Dining room lockdowns, start-stop mandates, and the maze of federal aid was always going to hit independent restaurants hardest. Former National Restaurant Association CEO Tom Bene illustrated this in plain terms during initial waves: the average restaurant walked into COVID-19 with about eight weeks of cash on hand. That’s not an indictment of independents, but rather the reality of thousands of mom-and-pop businesses across America.
Ninety percent of restaurants industry-wide boast fewer than 50 employees and 70 percent identify as single-unit operators, according to the Association.
And so, asking a lean, foot-traffic-centric business to close for months on end was hard to equate. As was restocking inventory when traffic and capacity fluctuated wildly. Tech fixes (and fees) and pivots, without the leverage of a chain system, were steep and costly asks. Generally, independents have lower margins and access to less relief on rent and other fixed costs than large-scale counterparts. They also entered COVID-19 with underdeveloped off-premises business and higher levels of financial stress.
And perhaps the most critical distinction: Nearly two-thirds of independents are full service—the category naturally most reliant on four-wall traffic—versus 15 percent for chained/franchised. In all, grappling with external forces, like increasing rent, rising food costs, scarcity of ingredients, and increasing wages (up nearly 13 percent for nonsupervisory leisure and hospitality workers in April, per federal data) continues to weigh heavy.
“Small business is the backbone of our America economy,” Diana Staley, owner of Reverie Kitchen in Branford, Connecticut, says. “Ten percent of all payroll jobs in the economy are in the restaurant industry—10 percent. When the Restaurant Revitalization Fund ran out of money, 177,300 restaurants were left with no aid to struggle to compete with those who received RRF; the potential impact of these restaurants closing will affect roughly 4,432,500 million employees.”
Independent revenues dropped more than 70 percent in the final two weeks of March 2020. At least 4.5 million of the roughly six million jobs shed in the food and drink industry within opening weeks of COVID came from independents, according to the Independent Restaurant Coalition.
In 2020, independent locations declined by 8 percent, according to The NPD Group. Or 28,399 closures.
The sector still has myriad challenges ahead, but a glimmer of hope as Congress is expected to vote on further aid on May 19—a $48 billion bill that would fully fund the Restaurant Revitalization Fund. It should take place Monday or Tuesday, according to recent reports. The bill, introduced by Sens. Ben Cardin (D-MD) and Roger Wicker (R-MS), includes $40 billion for RRF replenishment and $8 billion in support for other industries impacted by the pandemic. It needs 10 Republican votes to pass. “… right now we’re not sure if those votes are there,” an Association spokesperson said in an email.
As Staley, who says she’s had more that 40 meetings at the Senate, mentioned, aid thus far has been a mixed bag for independents, to put it lightly. “Restaurants were promised relief in the American Rescue Plan, but 67 percent of restaurants received nothing when the funds were exhausted: 278,304 restaurants applied for relief, 101,004 received assistance, and 177,300 restaurants are still waiting for that promised assistance,” she says.
“Unlike previous bailouts of other industries, restaurants, the second-largest private sector employer, were shut down, through no fault of their own, during COVID, and furthermore, our government told the American people, over and over, it was not safe to eat at restaurants,” Staley adds.
In mid-April data from the Coalition, the organization reported 86 percent of restaurants (from a 1,000-operator survey) believed a a grant would allow them to hire more staff; 77 percent said they’d be able to pay rent; 72 percent utilities; 76 percent supplier payments; and 77 percent repairs.
On the reverse, 24 percent of restaurants that did not receive RRF said they were in danger of closing in as soon as three months compared to 13 percent of those who did. Forty-eight percent added they were tracking toward defaulting on a loan versus 22 percent, respectively.
“While the government has declared the pandemic over, it is not over for restaurants, who continue to struggle because they were never provided the assistance they were promised,” Staley says.
“This legislation is not another program to help restaurants; let’s be clear, this is to help the restaurants who were left out when the RRF ran out of money last year,” Staley adds. “You cannot have an American Rescue Plan, a small part of which was to help restaurants, and then fail to rescue 67 percent of restaurants that applied. That is egregious, and it does not matter whether you are Democrat or Republican, you either are on the side of doing what is right, and on the side of small business who were tantamountly crushed during the pandemic, or you are not.”
Trends and developments
As independents await news on potential aid, the industry has begun to grow from a unit count perspective. According to NPD’s Fall 2021 ReCount restaurant census, which counts restaurants opened as of September 30, 2021, the independent field expanded by 1 percent, or 2,893 units, last year.
Independent locations are growing in seven of the nine Census regions, NPD said, and large areas like Los Angeles, Dallas-Fort Worth, and Seattle-Tacoma.
Another evolving development is independents who purchase enough volume to order from broadline foodservice distributors hiked spending and orders. Independents increased cases of food and supplies ordered from leading vendors by 27 percent in the 12 months ending March 2022 compared to the same period a year ago, NPD reported. That’s 5 percent above the pre-pandemic level in the period ending March 2020.
Dollars shipped from broadline distributors to independents also rose 47 percent in the calendar ending March 2022, year-over-year—a 25 percent jump versus the pre-virus figure in the 12 months end March 2020.
On the ground level, consumer online and physical visits to independents increased by 12 percent in the 12 months ending March compared to the same period a year ago and are now 7 percent below pre-pandemic in the 12 months closing March 2019.
In the same period, visits to independent full-service restaurants, which in NPD’s definition mix 63 percent of the category, upped 19 percent versus the year ending March 2021, resulting in a 14 percent decline from the year ending March 2019. Quick-service independent traffic lifted 5 percent and was 1 percent above pre-virus March 2019 marks.
“The pandemic lockdowns and restrictions were particularly tough for independent restaurant operators since they have fewer resources and capital than chains to withstand tougher times,” said David Portalatin, NPD Food Industry advisor and author of Eating Patterns in America. “Some independents didn’t make it, but many did, and they are thriving and contributing to the overall vibrancy of the U.S. foodservice market.”
Demand really hasn’t been the anvil, however. It’s clear consumers are returning to restaurants, independents and chain operations alike. In fact, the reality has accentuated other forces at work, like higher costs and lack of supply. Meeting demand, in other terms, has become as, if not more, difficult than trying to generate it.
And there’s a lot going on under the surface. Dine-in restaurant visits in Q1 of this year increased 38 percent versus a 45 percent decline a year ago, NPD said. Off-premises, through carryout, drive-thru, and delivery, fell 9 percent from a 24 percent gain in Q1 2021. The full-service category grew on-premises traffic by 26 percent against a year-ago drop of 34 percent. Off-premises, which continues to account for about a third of full-service visits today, remains on the downswing—it declined 24 percent to start the year over a 63 percent surge last year, per NPD.
While off-premises business has stuck well above prior levels (Texas Roadhouse is more than twice pre-COVID, even without delivery), there are distinctions forming. From February 2020 through February 2022, digital and non-digital carry-out restaurant orders declined by 2 percent, according to NPD, while delivery increased 116 percent, and drive-thru grew 20 percent. Digital ordering, which hiked 117 percent in the two years, contributed to the delivery and drive-thru growth, the company noted. Although digital carry-out orders doubled through the pandemic, these gains were offset by a double-digit decline in non-digital pickup orders that account for the bulk of pickup orders.
In the year ending February 2022, 76 percent of carry-out were non-digital orders, and these orders declined by 16 percent compared to the prior year. Non-digital drive-thru orders rose 20 percent in the same period, and non-digital delivery, which represents 25 percent of delivery orders, increased by 25 percent.
“Several factors have encouraged consumers to move away from ordering carry out. The convenience of drive-thrus, delivery, and mobile ordering, in addition to dining room closures, have influenced consumers’ willingness to get out of their car, walk into a restaurant, and order to go,” Portalatin said. “Convenience rules and the more convenient options will win.”
So full-serves and independents have started to regain share where they historically fought for it. But those brands with resources to couple on- and off-premises business, without eroding margins beyond repair, are beating 2019 baselines. Again, it’s a conversation favoring chains with scale and collective bargaining power, either from a tech stack perspective or their ability to weather supply shortages and lifting costs.
First Watch, for example, posted Q1 same-store sales of 27.2 percent and traffic growth of 21.9 percent. On a three-year stack basis, those figures were 30.6 and 9.9 percent, respectively. Against, pre-COVID 2019, they’re 26.1 and 3.4 percent better.
In March, the chain experienced a surge in sales that boosted its restaurant-level operating margin to 19.6 percent, exceeding expectations. Dining rooms recovered to 90–92 percent of pre-COVID levels, and off-premises maintained a mix of 22 percent. It was just 6 percent back in 2019.
However, the movement back into dining rooms is clear from a broader level—Texas Roadhouse pushed $19,500 in average weekly sales in Q1. So far in Q2, it’s down to $18,000. That number was north of $21,000 last summer, yet Texas Roadhouse was taking in $126,442 on average.
The Q2 number (at $18,000 to-go) is $135,000.
Also, Texas Roadhouse’s Q1 same-store sales growth of 16 percent comprised of 7 percent traffic and average check of 9 percent. The latter got a 3 percent boost from positive mix tied to guests ordering higher-margin and priced items in-store than they were from their cars. Mainly, drinks and appetizers.
According to recent data from Revenue Management Solutions, drive-thru experienced a 13.4 percent drop in the company’s May 2022 impact report. Dine-in had the most marked increase, 2.4 percent growth, year-over-year, while takeout and delivery both ticked 0.8 percent higher.
RMS credited the drive-thru slide to Gen Z in particular, which might be due to rising costs and gas prices. Among the demographic, drive-thru frequency dipped from 91 percent in Q4 2021 to 81 percent in Q1 2022 (asking if they visited a drive-thru at least once a week).
Intent to hit the drive-thru more or “much more” in the future fell from 34 percent to 12 percent in those same windows.
Nearly 50 percent of Baby Boomers and Gen Xers said they believed they were getting less value from restaurants today. And the 40-plus crowd were managing spend primarily by ordering less, choosing less expensive items, and going to less expensive restaurants.
Speaking of rising costs …
According to Bureau of Labor Statistics data released Wednesday, full-service menu prices increased 8.7 percent, year-over-year, in April. The figure was a record as prices climbed 0.9 percent from March to April. Quick-service prices ticked 7 percent in April over last year.
Prices for food away from home as a category leapt 7.2 percent. One thing that’s helped restaurants is the soaring prices are being outpaced by grocers. Food-at-home spiked 10.8 percent in April, the largest bump since November 1980.
The producer price index for food showed wholesale food prices 17 percent higher over this time last year—the loftiest in 50 years. Fresh vegetables are costing companies 82 percent more; cooking oil 46 percent; chicken 29 percent.
In FoodMaven’s latest market trends report, released May 7, the company said weeks of increases in commodity prices have begun to impact the average wholesale price, driving it up 3.06 percent.
The biggest increases came in produce, with fresh lettuce rising 8.93 percent; fresh bell peppers up 6.42 percent; and fresh onion 2.5 percent. Beef Strip Loin (6.28 percent); shell eggs (4.7 percent); chicken wings (0.67 percent); chicken breast (0.5 percent); fresh potatoes (0.33 percent); and pork loin (.12 percent) climbed as well.
Food, labor, and occupancy costs are historically the largest line items for restaurants, combining to account for roughly 70 cents of every dollar of sales during normal times, according to the Association. The challenge now, and why prices are going up on menus, is three categories are making up a larger share of sales than they did before the pandemic.
Per Association survey data, 91 percent of operators said their total food costs (as a percent of sales) are higher than they were prior to the outbreak. Only 3 percent said their food costs make up a smaller proportion of sales.
The Association requested Congress reinstate the tariff exclusion process and remove all tariffs that affect the food supply chain and protect secret ballot elections for workers rather than a new compulsory “card check” process.
President Joe Biden spoke on Tuesday about inflation and credited COVID alongside the Russia-Ukraine conflict for driving prices higher. “We believe that there are many ways the Administration and Congress can help restaurants—from addressing supply chain logistics with investments from the Infrastructure Investment and Jobs Act, to augmenting needed industry workforce by passing the Essential Workers for Economic Advancement Act,” Sean Kennedy, EVP for public affairs at the Association, said in a statement. “While there isn’t a single silver bullet that will bring the current economic climate under control for the restaurant industry, the Association is taking an ‘all of the above’ approach to legislation that could provide relief for operators.”
The U.S. Federal Reserve raised interest rate half a point last week—the largest jump in two decades—in an effort to stem inflation.
Returning to independents, the above dynamics spin a climate difficult to navigate with a team of experts, let alone as a mom-and-pop.
Staley recently called John Geanakoplos, an American economist, and the current James Tobin Professor of Economics at Yale University, to address one of the reasons critics have argued against aid—the idea new legislation would contribute to inflation. Geanakoplos, also a former U.S. Junior Open chess champion, told Staley anybody who believes that “does not understand the economy.
“This legislation enables small business to get back to work,” Staley says “It allows restaurants and hard-hit industries, who lost so much during the shutdown to get their businesses back open or fully open, to pay their landlords, fixed costs and overhead that have piled up during the pandemic, to make the necessary improvements and repairs, to recover and grow their businesses. Work that was not able to be done when the government closed their businesses, as these businesses drained their resources to stay afloat and do not have easy access to capital. This investment in small business puts people to work, creates efficiency, and strengthens the economy and the bonds of the communities they serve.”