Chain Restaurants to Expect Market Evolution

Food & Beverage Industry Update

Chain restaurants that survived the pandemic are now facing high rates of inflation, cuts to profit ad evolving consumer preferences. Historically, sit-down restaurants garnered the majority of market share, however, following the pandemic and a new preference for takeout meals, the traditional restaurant goer is less willing to pay the expenses for a formal or traditional sit-down meal. The fast-casual concept is now considered the consumer preference. Fast-casual is typically associated with a lower price, yet still offering a sit-down meal as opposed to the traditional meal experience or at-home meal kit alternatives.

Chain restaurants that have been able to sustain the fluctuation of growth and decline have survived based on one or a combination of factors including (i) cheaper meal alternatives, (ii) ease of access provided by mobile ordering services (i.e., DoorDash, UberEats, GrubHub, etc.), (iii) healthier food options and (iv) minimal customer contact with restaurant employees. Fast-casual restaurants that integrated technology via digital ordering systems, or fully robotic meal preparation have also boosted revenues.

Consumer Price Index for All Urban Consumers²

Food in U.S. City Average

Industry Wide Disruptions

Though the majority of chain restaurants have sustained growth amidst consumer evolution, the overall industry is combating inflation, a decrease in profit margins, and a shrinking employment rate. Industry revenue rebounded following the pandemic at a CAGR of 1.5% to $57 billion, though yearly revenue fell by over 25% in 2020¹. Inflationary measures by the Fed have since affected chain restaurants in tandem with the shrinking percentage of laborers willing to work. Burnout, high turnover, lack of benefits, long hours, and assisting unruly customers has erased nearly a million service workers from the economy¹. Not only that, but high labor costs have left nearly a million food service positions permanently “open.”

Consolidation of restaurant locations has remained consistent as a result of these industry disruptions and is forecast to continue, especially after revenue from the post-pandemic spike is entirely consumed by inflation. Chains recognized as offering “traditional American cuisine,” or restaurants offering burgers, pizzas, steaks, salads and other comfort foods are not expected to experience the same fate as more niche restaurants operating in the market. Many consumers turned to comfort foods amidst the pandemic and those chain restaurants are still seeing a surge in revenue. Those chain restaurants and establishments include The Cheesecake Factory, Applebee’s, Denny’s and Outback Steakhouse amongst others¹.

Profit & Revenue Sustainability

Businesses that target consumers anywhere between the ages of 25 and older will likely need to change their pricing strategy based on the niche or traditional markets they serve. Consumers between the ages of 25 and 44 constitute 38% of industry revenue while consumers between the age of 45 and 64 constitute 37% of market revenue.

Targeting the younger demographic of consumers aged 25 to 44 has the highest revenue potential. Young adults are getting married and having children later than previous generations. This enables them to spend a greater proportion of income on eating out and other related luxuries. Further, younger and more price conscious consumers prefer cheaper restaurant alternatives like casual Chinese, Italian or Mexican. All are relatively attractive to the young consumer due to their affordability per portion and proliferation of chain restaurants.

Ultimatley, the heath and sustainability of restaurants and restaurant chains will be determined by their ability to reduce cpsts and increase revenues in a highly inflationary economy. Technological disruption will benefit the early adopters to limit their wage costs as greater advancements in robotics and online ordering will reduce the need for physical employees. Larger pizza chains, namely Papa John’s, Domino’s, and Pizza Hut now drive more than 40% of their sales through the internet due to technological advancements they made post pandemic. Most notably, mobile technology has become the new frontier for food services and profit potential that will remain commonplace for young consumers looking to order quick or fast-casual meals.