas, Calif.

Concept: 100% plant-based burgers, fries, shakes

Right brand, right time: We have 10 units so far, including a new flagship store in Las Vegas, our first outside of California. I joined the company in January, after nine years with Starbucks, in part because of the tremendous opportunities developing in the plant-based QSR space. Consumers are shifting towards plant-based for a variety of reasons, from health and animal welfare to sustainability and the environment. So, here’s a growing QSR that’s achieving exceptional average unit volumes in a rapidly growing segment. The timing is perfect for the brand. We’re just getting started and the future looks really exciting.

2020s focus:  We’re taking time now to tighten up operations ahead of very aggressive growth through franchising, eventually targeting an opening rate of one store per week. There are a lot of pressures on the P&L in this current environment, however, so we’re taking our time, putting systems in place and building a strong foundation while priming the development pipeline. We’ll continue to refine and improve our prototype and look for more sites with drive-thru capability. We offer all of the different mobile-order channels, and they’re all growing, but the drive-thru is growing fastest. Another big area of focus is on people — staffing, training and retention, celebrating and empowering our team members. Technology will help us in all of these areas.

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Patrick ConlinPatrick Conlin, CEO

Wayback Burgers

HQ: Cheshire, Conn.

Concept: Fast-casual “hometown” burger joint

Pandemic success: We had record years in 2020 and 2021, both in revenues and franchise sales. We were fortunate that we were already set up with online ordering, a strong mobile app, third-party delivery, etc. As offices shut down, we also benefitted from our core strategy of locating in suburbs and smaller towns. We’ve all had to learn to be flexible and nimble. We tightened up our menu and pivoted to what we called emergency room franchising to get through that first couple of months and everything’s been uphill since. In 2020 we had four locations with more than $1 million in sales; in 2021, we had 17 units with revenues over a $1 million. We’re growing in Texas, the Southeast, California. We have new locations going up in Connecticut, New York and Pennsylvania. And we’re seeing strong international growth through master franchise agreements, the most recent of which is in Japan.

Revamped normal:  The farther we get from 2020 and 2021, the more we get back to normal, but revamped normal. We haven’t changed our footprint or our basic go-to-market strategy, but we’ve broadened it to include ghost kitchen partnerships in urban markets. Delivery is here to stay, and digital options will evolve and expand as well. We’re in the process of testing in-store kiosks, a text-based ordering system and AI-based phone system. We’re also starting to look at robotics and contactless food lockers. But we believe that people still want to go out to eat, to socialize. On-site dining will be back, but with more space between tables, more outdoor dining and heightened emphasis on sanitation and service. Brands that are ahead of the game technology-wise will survive, but those that also provide great service and hospitality are going to be the real winners in the 2020s and beyond.