This past year felt less like a panic room (as 2020 was) and more a minefield for restaurants. But there is a similar end game to surviving both. Cristin O’Hara, restaurant head for Bank of America, believes many brands are in healthier place today because they had to answer questions pressing to the surface: How do we deal with dine-in traffic declines? Are there new ways to chase revenue? “Most restaurants were able to figure that out,” O’Hara said in the company’s State of the Industry Report.

Consumers ramped up spending in 2021 thanks to stimulus hitting the economy. That was then coupled, BofA Global Research economists note, with a spring reopening of the economy unlike any recent financial event we’ve seen. Consumers flooded back to leisure. There was a meaningful acceleration in travel, restaurants, and especially in-person dining. It held steady until July when moderation set in. Now, the company projects a mini-balancing going forward—not as dramatic as spring and summer when “pent-up demand” was the buzz phrase of the hour, but still higher than restaurants saw pre-crisis. Bank of America aggregated card data shows spending on restaurants and bars, on a two-year comparison to 2019, remains up 20 percent.

On a same-store sales view, restaurants were up 12.8 percent in Q2 versus two years ago. Wally Butkus, partner and analyst with Restaurant Research, called the rebound “remarkable.”

Although, he added, it’s worth noting recovery wasn’t always evenly spread. “It took a little while for these chains to reconfigure their strategies, but that’s the advantage the national brands have: They had the technology and infrastructure in place, the top-notch real estate,” he said in the report. “They’re at a scale to negotiate better agreements with third-party delivery services.”

Some chains, especially in quick-service came into COVID generating only 15–20 percent of their sales in-store. And that number wasn’t climbing.

Circa 2019, off-premises sales increased nearly four times faster than dine-in business, accounting for about 80 percent of restaurants’ U.S. dollar sales growth over the three years preceding coronavirus, according to financial services company Rabobank. From a National Restaurant Association survey in early spring 2021, Gen Xers and Baby Boomers upped their weekly off-premises dinner purchases by 8 and 7 percent, respectively. What restaurants are finding is that off-premises’ percentage of sales might be sliding as dine-in returns, yet the dollar figures are not.

Ahead of COVID, more than 85 percent of Shake Shack’s sales came from guests walking into restaurants and ordering at the cashier. Once lockdowns erupted, digital sales leapt from 15 to 75 percent. Despite dine-in coming back, the fast casual held 80 percent of digital sales seen at COVID peak, even with the mix lowering to 42 percent of total business. On the full-service side, The Cheesecake Factory was making $60,000 per restaurant in off-premises business last quarter, or a $3.12 million, annual per restaurant take. That’s more than Red Robin and California Pizza Kitchen’s total AUVs in 2019.

In both cases, COVID—and restaurants’ ability to reconfigure—erased many of the digital adoption gaps keeping executives from pulling the trigger on broader initiatives, like apps, delivery, curbside, and other omnichannel efforts considered back-burner items previously. Cheesecake Factory saw new guests enter what it terms its “frequent cohort” in Q3, which reinforces the idea this off-premises boom is going to be a long-term driver. Core guests overall upped their brand usage from 14 to 20 trips over the COVID stretch. Importantly, a third of Cheesecake Factory’s “frequents” are new customers who weren’t in that base before.

READ MORE: The 7 Restaurant Industry Trends You Need to Know in 2022

Similarly, at Shake Shack, between March 2020 and November 2021, the brand served north of 3.2 million total purchasers on company-owned app and web channels. In Q3, Shake Shack grew this base by 14 percent quarter-over-quarter at the same time its dine-in sales lifted double digits and more than doubled from last year’s levels. 

Chipotle, in October, said it had more than 24.5 million members in its loyalty program, “many of whom are new to the brand.” That’s a 40 percent increase from a year ago and Chipotle entered 2020 with fewer than 10 million.

Such expansion gives Chipotle a large, captive audience it can now engage with and distribute content to. Was that possible before COVID sprung the digital torrent? Not to this degree.

As CEO Brian Niccol explained, Chipotle today leverages “CRM sophistication” and focuses more on personalization than ever. Things like predictive modeling to trigger purchasing journeys (especially for new and lapsed users). It’s a long way from the offers and discounts of old. Chipotle instead leads with personalized, brand-related messages that allow it to optimize the program’s foundation and the chain’s economics. And COVID set it all in motion.

“All these efforts, along with the use of enhanced analytics, are allowing us to consistently attract more visits from loyalty members than non-members,” Niccol said. “No doubt the loyalty program has moved from a crawl to the walk stage, and we still have a lot of room to grow.”

Chipotle evolved to “Extras,” which was an exclusive loyalty feature that gamified rewards with personalized challenges to earn extra points and collect achievement badges. Simply, how restaurants drive engagement has changed. And so has a brand’s ability to provide relevant communications and do exactly what Cheesecake Factory accomplished with its digital business—increase the usage rate of all kinds of consumers.

One vivid example: At Panera, more than 50 percent of the chains orders currently are processed in some sort of digital fashion that captures data (app, online, kiosk, drive-thru, loyalty at the register).

Going back to the earlier point about divergent results, Butkus said, “It’s unfortunate for independent restaurants, but national brands are taking market share.” Quick-serves today, he said, have learned to manage labor better and are making more money than they have in the past, with 120 percent two-year sales increases showing up across the lexicon.

The restaurant industry lost roughly $240 billion in 2020, closing the year at $659 billion, according to the Association.

McKinsey & Co. outlined a long-term trend toward a 50/50 split of U.S. consumer food spending between grocery stores and restaurants, and other foodservice outlets, such as noncommercial. COVID altered that trajectory, too. In March 2020, the balance titled dramatically toward grocers as consumers spent 63 percent of their food dollars there. Restaurants abruptly fell 29 percent from the previous March.

Yet come Q3, the arrow recalibrated. Total restaurant sales are expected to reach $789 billion by year’s end, up nearly 20 percent from 2020, despite closure rates. So we’re talking a $270 billion lift.

Roger Matthews, investment banking vice chairman for BofA Securities, said COVID flipped consumer perception as well, which has played a role in spending trends. “For three decades, more of our food dollars have been increasingly spent away from home compared to at home. Then all of a sudden, we pivoted to needing to shop, prep, cook, and clean every meal,” he said. “Collectively, we missed the restaurant food, but also the time needed to cook at home. That’s the ultimate product you can’t buy.”

Market research company Incisiv estimates digital sales will account for more than half of quick-service business by 2025. That might not sound surprising these days, but it’s a 70 percent increase over pre-pandemic estimates. Delivery’s share of sales is also forecasted to grow to 23 percent by 2025.

None of this seems otherworldly anymore because trade channels like curbside, contactless payments, alcohol to-go, virtual brands, ghost kitchens, and the like have become common parts of the restaurant vocabulary.

Still, there are sure hurdles on the 2022 horizon. Finding labor. Paying for it. A new variant. Industries of all kinds coping with supply chain issues that, also, are often tied to labor.

While these challenges weigh on operators, the consumer is one worth chasing. The guest, Matthews said, has a “greater appetite for the industry than ever.”

“Restaurants themselves,” he added, “they’re better and more resilient than before the pandemic.”

“I feel more confident and better about the restaurant industry than ever before,” said Roger Matthews, investment banking vice chairman for BofA Securities. “It may seem crazy that I’m saying that. But ultimately, we know the consumer demand is there, and the restaurant industry has proven even more resilient than expected

Some thoughts on labor

There isn’t much that can be said about labor that hasn’t already dominated headlines. But here is one interesting shift: According to Black Box, the pandemic and staffing shortage have not only affected the number of available employees, but have also disrupted teenage employment in restaurants.

In limited service, 17 percent of hourly, non-management employees were 18-years-old or younger in 2019. That’s grown to 24 percent. The age group that witnessed the biggest reduction in its share of limited-service employees was 25–34 years old. For full service, the teenage percentage lifted from 4.6 to 7.2 percent over two years,

How this plays out is difficult to predict as school schedules, college admissions, and other routines bounce back. One thing that is bankable, though—that minimum wage debate has lost some luster. “Operators have had to increase what they’re paying for many reasons, including the presence of federal stimulus payments, and more competitors increasing wages, too,” Butkus said.” And the pandemic has changed the way people think about work, and how they prioritize things in their lives; some are not coming back to the industry. It’s a shift in mentality.”

Bank of America research shows nearly 2 million workers left the U.S. labor market due to skills mismatch, retirement, and COVID deaths. As of April, more than 4.6 million former workers remained on the sidelines for myriad reasons, everything from personal safety fears to childcare concerns. Federal unemployment programs might have ended but the effect lingers. During that stretch, an untold pool of workers found other careers, decided simply to reevaluate current ones, or completely reset their wage expectations.

“The shortage we have now has created a bidding war in many markets, especially for store managers and assistant managers,” Valerie Sanger, Bank of America senior relationship manager, said in the report.

BofA Global Research economists don’t expect higher labor costs to retreat short-term. That’s just hard to imagine with a record-high rate of job openings accompanied by a record-high quit rate.

“How long does this last?” the company said. “We should see some movement back into the labor market more naturally, and you should see perhaps some cooling of demand once we get past this pent-up demand for restaurants. And then we should see some moderation in wages. But we’re certainly not there yet. It’s going to take a lot more time until we get to equilibrium in the labor market.”

Counter tactics like tablets in the hands of servers (from Chili’s to Red Robin), kiosks, QR codes, and robotics, are going to continue to gain relevance. As will programs like retention bonuses, education assistance, pet insurance, and other perks that speak to a generation that has different demands. Even from 19 months ago.

Investor confidence

Matthews, of BofA Securities, said investors took notice of restaurants’ resiliency as much as customers did. The sheer number of IPOs (eight) of late proves that, O’Hara adds. Bank of America, for one, led Dutch Bros’ public offering in September.

Valuations have trended higher for publicly traded restaurant companies throughout 2021, particularly quick service. Ted Lynch, the managing director for Bank of America, credits that to the sector’s ability to “get more transactions out of a box, with less labor.”

“The past couple of years have really highlighted the quality and reliability of the top [quick-service restaurant] brands,” he said in the report.

Call it “annuity quality.”

“They generate predictable dollars,” Lynch added. “Having something like that that doesn’t go through ups and downs or is subject to seasonality—many investors find that’s worth paying more for.”

This line of thinking goes back to the first point. Closing dining rooms was a mixed blessing of sorts for many quick-serves. It reduced labor costs and saved the wear-and-tear on dining rooms, Lynch noted. Given the small dine-in sales figure to begin with, sending guests to curbside or drive-thrus often provided a financial boon.

“As we’ve come through COVID-19, it’s forced operators to wring out unnecessary expenses,” he said. “For a strategic buyer, that means a lot of the hard work is already done; he can take over a clean operation. Opportunistic buyers often expect an even higher return on their investment, but because this industry is so reliable, with such good earnings quality, they are willing to live with a lower level of returns when they are assessing their models when considering an acquisition.”

To put it plainly, there could be plenty of M&A activity when the calendar turns.

So where does the industry go next? Bank of America’s SVP of Global Commercial Banking Rich Watson said the past couple of years forced operators to “evaluate and strip down their business models to figure out what’s working and what’s not.”

“Over the next six to 12 months, things will continue to change and the restaurant industry we saw in 2018 or 2019 won’t be the industry we see going forward,” he said in the report.

A lot of new restaurants are going to be built—and remodeled—in the coming years. And these aren’t going to turn back the clock. Double drive-thru lanes. Pickup widows. Access points dedicated to digital orders. Points of pickup just for third-party drivers, whether attached to restaurants, in them, or on the outside. Ghost kitchens won’t just be for low-grade real estate anymore. They are already popping up in major urban metros.

These are all commitments that will change the makeup of quick service. “Everyone has learned that they can run a more profitable four-walled business without the dining room—that they don’t need 60 to 80 seats,” Watson said.

The industry was overbuilt before COVID, inching its way toward a course correction that retail brands know all too well. The shakeout started pre-pandemic as you saw with a rash of bankruptcies. What COVID inspired, however, was a favorable arena for what Butkus calls “billion-dollar chains,” which have the capital to selectively expand and make acquisitions, and invest in tech and innovations needed to thrive today. In turn, consolidation is in store (just look at FAT Brands and Restaurant Brands International’s recent deals).

“A lot of franchises are looking to become multi-brand franchise groups, providing a path for growth and a way to transform their companies,” O’Hara said.

“I feel more confident and better about the restaurant industry than ever before,” Matthews added. “It may seem crazy that I’m saying that. But ultimately, we know the consumer demand is there, and the restaurant industry has proven even more resilient than expected. If we also create better jobs for the workers, we will have a win-win-win—a more sustainable industry, where people are happy to work. And happy workers produce better food and a better experience for customers.”