The stickiness of digital

Headed into COVID, off-premises sales increased nearly four times faster than dine-in business, per financial services Rabobank. That meant 80 percent of restaurants’ U.S. dollar sales growth over the last three years came away from the dining room. By November, according to NPD, dine-in visits were down 48 percent in the 12 months ending September 2021 compared to the year-ago measure. Off-premises orders upped 20 percent versus two years ago.

Dine-in visits represented 28 percent of total quick-service trips pre-coronavirus. That fell to 14 percent in the year ending September 2021. On-premises visits to quick-serves, some 19 months later, were 52 percent below old levels, while off-premises were 16 percent above.

“If you look at the restaurant industry for the five years before COVID came along, what was growing? Off-premises transactions were growing,” Portalatin says. “The [quick-service restaurants] were taking share from full-service restaurants. Digital orders were growing. And we were increasingly talking about the rising percentage of restaurant meals that were consumed at home.”

Portalatin says there’s little to zero question of whether or not digital occasions are going to stick around. NPD looked at customer receipts to be sure. What’s visible, he says, is the new digital buyers picked up when the category pulsed last year have been retained. “And yet, we continue to incrementally add new ones on top of that,” he says. “Once we adopt behaviors as consumers, we don’t really give them up.”

It’s not just delivery, either. Digital order for pickup is growing just as fast, Portalatin notes. In survey data from location company Bluedot, 43 percent of consumers said they prefer to place their order by mobile phone, well ahead of the 18 percent for “staff member.”

“I think you’ll see the top-performing chains be the ones that really know how to lean into digital to unlock a higher capacity of off-premises occasions that the consumer picks up,” Portalatin says.

An AdColony report in November discovered 65 percent of consumers order takeaway food on an app or website more so than before. Over a third of mobile users, of all ages, said they eat fast food at least once a week, while one in five were doing so more frequently. Overall, 65 percent of users in the survey noted they order takeaway on an app or website at a higher clip these days.

But how that unfolds is where the recalibration is taking shape.

Mike Wilson, head of industry at driving app Waze, says restaurants continue to invest in flexible formats and layouts to tackle an omnichannel opportunity. “For example, many customers are still hesitant to use in-store kiosks to order, and we’ve seen an accelerated use of mobile restaurant apps increase order accuracy and satisfaction,” he says.

With delivery, the battleground is shifting to the last mile given the category’s proliferation (its share of foodservice sales doubled to more than 15 percent last year). This has become an expensive proposition on multiple fronts. While it might make sense if the consumer is purchasing a $500 TV, how does it work for a lower-priced quick-service meal? Guests are getting wise to that, Portalatin says, and it’s another reason why he sees the digitally ordered for pickup occasion gaining share out of COVID.

A traditional quick-service restaurant with a single drive-thru lane could be nearing its limits in terms of capacity as well, he adds. So the push toward multiple-lane setups is just kicking into gear, with brands like Taco Bell and Shake Shack plotting multiple-lane buildings. Often, one of the lanes is dedicated to digital business, and that’s a go-forward reality worth banking on. Also, typically manifested in pickup lockers, like those featured in CKE Restaurants’ prototype, expect to see more curbside-centric models and physical infrastructure that opens capacity for the drive-thru or pickup channel.

However, you can’t understate what the drive-thru did for quick service in 2020. In the same Bluedot study, nine out of 10 respondents said they visited a drive-thru in the last month. Seventy-two percent had pulled up either the same amount or more in that span than previously. And the No. 1 channel for order pickup, at 39 percent, was still the drive-thru, followed by in-store (31 percent) and curbside (30 percent).

Fazoli’s CEO Carl Howard says COVID was a game-changer. Simply, it led restaurant-goers to brands with drive-thrus, either due to closures or safety concerns. It was difficult to tell who was open and who wasn’t. Not so with lines snaking around quick-serves across America.

“And that has forever changed the brand, from our [average-unit volume] to our unaided awareness,” Howard says. Recently, 217-unit Fazoli’s same-store sales were up 28.7 percent on a two-year view. Multiple-digit increases have become the norm.

“It was the advertisement I could never afford,” he says. “We had trial rejecters and lapsed users, and we had all this data quantified in different surveys in 2020 and 2021.”

Welcome to the loyalty generation

Fazoli’s value proposition and food quality, and the fact it travels and reheats well, are strengths the pandemic revealed to new guests, Howard adds. Yet it’s clear they’ve kept coming back, and Fazoli’s has more avenues today to serve that demand.

Guests can order through mobile, tablet, desktop, from home, in-store, behind the wheel of their car, and so on. “We keep knocking down any type of barriers for the consumer,” Howard says, referencing Fazoli’s app in particular.

According to Paytronix, from a data pull of the highest-spending 10 percent of loyalty members in 2020, while core guests accounted for 7.8 percent of spend in January, it upped to 8.8 percent in March as coronavirus hit. During the lowest points, it rose to 9.4 percent in April. Loyalty users were responsible for a bigger proportion of total sales following the pandemic onset, which proved loyalty guests continued to visit more often than non-loyalty guests, difficult times or not. When observing a population of only loyalty members, the top 10 percent of loyalty guests accounted for more than half of all spend for eight months of 2020.

In other terms, despite everything thrown at quick-serves in 2020, the segment saw only a 2 percent decline in average annual visits among loyalty members. 

Waze data showed 40 percent of customers feel a restaurant loyalty program would encourage them to spend more on food orders. “It’s also a key reason that 42 percent of restaurateurs say they plan to increase their investment in their loyalty programs in the near future,” Wilson says. Three-quarters of consumers in Waze’s study plan to continue using contactless payments after COVID as well (a draw of loyalty).

With loyalty and rewards, you’re looking at what’s hastily become a ticket-to-entry strategy in quick service.

Fazoli’s deploys its app in a “red, yellow, green” model where it triggers plans based on how individual units are performing. Again, it’s the intersection of technology and hospitality that might have taken years to materialize sans a pandemic.

Fazoli’s can geotarget around an area. If a store needs a boost, it goes on the “yellow plan” and get more stimulus beside typical earn-and-reward offers. For example, a $2 off $5 deal added going into a weekend. On the red option, guests could get three to five deals a week.

However you look at it, Howard says, restaurants are in a crowded digital arena. People still consider real estate on their phones a valuable commodity. “You’ve got to be relevant to the consumer and you have to have an app that not only is easy to navigate, but also one that entices you to visit more often, whether that’s through loyalty earn and redeem, or just an ongoing onslaught of pretty nice offers,” he says.

Skating on thin ice?

Returning to drive-thru, Howard says the biggest opportunity for quick-serves is personnel. The industry, on the doorstep of winter, remained roughly a million jobs short of pre-pandemic figures. So what a brand might hope to accomplish, even with the best-laid plans, could be difficult to execute. 

Howard calls Chick-fil-A and its system of order takers roaming drive-thru lines “the gold standard.” That’s become increasingly common of late, including Starbucks and Taco Bell joining the fray. Howard says it creates an additional line or two versus the old traditional speaker box, and it’s a speedier counter to the capacity concern than building new restaurants with more lanes. “And I’ll also tell you what we found out with tablets is the guest experience is a lot higher,” he says. “Because we made less errors. We don’t have any communication problems. We’re standing right in front of you, direct-to-direct. So there’s less confusion on the order that might come through slightly muddled or not heard correctly via the headphone set.” Fazoli’s was able to reduce a full minute off window times doing so.

What it’s also accomplished, though, is to enable operators to deliver hospitality outside the restaurant. Chick-fil-A devised a multi-stop process that feels akin to servers conducting table checks at a full-service restaurant. This way, Chick-fil-A employees greet and serve guests several times before their car peels out.

Liz Moskow, food futurist and principal at Bread & Circus, says quick-serves need to think about technology through that people-first filter. Can you guard the hospitality element in an increasingly distant world? “It’s become this food transaction as opposed to say hey, let me give you many ways to feel good other than what does it taste like?” she says. “And then, often times, especially post COVID in quick service, it’s less focus on what it tastes like and more focused on convenience, and I don’t know how long that wins.”

This August, according to the Bureau of Labor Statistics, quick-service food prices climbed 6.9 percent year-over-year. The CliffsNotes reason was labor became more expensive and supply chains more unstable (also, in a lot of ways, due to labor). As a result, restaurants paid more for product and talent and passed along those costs to consumers.  

Thus far, it hasn’t fazed guests too much. “Food services and drinking places” collected a touch under $72 billion that month—32 percent higher than the year-ago measure and 10 percent above 2019 levels. Importantly, it was on par with recent months, where sales were $71.9 billion in July and $71 billion in June.

What does that look like in 2022, however? Moskow believes the convenience equation is going to become unbalanced if operators aren’t careful. “There’s so much choice at this very mediocre food level,” she says.

Unless value returns, she notes, people are going to seek better food experiences and healthier options. “I think, right now, we’re at that very base human necessity level,” Moskow says. “I’m hungry. I need food. I need it fast. … But I think there are so many players there it’s going to start moving into the next level up.”

This cautionary tale bears similarities to the rise of fast casual, which really hit full gallop in 2010 when the country emerged from the Great Recession. Lowered barriers to entry allowed operators to fill a demand void—the need to push past food as fuel and into something they were willing to pay more for. As Moskow explains, it’s an interesting COVID dynamic when you consider consumers are paying more for everything right now.

“It’s more than a loyalty program or an app, or a follow-up email or a coupon,” she says. “You have to show people you care about their choices. That you know who they are as a person.”

Artificial intelligence is going to get smarter, Moskow says, and there is going to be an infusion of emotional intelligence into digital systems. Think of it as Starbucks writing a guest’s name on a cup, but pulled into the future. Imagine restaurants suggesting options based on order history, or curating experiences on a far more granular level, whether that’s based on trends, weather, promotions, or family dynamic. “It just gets on a more personal level to apply that layer of hospitality that’s missing from that digital experience,” she says.

Experience and higher cost is a fragile tightrope troubling Howard as restaurants head into 2022, especially since there’s no telling when inflation might ease. Fazoli’s has had restaurants with single-digit employees where it’s shipped people in to help out. Even with sales surging, the brand found it challenging at times to reach its “gold standard,” he says, due to the employee shortage.

“I use the term ‘arms race,’” Howard says. “We’re in an arms race right now and a lot of people think of that more as global warfare, and I’m more thinking there’s just not enough arms out there to do the work.”

“We’re skating on extremely thin ice right now,” Howard adds. “The entire industry is feeling it. And the biggest problem is no one has given us, especially from the leadership of our country, any indication that this is going to come to an end.”

Beyond finding employees to staff restaurants, Howard views 2022 as a time when you’ll see workforce burn out come into focus. He’s observed it already. It could be supervisors or suppliers, hourly workers or managers. “Everybody is tired,” he says. “Everybody is worn out and they’ve had enough. Restaurants preparing food and washing dishes and mopping floors, is a hell of a lot harder than taking your bread or your soda and scanning the QR code through and sticking it in the bag and telling you to have a nice day. So we’re fortunate that anybody shows up to work today.”

The key, he says, is to tackle the problem instead of trying to wait it out—to find systems to eliminate certain tasks via automation and consider every outlet, even whether bread sticks show up on pre-tray. Fazoli’s tapped a staffing specialist and has worked to simplify applications and make it so live, same-day interviews are possible. And that can be difficult with managers lending a hand throughout the restaurant. “So my goal is to get people hired without ever having to leave the house,” he says. “And I believe when we figure that out, which I think we’re doing right now, we can get our restaurants staffed.”

Howard says he recently noticed McDonald’s airing value commercials again. Fazoli’s has leaned into its $8 price point proposition throughout COVID. Early on, when brands across the lexicon pulled value, Fazoli’s ramped up. Howard says the chain absorbed margin erosion for some 120 days. “And I didn’t care because we introduced people to the brand,” he says. 

That guest perception is going to linger for the brands that think long-term.

“There is stealth inflation that’s coming that’s going to smack the consumer right in the face …” Howard says. “Again, we’re skating on very thin ice with the consumer. We don’t have enough help. Supply chain is an issue. Discretionary income is going to drop. You’re going to see a rapid rise in the value menu.”

Alec Haesler, director at Carl Marks Advisors, calls it a “delicate line to walk.” For now, it will pay off to remain transparent. “As this is occurring everywhere, consumers have been somewhat accommodating of the situation—whether that be a short-staffed rush hour or an increase in the price of a meal,” he says. “Some of this might be offset by consumer excitement to be back out-and-about. However, as the current environment persists, we may start to see cracks in consumers’ willingness to accommodate.”

He adds restaurants must be careful implementing aggressive stealth inflation techniques. “Pricing modifications need to be strategic, and monitored in real-time to gauge customer willingness,” he says.

Supply, plenty of demand

Fazoli’s expects to open 20 stores next year and 30 the calendar after. Further down the line, Howard sees the brand debuting a store per week. 

But like labor, supply chain issues have hampered growth. Howard has gone out and purchased 10 sets of equipment to pay for future openings given delays. He was outlined a six-month lead time on walk-in coolers.

According to the National Restaurant Association, expressed in a letter to Congressional leaders in November, 95 percent of operators experienced significant supply delays or shortages of key food items in recent months. And 75 percent made menu changes in response.

Wholesale food prices increased sharply in September, posting the highest 12-month increase since 1980. Restaurant commodity prices soared in 2021, with beef up 57.7 percent, fats and oils 49.6 percent, and eggs 39.2 percent.

Haesler says it could take “years, not months” for the supply-demand mismatch for labor to normalize. “There is likely a portion of the pre-pandemic work force that is never returning to the industry,” he adds.

“There are a lot of moving pieces to the staffing conversation,” Haesler says. “You will likely see a mix-and-match approach, with operators leveraging a combination of technology and location design to improve staffing efficiency as best they can. At the same time, there will likely be an increased reliance on employee satisfaction to minimize attrition.”

Work-from-home impacts

In truth, the structure of the workforce was changing long before the pandemic. Part-time work. The on-demand economy. A push toward remote jobs and gig opportunities. These all created fluidity in dayparts. And everything was on the table in 2019.

Yet to Portalatin’s earlier point, COVID hastened conversations. 

Just look at breakfast. NPD estimates, ultimately, there could be as many as 25 million people working from home on a full- or part-time basis. So far, the trend has pushed breakfast back in the day as commuter routines shift—realities seen at Starbucks, Dunkin’, and others. Out of the gate, Dunkin’ said business in the 6 to 9 a.m. stretch dropped. But 10 a.m. to 2 p.m. picked up.

Portalatin says the “late-morning snack occasion” is something that showed up frequently pre-virus and is only going to gain steam. Guests who start their day at home with a cup of coffee and then hit the drive-thru later for a breakfast sandwich, for instance.

Or perhaps they’re one of the 7 percent or so of consumers (and growing, Portalatin says) actively leaping on the intermittent fasting trend. “We’re even seeing nontraditional breakfast foods in things like salty snacks, or trail mix, or a protein shake or something like that emerge as things that consumers are looking for a little later in the morning,” he says.

“It’s just the structure of the day—the share of breakfast we attribute to an away-from-home occasions may be more or less permanently altered,” Portalatin adds. 

Waze’s Wilson says the company’s data reflects pattern shifts as well. People are no longer isolated to a single hour to grab lunch or stuck thinking about dinner on their drive home from the office.

“More navigations are taking place between 1 to 4 p.m. and 7 to 10 p.m., and quick-serves are seeing more consistent traffic throughout the day,” he says. “Coffee shops, for example, are seeing steady customers between 9 a.m. to 4 p.m., rather than previously being the busiest between 5 a.m. and 9 a.m.”

Wilson doesn’t expect these trends to revert next year, and they may never snap back. In that disruption, restaurants should target opportunities to reach and serve these “always on” drivers, he says.

Too many restaurants?

Lee Schulman, owner and operator of Old Vinings Inn and president of Panacea Management Group Consulting, says the industry was oversaturated before COVID—a widely held belief that seemed to be resulting in a rash of bankruptcies. While 90,000 or so closures (the number remains uncertain for now) were unfortunate, of course, it did create a natural thinning in some respects. And it drove innovation into the survival pool. “Operations that were already on the edge have failed at this point,” Schulman says. “The ones that were succeeding, however, are going to emerge much stronger. Those operations were forced to look closely at all the details of their systems and refine them in real time and on the fly. Any system that didn’t immediately exceed operational expectations was discarded, and the ones that did work were immediately incorporated into normal operations.”

Portalatin agrees there were too many restaurants in 2019. During the Great Recession, only 5,000 net new restaurants were added between 2007 and 2010, compared to nearly 25,000 in the three-year period before the crisis, per Rabobank. 

The count of U.S. restaurants and bars increased at a 2.2 and 2.5 percent compounded annual growth rate over the last there and five years, respectively. Roughly 45,000 new restaurants (net of permanent closures) opened in the three years ahead of coronavirus—more than in any other comparable period over the last 25-plus. It’s something that was leading pundits to suggest a course correction, like the one that flooded retail, was in the works already.

“In terms of the total number of restaurants, I think you can accommodate the customer demand on a more efficient store network,” Portalatin says. “What you’re going to see happen is you’re going to see plenty of opportunities for strategic, new store development. Among all of the disruption of routines we talked about earlier, is the idea that many in the country have shifted a little more or a little less urban, a little more suburban.”

Adds Howard: “I think, definitely, we were heavy with the amount of seats per marketplace. And then you had all the new up-and-coming brands that were coming into the marketplace. The emergence of fast casual and the rapid expansion of fast-casual restaurants and their ability to go into any strip center in the country.”

The brands still standing are more active and resilient than ever.

“The biggest change will be what guests expect when they dine out,” Schulman says. “Whether it’s supply chain, staffing, or new restaurant models, the dining experiences across all levels of service have changed, and it will not go back to what they were before. Broadly speaking, I think the experience for everyone will be better.

Could you say the same about virtual brands?

If the restaurant marketplace was bursting, how do you describe the virtual brand flood? Chowly CEO Sterling Douglass turned heads when he suggested there might be 100,000 operating on third-party apps. That was in August 2020. Uber Eats recently estimated the number on its platform tripled last year to north of 10,000. According to the aggregator, 15 percent of restaurants operated one pre-COVID. It soared to 51 percent by 2021.

Really, nobody can say for sure what the count is. In Baum + Whiteman’s 2022 Food & Beverage forecast, the company predicted a “competitive free-for-all” as ghost kitchens throttle up expansion.

At what point does saturation kick in, however? And how will guests react when they discover food brands online don’t exist in the real world? Euromonitor estimated ghost kitchens could become a $1 trillion industry by 2030. Grand View Research tapped the number at $139.4 billion by 2028.

It’s going to unfold across sub-segments, from host kitchens to virtual concepts to virtual food halls, etc. Baum + Whiteman suggests an aggregator, like DoorDash, could even launch a ghost fleet of its own invented brands, sold via its platform, cooked in the company’s own phantom kitchens, shipped by its own delivery people. “If this happened, we’d be seeing these delivery specialists [who already take a financial bite out of conventional restaurant revenues] competing with their own restaurant customers in a very big, overlapping manner,” the company says, adding it believes that will ultimately happen. Too many players, it notes, inevitably means consolidation. Various players are going to emerge and join virtual and real restaurant brands along with robotics and digital ordering systems linked to restaurants’ computer systems.

“We’re looking at two banner years for the mergers-and-acquisition brokers,” the report states. “And a tough time for small independents who still cook by hand.”

Moskow has ample experience in the virtual space as a concept creator. And her red flag isn’t so different from her broader hospitality point. Brands can’t rush into the space by throwing a viable product in front of guests. “You can’t eat software,” she says. “… If you’re spending all these marketing dollars to get the consumer in the first place and you’re delivering them something you know is not optimal, what is the point?”

Like convenience, delivery, and drive-thru, the space is becoming far too robust to skate by. A shakeout will arrive sooner than later, Moskow says, because the consumer is getting savvy to the convenience trade-off, and why they don’t need to compromise.

The world of take-home meals suddenly feels more appealing, she adds. Meal subscriptions. Any chance for a trusted brand to play into that at-home occasion in new ways.

One thing about prepared food, too: It looks unappetizing on-premises (like a grocery store), but it plays perfectly into off-premises applications. “I think a lot of restaurants can adopt that kind of thinking,” she says. “All right, No. 1, it will take down our peak labor costs. It’s more prep than it is service, and it’s just a different shift of thinking that needs to happen.”

With celebrity-based concepts, Moskow says, we could notice a trend toward more food-focused personalities carrying the mantle. That’s not to gloss over Baum + Whiteman’s robotics comment. Aaron Allen, CEO and chief global strategist of his eponymous Aaron Allen & Associates, says of the possibility: “If you add them together as if their SaaS fees were salaries, maybe there’s $10 million in robot payroll worldwide. But we think in the next three to five years, the number could be as large as the entire commercial foodservice commercial equipment space, which is $40 billion-plus.”

Allen says, reflecting on labor, restaurants will start paying GMs more and pressure will rise to shed hourly positions, if possible, in favor of automation and other workarounds. “There’s going to be a lot of, how do we have the same number of operating hours but with fewer labor hours,” Allen says. “So you’ll probably see more sophisticated GMs. And anything that’s [easy] if it’s pushing this or moving this from here to there, a robot can do that a lot cheaper. So they’ll become the new [crew member.]”

Sound like a Jetsons take? Remember when delivery was met with divisiveness just a few years ago? Allen sees emerging ideas like chatbots, voice ordering, and QR codes skyrocketing into consumer conscious. Industrial and convenience engineering. Drive-thru systems alone, he says, represent a multi-billion-dollar opportunity for contractors. “They’re about $200,000 per drive-thru to replace them,” he says. Multiply that by the properties that need to be updated and it’s a huge number, Allen says. 

Natural language processing applied to chatbots. Voice ordering so brands can see and analyze the emotion behind the words. Internet of Things. There’s no shortage of communication tools ready to crack through.

In addition, just like potential consolidation in the virtual space, the same is true for restaurants, especially franchises, Allen says. Fazoli’s was sold in early November to FAT Brands for $130 million. After adding 23-unit Native Grill & Wings for $20 million later in the month, FAT Brands’ acquisition bill climbed to $892.5 million in 2021 (it purchased Global Franchise Group for $442.5 million over the summer and sports bar Twin Peaks for $300 million in September).

Restaurant Brands International struck a blockbuster of its own in November when it forked up $1 billion for Firehouse Subs, adding a sandwich giant to its lineup of Burger King, Tim Hortons, and Popeyes.

Allen sees this reality dominating the M&A scene. In the U.S., acquisitions drive nearly 30 percent of revenue growth among publicly traded companies, he says. “Look at [Dunkin’ and Arby’s owner] Inspire Brands,” he says. “That’s the fastest-growing foodservice company in the history of the world and they just started in 2017.” Roark Capital-backed Inspire, which also owns Sonic Drive-In, Jimmy John’s, and Rusty Taco, acquired Dunkin’ and Baskin-Robbins for $11.3 billion in fall 2020.

Another thing to consider: About 85 percent of global foodservice growth originates outside the U.S. “There are very few independent companies really in that [top 500], In-N-Out Burger would be one,” Allen says. “But there’s a lot of much bigger guys that are behind the scenes that are pulling the strings.”