Leasing: How will restaurants return?
While the next year is uncertain for restaurants (at least 1 in 10 are estimated to close), data indicates demand for dining out remains, and restaurants will adopt more viable long-term business models . We took a look at the data to better understand future restaurant needs and opportunities:
1 - High touch is not dead – people miss human interactions:
On-premise dining has rebounded in lock-step with reopening regulations, and take-out still far exceeds delivery. One high-end NYC restaurant group reported that diners “immediately made it clear they wanted to be waited on when they returned.”
Takeout sales volume is up 55% from 2019; delivery is up 40%
Restaurant sales have proven most resilient in secondary and tertiary markets vs. urban cores such as NYC and SF. Less stringent regulations, lower rents, and more static populations during this period contribute to this result; in NYC, 90% of restaurants reported they can’t pay full rent. In high-turnover markets, many anticipate an influx of new entrepreneurs and concepts; landlords with a willingness to structure creative leases and partnerships might benefit.
National Toast POS data
We do, however, anticipate off-premise dining to play a larger role in restaurant revenue: pre-COVID, revenue from dine-in operations was declining at a -2% CAGR, as revenue from off-premise, digital ordering grew at a 30-40%. CAGR. Restaurants must adopt hybrid business models to capture that growth.
Reforming Retail, Jan 2020
2 - New business models focus on recurring revenue, increased check size, and efficiency of labor through mobile ordering and fulfillment.
Mobile ordering for QSRs has the potential to increase restaurant sales volume and reduce complexity in order fulfillment. For instance, at the Alpine Inn in California, Toast Order & Pay increased the average customer check size by 45%. Customers were ordering more frequently from the comfort of their table via a QR code and mobile menu, and restaurant runners brought their food out as it was ready.
The convenience of mobile ordering increased volume per customer (Toast)
Output per employee is increasing as restaurants re-hire (FSR Magazine)
Subscription/membership models are gaining traction, enabling restaurants to capitalize on local consumer demand and loyalty. Table22 launched this summer to make it easy for restaurants to start and manage subscription businesses. Their average restaurant experiences 35% month-over-month subscriber growth, with 40-50% margins on their subscription revenue.
Table22 Case Studies
3 - Ghost Kitchens gain traction, but rely on national and well-known brands and direct ordering volume to avoid third-party delivery fees:
Ghost Kitchens claim the following factors make them more attractive to concepts and brands looking to scale:
However, early models have struggled with profitability due to high build-out and operating costs. In order to make the model work, ghost kitchen operators must make >$650k per year charging either high service/membership fees, or take a significant percent of revenue (18% in some models) on top of rent. The brands that can produce enough volume to justify such fees tend to be well known brands less concerned with quality (fast food, fast casual, national). It remains to be seen if ghost kitchen models are viable and scalable for locals.
