Rabobank’s 2022 target stems from two main detractors: lower contributions from foodservice growth (price and unit growth, which accounted for nearly 90 percent of foodservice expansion over the last five to 10 years), and a likely protracted economic recovery, notwithstanding the surprising quick jobs recovery outlined in May by the Bureau of Labor Statistics, when restaurants gained 1.4 million jobs.
What also needs to be considered is how the speed of recovery won’t track uniform across all sectors.
U.S. restaurant sales increased at a consistent compounded annual growth rate (CAGR) over the last five, 10, 20 years (5.3, 5, and 4.9 percent, respectively) compared to a steady deceleration in food retail trends (2.7, 2.9, and 4.9 percent).
This growth, though, was not one-size-fits-all. And those divergences are poised to only accelerate as restaurants emerge from COVID-19 lockdowns.
To put this in perspective, limited-service restaurant sales increased at a 6.9 percent CAGR over the last three years. That’s nearly twice the rate (3.6 percent) of full-service venues. Rabobank expects this to widen as counter-service sales lift 3.5 percent over the next three years versus a decline of 2.5 percent for sit-down brands.
The reason: The standard drivers of quick-service growth—demographics, convenience, behavior trends, improving quality—will not only remain in play in a post-COVID-19 landscape, but will be further augmented by a higher number of full-service closures, permanent dine-in constraints/changes, lingering health-and-safety concerns and a slower recovery during periods of low or no economic growth. Additionally, older, more wary consumers typically over-index to full-service restaurants.
Nearly two-thirds of independent restaurants are full service (versus 15 percent for chained/franchised). It’s a segment more at risk of permanent closure than any other. The Independent Restaurant Coalition said in June that 85 percent of independents could close without direct aid, which would strike a severe blow to the industry. Independents generate about $760 billion in sales and employ 11 million people. The Coalition warned independents were more in danger of permanently going out of business due to the pandemic because consumer spending at these establishments has been disproportionately affected and they lack the same access to capital markets.
“Mass failure may also destabilize the commercial real estate market if these restaurants cannot pay rent, which could also incite a spillover effect in the larger economy,” it wrote in a report released by Compass Lexecon.
The Coalition added independent restaurant revenues dropped more than 70 percent in the final two weeks of March and are still 60 percent lower compared to last year. At least 4.5 million of the roughly six million jobs lost in the food and drink industry came from independent brands.
Generally, independents have lower margins and access to less relief on rent and other fixed costs. They also entered COVID-19 with underdeveloped off-premises business and higher levels of financial stress.
A post-COVID-19 survey of small businesses by the National Bureau of Economic Research showed only 30 percent of restaurants expected to remain open by the end of the year if the current disruption lasted even four months. That was last among all retail/consumer sectors.
Rabobank, even with the CARES Act in consideration, projects as many as 50,000 to 60,000 independent restaurant closures, or 15–20 percent of the entire field. Looking at the bigger picture, it would slice 8–10 percent of all restaurants in the next 12 months.