Scott Barnett & Associates Blog
The Unknowns & Unknown Unknowns:
the Long Term Effects of COVID on the Restaurant Industry

November 17, 2020
The old saying, "It's going to get worse before it gets better" has been true for good reason, and arguably never more appropriate than when it comes to describing the long term effects of COVID on the restaurant industry.
When preparing for the post-COVID future, there are the unknowns, or questions that we don't know the answers to, and what might be called the "unknown unknowns," or issues that we can't even conceive or question at this point.

Below I go over some important unknowns that are not getting enough attention in the media when it comes to the long term effects of COVID on the restaurant industry.

Will Ghost Kitchens Become More than
a Specter?
We know virtual kitchens or "ghost kitchens" are here and growing. These are professional kitchens with only delivery or pick-up service and with no in-dining area. But are ghost kitchens the next big thing?

Some very powerful players like Google, Travis Kalanik and others seem to believe so, flooding this niche market with hundreds of millions in seed investment. There are ghost kitchen locations popping up nationwide with upwards of 100 brands (most virtual), including in existing restaurants where smart restaurateurs are hedging their bets with multi-branding initiatives.

Is Big Tech to Become a Big Restaurant Player?
As the ghost kitchen example illustrates, big tech is capitalizing on changes to the restaurant industry, investing money where they see COVID altering supply and demand and creating niche markets. As big tech stakes its claim, how will it alter the restaurant industry and investor landscape? Big tech is known for its search and destroy competitive approach, as well as its propensity for bundling products. How will this affect big name restaurant chains or even local mom and pops?

Let's take a look at a hypothetical: If Travis Kalanik owns a kitchen, the brand, the delivery vehicle and the payment method; what is the small chain or single operator to do? The ownership situation in this example extends to basically every level of the supply chain. With this extensive reach, big tech can buy out competitors or run them out of business.
Another thing to keep in mind that we know about big tech:
they don't take prisoners.
What Is the Future of Third-Party Delivery?
As a corollary to big tech investment, what is the future of third party delivery? If it's true that nobody but the driver is making money, where is the beef (to coin a phrase)? Is controlling payment methods and related income the key? As autonomous vehicles become prevalent, how will this technology affect delivery pricing and who is making money from it?

Another consideration is that as these large third-party delivery companies consolidate, municipalities are restricting the exorbitant delivery fees these companies have leveled against restaurants in the past. Will more local or state governments get on board in placing delivery fee restrictions?

Finally, delivery co-ops, which have much lower fees than traditional third party delivery companies, are springing up in secondary and tertiary markets as a way of competing. How will these grassroots delivery methods alter the delivery landscape?

What Percentage of the Business Will
Be Off-Premise?
No matter what happens in our post-COVID world, we know off-premise dining is here to stay at all levels of the industry. If your restaurant didn't have a plan for off-premise before COVID, you undoubtedly have one now or you're not in business.

Online ordering that is responsive (mobile friendly) is a must, even for the little guys. The big unknown is how much of off-premise dining is here to stay. If it's half your business today versus 5-10% pre-COVID, what will it be in the months and years post-COVID?

With an effective vaccine a few months away from widespread distribution, the key question is when will folks feel comfortable about in-restaurant dining again?

Will people still be hesitant to dine in a restaurant with strangers even with the vaccine available? If so, how soon after it is available? After they receive the vaccine themselves, or after mass vaccinations have allowed us to reach herd immunity?

And how much will people have simply grown accustomed to dining at home and prefer it to restaurant dining?
Is the Demise of the City Really a Thing?
Early information certainly points to urban restaurants being hurt the most from COVID. Indications are that population density was a big contributor to COVID transmission, worrying many residents of urban areas. The migration from densely populated areas to suburban areas is already happening.

Additionally, civil unrest has become a concern in recent months, which disproportionately affects shops in urban areas. On top of this, fewer offices are being rented out, or will be rented out in the foreseeable future, as businesses and organizations have learned that remote work works overwhelmingly well with employees. These organizations are asking themselves, why pay for the overhead if we don't have to?

So, how do all of these massive social and business changes affect real estate prices? Will real estate prices crash in cities? Will they rise in suburban areas? Most importantly, how long will this trend last and what does it mean for restaurant owners and investors in urban and suburban areas?

The Answer Is Adapt, Adapt, Adapt
Irrespective of the answers to all of the questions above - all of the known unknowns, if you will - there will still be many unknown unknowns - or issues we can't conceive of at this time.

All of this uncertainty means one thing: restaurant owners and investors must be nimble and quickly adapt to the landscape as it changes under their feet.

The good news is that the restaurant industry does just that. It is filled with flexible, think-on-their-feet entrepreneurs and managers who rapidly adjust. The restaurant industry response to COVID only proves these virtues of the restaurateurs and workers once again.

Next blog: the industry finally embraces technology and what are some people doing internally.
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