Restaurant Quarterly Update - Winter 2021

The U.S. restaurant industry was one of the most severely affected sectors by the global pandemic. Certain fundamental shifts in the restaurant sector leading up to the pandemic further exacerbated the impact of the government-mandated response.

An oversaturated restaurant market, changing consumer preferences emphasizing convenience or experience and a noticeable decline in millennials visiting full-service restaurants, contributed to negative traffic trends before the pandemic. For the two years prior to the pandemic, traffic declined by an average of 2.2% each month. Operators were forced to compensate with price increases, which largely offset the negative traffic.

The resurgence in global equities—including restaurant stocks which are up 80% from April lows—has partially masked the continued pain points being felt on the ground across a large part of the sector.

Government-mandated lockdowns beginning in March led to massive declines in same-store sales for all concepts, especially those without robust off-premise infrastructures. Drive-thru capabilities, innovative off-premise solutions, and warmer weather helped fuel a rebound leading into the summer. However, the December resurgence of new COVID-19 cases and accompanying restrictions, as well as the cooling weather in Northern states, drove further setbacks in same-store sales moving into 2021.

Concepts that were already struggling with large traffic declines pre-pandemic and those that recently took on leverage to fuel growth were particularly disadvantaged when government-mandated closures were initiated. Many of these concepts, unable to negotiate a plan with incumbent lenders, filed for Chapter 11 protection. As a result, more than 30 restaurant chains filed bankruptcy in 2020, a fivefold increase over the prior year.

Despite the challenges endured over the past year, some positive signs point to a more favorable 2021. Operators spent the better part of 2020 shifting to off-premise capable business models with a reduced labor force, helping to salvage profitability margins despite lower volumes. Significant liquidity in the markets, combined with operators’ realization that size and scale has become more important to survival, will likely continue to drive consolidation throughout the industry.