The future of fast food has arrived ahead of schedule
Need to quickly adapt to changing circumstances means the future has arrived faster than expected
Big restaurant chains have done an admirable job navigating the coronavirus crisis. As a result, the future of the industry might look a lot like the present.
The spread of the coronavirus, coupled with government-mandated lockdowns, wreaked havoc on the U.S. restaurant industry. Darden Restaurants, which operates sit-down chains like Olive Garden and LongHorn Steakhouse, said Thursday that comparable sales fell nearly 48% from a year earlier in the quarter that ended May 31, and are down by a third so far in June. Many smaller independent businesses, meanwhile, have been hit even harder.
At the same time, big fast-food chains have been bringing home the bacon. These chains have responded to the crisis by reducing menu options, closing dining rooms and offering better deals. As a result, customers have been returning in large numbers.
McDonald's U.S. sales fell by 19% from a year earlier in April, but that figure rebounded to just a 5% decline in May. Carrols Restaurant Group, one of the largest franchisee groups in the U.S., said sales at its Burger King locations fell by 33% from a year earlier during the last week of March, but were up by 2.5% during the first week in June. Sales jumped 14.6% during that same week at its Popeye's Louisiana Kitchen stores. Stock prices have jumped far off the March lows in response.
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As in other industries, the need to quickly adapt to changing circumstances means the future has arrived ahead of schedule. Analysts at Morgan Stanley now predict online delivery orders will comprise 13% of all U.S. restaurant sales by the end of this year. Before the crisis, they predicted online delivery would reach that level by 2023. Online advance pickup ordering has also increased in popularity.
It certainly doesn't hurt that many fast-food customers have more income in their pockets. The Internal Revenue Service had sent $258 billion worth of stimulus checks to Americans as of May 22, while enhancements to federal unemployment benefits will continue through at least the end of July. Actual visits to stores are down across the board, but the average customer check has grown sharply, thanks to larger orders from families.
Also, with many independent restaurants still shut altogether, there are fewer options for consumers, which naturally benefits those who can stay open. And franchisees can reduce labor costs by operating stores without the usual dine-in service.
Still, the fast-food recovery hasn't been distributed evenly. While urban locations are suffering, suburban stores with drive-through service are seeing a massive increase in demand, as customers pick the dining option that allows them to stay in their cars. Here, too, the fast-food chains have made rapid improvements. McDonald's finance chief Kevin Ozan said last week that the company has shaved 25 seconds off the average time to complete a drive through order during the pandemic.
In a high-transaction business like fast food, that results in greater sales potential and higher marginal profits. In contrast, sales continue to lag in restaurants that used to rely on high levels of nearby foot traffic, like those inside college campuses, airports, or in downtown urban areas.
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The disruption to ordinary work and school routines has also hit chains that rely heavily on breakfast sales. In ordinary times, breakfast is an attractive category, thanks to sales of high-margin beverages like coffee.
Starbucks reported comparable U.S. sales declines of 32% during the last week of May, while Dunkin Brands reported a decline of 23% for the week of May 23 at its doughnut shops. McDonald's and Taco Bell have also warned that breakfast sales have fallen sharply. Sales at other times of the day, like dinner, have grown, but not every chain offers a menu that can take advantage.
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This problem is difficult to solve in the short term. After all, an ad campaign or promotional offer might persuade a diner to switch restaurants. But in a world where workers don't need to commute to their office, convincing them to venture outside in the early morning is a tall order.
For their part, Starbucks is planning to build more locations in urban areas designed specifically for takeout and advance ordering. While these locations will have lower sales potential than a traditional cafe, the savings on labor and occupancy costs will be significant. A greater emphasis on online ordering makes that store format more attractive. "We would expect returns on those investments, even with lower sales volumes, to be at least as good as our traditional cafes," finance chief Patrick Grismer said at an investor conference last week.
Delivery, takeout and advance ordering make economic sense for restaurants even without a pandemic. Don't be surprised if social distancing at the burger joint outlasts the worst of Covid-19.