The restaurant industry has been hard-hit by COVID-19. According to the National Restaurant Association's September 2020 report, one in six restaurants closed permanently or long-term as COVID-19 restrictions evolved. These restrictions, which initially resulted in temporary closures, later allowed for outdoor dining and indoor dining at limited capacities. Restaurants will likely continue to struggle throughout the colder winter months as we see an uptick in COVID-19 cases nationwide.
However, as we have seen throughout the pandemic, restaurant owners and operators are creative. They will continue to adapt to cater to consumer preferences and rethink their operational models to enhance consumer confidence. If restaurants pursue this positive, flexible mindset, they can use this time as an opportunity to re-evaluate their operational model and determine how they can adjust their long-term business strategy.
TD Bank 2020 Restaurant Franchise Pulse Findings
To delve into how restaurant owners and operators have pivoted during the pandemic and changed their priority areas of investment in 2021 and beyond, the Restaurant Franchise Finance Group at TD Bank, America's Most Convenient Bank, conducted a survey of 250 restaurant franchise owners and operators from across the United States from September 3–16. Key findings from this survey provide insight into where the industry may be headed more permanently.
Evaluate Reliance on Delivery and Mobile Ordering: Due to decreased foot traffic and consumers' desire for limited interaction, 72 percent of survey respondents reported prioritizing enhanced delivery and mobile ordering. Not only do these offerings provide a more convenient and efficient experience for the consumer, they also bolster consumer confidence since they can order, pay and receive their meals without ever being face-to-face with an employee. As a result, off-premises sales now account for a larger percentage of overall franchise sales, increasing from 20 percent in 2019 to 39 percent in 2020.
These services also allow for less front-of-house staff and a reduction in franchise real estate. Franchisees are planning to continue to invest in these services to further business outcomes. Compared to TD's 2019 survey when only 12 percent of franchisees planned to invest in delivery and 25 percent in mobile ordering in 2020, this has since jumped to 63 percent planning to invest in delivery and 69 percent in mobile ordering in 2021. The success of these offerings may lead franchisees to reevaluate their long-term business strategies to account for third-party delivery fees and if they need to adjust their employee base and overall lease profile accordingly.
Focus on Payment Methods: Once an afterthought, consumers are now more concerned about how they make payments at a restaurant. In fact, many consumers will not return to a restaurant that does not offer mobile, online and/or contactless payment methods that limit face-to-face interaction and potential spread of the virus. According to the survey, restaurant franchisees recognize the benefits of contactless payments and other merchant offerings and are implementing these methods to provide a more efficient payments experience—42 percent of franchisees reported pivoting to non-traditional payment methods and now use traditional retail or cloud-based point of sale (POS) systems (36 percent), online payments (28 percent) and person-to-person payment apps (22 percent) as their primary payment method.
If they have not already, restaurant owners might consider reevaluating their current payment methods. Implementing online, mobile or contactless payment methods benefit the restaurant owner by allowing them to get paid faster and providing a holistic view of the business' overall health while simultaneously making the consumer feel more comfortable. Restaurants should view their payment methods through the lens of the consumer who wants a quick and efficient experience with limited interaction.
Rethink Real Estate Portfolio: Many major chains are making changes to their real estate portfolio to add drive-thrus and limit the size of physical store locations as consumers continue to prefer mobile ordering and delivery to dine-in. Throughout the pandemic, restaurants have needed to close their indoor dining locations and have come to rely on the important role drive-thru, delivery and mobile ordering play in their business. Our survey revealed that 49% plan to reduce or have already reduced the number or size of their franchise locations as a result of COVID-19 and 51 percent are not planning or have not made any real estate changes.
It is not surprising that the majority have not yet made real estate changes as many are waiting to see how consumer behavior may change once a vaccine is broadly distributed. Although there is no need to make an immediate decision, now is a great time for restaurant owners and operators to rethink their real estate needs and current leases and how they may need to be altered to best serve the restaurant's changing business strategy.
While there is still a great deal of uncertainty as COVID-19 cases rise and consumer sentiment continues to change, restaurants need to remain nimble and adjust their operations to cater to evolving consumer preferences. The industry is full of creative thinkers constantly adapting to new challenges. Now is the time for restaurants to think through trends that may be here to stay and how they will leverage offerings like mobile ordering and delivery to remain profitable and emerge from the pandemic in a position of strength.
Mark Wasilefsky is the Head of Restaurant Franchise Finance and his team supports the franchise and independent restaurant lending program for TD Bank. Mark joined TD Bank in 2010 and has 20 years of commercial and investment banking experience as well as six years in corporate finance.