March 29, 2021
By: Andrew W. Lapin
Q. How has the fast-food industry been impacted due to COVID-19?
A. Shutdowns, social distance rules, employee safety concerns – almost no aspect of quick service restaurants and fast casual industry segments have been left untouched. Sales dropped precipitously in March and April 2020 when people were afraid to go out. After May 1, customers slowly returned. Currently sales comps are positive month over month, primarily chicken and pizza. Burger chains held steady. Food costs are down and margins are up because there is no need for discounting if you’re the only game in town. The fast casual segment of the industry continues to see margin erosion with continued discounting.
Quick service has built-in advantages for this environment: They are mainly stand-alone locations with drive-throughs and no dining room focus. People feel safe getting food in the drive-through and it is easy to integrate curbside pickup provided the operator already had an online app. Fast casual chains, however, are frequently located in strip mall locations, which are hurting, don’t have drive-throughs, and many have not been able to integrate curbside efficiently.
Q. What is the key operational pressure point that quick service and fast casual are facing now?
A. In a word, labor. It’s almost impossible to hire workers right now. Workers are afraid to come to work and interact with the public. Being able to stay home and collect unemployment and government benefits is a more attractive option for some, especially when government benefits pay as much or more than an employee’s salary.
Q. What is changing regarding food delivery model? How have Uber Eats, Door Dash and others made an impact?
A. In March 2020, food delivery took off. People were afraid to leave their houses so delivery services such as Uber Eats and Door Dash ramped up. Profitability for quick service and fast food suffered. Franchisees have a love/hate relationship with delivery services – they increase business, but at a loss or breakeven.
In April 2020, quick service operator operators realized they had a solution and began to push drive-through. Before COVID-19, the drive-through accounted for approximately 70% of quick service total volume. There was less emphasis on the dining room than years ago. With COVID-19 driving increased drive-through traffic, service times increased dramatically and customers would give up. Operators increased drive-through efficiency by retraining under-utilized counter and cleaning employees. Operators doubled up window cashiers and increased food prep to increase efficiency and move more customers through the line faster. Average wait times decreased dramatically and abandonment rates declined. By the end of 2020, drive-through and curbside pickup reduced reliance on delivery services like Door Dash.
Q. How have franchises had to be nimble with employment?
A. They’ve had to be creative with reassignment. Restrooms and dining room use is reduced or closed but pickup lanes and curbside are super busy. So, employees have been redeployed to support pickup lanes and curbside.
Q. What is projected in the future for fast foods in a flat economy?
A. The major national quick service chains will be the winners, partly due to availability of real estate. With many small players and casual dining going out of business or closing locations, quick service restaurants can pick up property they wouldn’t have had a chance at pre-pandemic. Another factor is the availability of capital. Banks are having a hard time deploying money because so many businesses are suffering and banks need certainty and clarity. Quick service is a good place to deploy capital. They’re doing well. The more successful you are, the more appealing you are to a bank. So big chain operators have access to cheap capital right now.
Unfortunately, casual dining will be losers. White tablecloth restaurants are currently near to dead in the water – with estimates of more than 50% being out of business before this is over. It’s not solely due to COVID-19. The pandemic just pushed marginal restaurants over the edge. And people are getting used to new routines with drive-through and curbside pickup. The longer this goes on, those habits will not go away. There will be less demand for dining-in overall.