Will COVID-19 Spark the Comeback of Casual Dining?

Closure tallies continue to vary for restaurants at this chapter of the COVID-19 recovery. Industry tracker Black Box Intelligence pegs the figure at roughly 12 percent of full-service restaurants. Datassential’s Firefly platform says 90,296 total (all sectors), with 7.4 percent of those being national chains, 13.3 percent regional, and 8.5 percent independent. Fine-dining accounted for 10.9 percent of the cut, casual dining 9.2 percent, and midscale 9.1 percent. Food trucks absorbed a 19.5 percent loss. Quick-service and fast-casual, respectively, trailed the pack at 7.9 and 7.2 percent. In all, nearly 9 percent of the sector’s 763,931 restaurants shuttered in 16 months.

As dramatic as these figures are, they pale in comparison to early day projections, which guessed as much as 30 percent of the restaurant industry would vanish. Additionally, recovery took hold quicker than some expected, with eating and drinking places registering total sales of $67.3 billion on a seasonally adjusted basis in May, according to data from the U.S. Census Bureau. Despite an unfavorable shift in the Father’s Day holiday, the industry posted its 13th consecutive week of positive same-store sales growth in the period that ended June 13, per Black Box.

It would be safe then, given what took shape, to label COVID a reset event more so than an apocalyptic one. Here’s a good illustration of how trends are moving.

In nominal terms, May’s sales surpassed February 2020 pre-pandemic volumes of $66.2 billion. However, after adjusting for menu-price inflation, real sales remain about 3 percent below where they were before coronavirus. So the industry’s recovery is not yet complete, in terms of a return to normal traffic.

Yet as we know, traffic was sliding before the crisis, too. Coming into COVID, off-premises sales increased nearly four times faster than dine-in business, accounting for about 80 percent of restaurants’ U.S. dollar sales growth over the last three years.

Traffic and on-premises business tracked in opposite directions. Dine-in’s share declined consistently from 73.8 percent in 2013 to 68.6 percent in 2019. It was 52.8 percent in 2020 (not a year that makes any clear sense to measure against).

As that 2020 figure proves, though, COVID did little to slow the rise of takeout/delivery/curbside and everything else outside the four walls.

In the U.S. during COVID, delivery’s share of foodservice sales doubled to more than 15 percent, according to financial services company Rabobank. Per Datassential, 90 percent of guests said they changed delivery behavior as a result of the crisis.

With restrictions lifting around the country, consumers have a chance to recalibrate. And while they’re clearly doing so (the Census data) pent-up demand has hardly cashed out. According to the National Restaurant Association, 50 percent of adults said they are not eating on-premises at restaurants as often as they would like (survey data from June). That was down significantly from the 83 percent who reported similarly during the early weeks of the pandemic. But still slightly above January 2020 pre-pandemic marks of 45 percent.

However, in the past year-plus, restaurants across every segment expanded off-premises options on survival terms, and customers embraced these additional points of access. An earlier Association study showed 53 percent of adults believed purchasing takeout or delivery food was now essential to the way they live.

In turn, it’s not surprising only 28 percent of adults now say they are currently not ordering takeout or delivery from restaurants as often as they would like. Increased usage of off-premises foodservice is baked into the cake for many consumers, the Association said. “And this trend is likely to continue well beyond the end of the pandemic.”

What does this mean for sit-down restaurants? Firstly, guests are still clamoring for both sides of the transaction coin. Could you say that before? We’re nowhere near the recovery apex (and we’re not talking about the labor and hiring shortages at hand and how that might be limiting hours, service, etc.)

A good way to measure this would be to examine what happened in the cinema/box office industry pre-COVID. Trends suggest there’s a cap on consumers’ trade-off between social/immersive experience and convenience. Despite wide availability of streaming, which can be used as a proxy for delivery in this example, the number of tickets/admission remained largely steady over the years. Concert sales didn’t suffer from the wide availability of CDs or streaming, in another precedent.

In Rabobank’s view, delivery’s main threat is as a substitute for restaurant spending driven by convenience. Not so much when the experience factor is the selling point.

It believes, for brands where consumer experience and personal connection reign, delivery will inch back in the coming years to a relatively marginal part of the business.

Before 2020, total foodservice growth was flat or lower in 10 of the largest global foodservice markets over the last three years compared to the previous three-year period. This even as delivery’s share of total sales in these areas jumped 250–300 basis points.

Just look at Amazon for why this might matter. The behemoth’s share of U.S. retail sales increased from 2.5 percent in 2015 to 5.9 percent in 2019. It outgained the category by 24 percent over that stretch.

However, it didn’t present much impact on the overall retail sales growth trajectory, as U.S. figures posted a 3.3 percent CAGR during this stretch—largely in line with the 3.8 percent CAGR over the 2010–2015 window.

Generally, disposable income, GDP growth, and unemployment levels have a bigger impact on restaurant growth. Domestic foodservice consumption showed a nearly plus-74 percent correlation with per capital personal consumption expenditure over the past 25 years, including less than 90 percent correlation during recessionary stretches, Rabobank said.

As a result, the food-away-from home share of total disposable income increased at a fairly steady rate over the last 10, 20, 40 years—from 2.2 percent in 1979 to 6.3 percent in 2019.

To dress this all down, people are going to spend money on in-restaurant experiences again. Any off-premises gains made during COVID might alter it somewhat, but it’s not going to materially change the draw of full-service restaurants.

In fact, it could signal the opposite. Particularly near-term as people put both hands back on the steering wheel for the first time in months.

According to Bloomberg, 82 percent of urban centers saw more people move out than in during COVID (compared to before). Ninety-one percent of suburban counties reported more people moving in than out.

And what often resides just outside those city-center markets? Casual dining—a segment that adjusted to off-premises pivots during COVID better than many of its independent counterparts. From virtual brands to curbside tech to stores redesigned to serve to-go options, casual chains, in general, saw massive off-premises gains during the pandemic. Beyond the obvious (guests had nowhere else to go for the food) this provided sit-down concepts a chance to introduce a new occasion into core customers’ habits. And it also reintroduced these brands to lapsed users who might have preferred convenience-driven options before. Lastly, casual chains simply entered the consideration set for a new generation of guests. Either because other options were closed during heightened restrictions. Or because casual brands opened ordering channels on platforms where previous core users weren’t (say third-party delivery for a brand that didn’t tout it previously).

And so you saw concepts tighten menus, improve execution, and lean into their cores, from Outback's simplified menu to a new guest experience at Red Robin to Darden calling the COVID reset a "once-in-a-lifetime opportunity."

"The most prominent and the most significant thing we've done is streamline the menus and our processes and procedures, and that's forever,” CEO Gene Lee said in June.

In a lot of ways, it's opposite of what happened six or seven years ago when casual brands tried to chase millennial customers and drifted from their centers. The result being the broad retraction of an overleveraged sector chasing relevancy.