A Domino's restaurant in Nottingham which remains open as the company provides a contactless ... [+]
The past two weeks have provided an early glimpse of just how badly the COVID-19 pandemic could affect the restaurant industry in the long term.
It’s not pretty.
From Darden Restaurants to Denny’s, public restaurant companies are withdrawing their 2020 guidance and drawing down from their revolving credit lines to sustain their businesses through the pandemic-induced downturn. And though it’s still early says, what a downturn it’s been.
The National Restaurant Association estimates that about 3% of restaurants have already closed permanently, with another 11% anticipating closure within the next month. According to the association, there are about 1 million restaurant locations in the U.S., so effectively 110,000 storefronts could be empty when the dust clears.
Further, the industry that was experiencing some traffic erosion prior to the outbreak is now flat out reeling. Total restaurant customer transactions declined by 36% in the week ending March 22 compared to the same week a year ago, according to NPD’s CREST Performance Alerts. Quick-service transactions were down by 34% during that time frame, while their full-service counterparts experienced a whopping 71% drop in customer transactions.
If there is a silver lining in any of this, it’s that check sizes are presumably up at many locations, as more orders come in from delivery (which generates bigger orders by nature) and as more brands generate entire households of customers forced together in isolation.
As such, brands have pivoted their marketing focus to family meals/bundles. Take Pizza Hut, for example, which is promoting its Big Dipper, “nearly 2 feet of pizza,” for $12.99. Meanwhile, Taco Bell recently introduced the “Tripleupa,” McDonald’s is now selling a Double Big Mac (with four patties versus two), Torchy’s Tacos just started offering Family Packs and Black Bear Diner is selling specially-priced Family Meals.
On Wednesday, KFC started offering a $30 Fill Up deal (an iteration of its signature $20 Fill Up promotion) that the company says will feed a family of four “for dinner tonight and lunch or dinner the next day.” Each meal even comes with reheating instructions.
Another piece of not-terrible news for many brands is that digital orders are up, buoyed by the abrupt shift to off-premise operations. Digital orders now represent 13% of all off-premise dollars, which bodes well for the large number of restaurants that proactively invested in such channels prior to the outbreak, and which especially bodes well for pizza companies that have long prioritized digital ordering and delivery.
On the other side of this crisis, restaurant brands that have a strong digital infrastructure in place will be in the best position, especially considering more consumers are forced to get familiar (and comfortable) with digital channels during this time. That’s a big group of previously untapped customers, by the way. Grubhub CEO Matt Maloney recently told MarketWatch that his company received "10 to 15 times" its usual restaurant leads in the early part of March. Uber Eats has also received up to 10 times its usual restaurant leads.
“It’s highly probable that this crisis will define winners and losers by their digital proficiency since consumers may prefer the contactless delivery protocol that digital ordering offers,” David Portalatin, NPD food industry advisor and author of Eating Patterns in America, said in a statement. “Now that we’re living in a world where the entire industry is an off-premise business, digital orders gain importance and provide an edge to those who already lead in that space.”
Still, such digital habituation takes time, and many consumers may not instinctively know they can just have a Whopper delivered straight to their door if their local Burger King restaurant is closed for dine-in business. Perhaps that explains why pizza companies are performing stronger than the rest of the industry right now.
Indeed, while major companies like The Cheesecake Factory announce furloughs, and other companies like Union Square Hospitality announce layoffs, Domino’s, Papa John’s, Pizza Hut and Jet’s Pizza have announced hiring sprees yielding tens of thousands of new employees.
And, while companies like Yum Brands predict Q1 same-store sales declines in the mid-to-high single digits, Domino’s Pizza estimates U.S. same-store sales growth of 1.6% during Q1–low by Domino’s standards, but still a rare positive in this environment. Rival Papa John’s expects an estimated 5.3% growth in Q1, lapping relatively low same-store standards from a tumultuous 2018-19.
A confluence of factors seem to be insulating pizza companies (again, relatively speaking) from much of the coronavirus-induced damage that is happening. For starters, their core product is geared toward groups — in this case, families. Second, their operating model is simple, a benefit for any company in a time of financial crisis.
Further, for these pizza players, delivery isn’t new. Though some have added third-party aggregates to supplement their in-house fleets, the segment as a whole isn’t reliant on such companies (which have been accused of inconsistencies and worse) because it doesn’t have to be. Pizza companies have had decades to perfect their delivery infrastructure and pizza delivery has become instinctual for customers or, as Domino’s CEO Richard Allison said in a press release, “normal.”
In this time of unprecedented uncertainty, normalcy is a big deal.
That’s not to say pizza companies will be the only survivors from this mess. But the crisis will undoubtedly kick start a shakeout, which some believe is long overdue in a bloated industry. Which companies emerge on the other side–meaning both when customers are comfortable spending their shrinking disposable income on eating out and when they feel safe enough to do so regularly–is the great, open-ended question right now.
