America is on a dining spree. Patrons are piling back into restaurants that survived difficult Covid-19 lockdowns to find a new boom in business. Hundreds of new outlets are opening daily. In aggregate, sales of restaurants and other eating places have jumped to $194 billion, a quarterly record, in the three months through June.
Despite the good momentum, challenges like the spread of the Delta variant and the waning boost from stimulus payments may crimp further growth in the near term. That said, we think these are transitory obstacles on what is a long runway of recovery ahead, with the sector’s fundamental drivers of demand intact. An increasingly busy lifestyle and people’s desire to socialise over meals will favour eating out in the long run.
This week’s Chart Room takes a closer look at the restaurant recovery in the US. On balance, big-name chains like McDonald’s, Starbucks, Papa John’s or Chipotle appear better positioned to capture the pent-up appetite. Some operators have reported 20 to 40 per cent revenue growth in the second quarter over the same period of 2019, compared to an overall nationwide increase of about 11 per cent. Winners in the sector are benefitting from reduced competition after an estimated one tenth of restaurants have permanently closed amid the pandemic.
As the economy reopens, restaurant sales will receive further boosts from the improvement in both domestic mobility and international tourism. Companies providing coffee, snacks and casual dining will likely benefit more from a rise in street traffic.
Another source of growth may be the increase in single orders, which appeared to have lagged group purchases so far in the recovery. Some publicly traded operators have recently reported larger average bill sizes attributable to group customers. In addition, on-premise eating, as opposed to drive-through or delivery, will likely increase as virus concerns ease.
Meanwhile, new venues are opening at a rate of 5,000 to 6,000 a month, according to Yelp data. At such a pace, supply should catch up with demand in one or two years. Current supply growth appears to be tilted towards the off-premise and limited service segment. Existing operators have also boosted their digital capabilities during the pandemic. The desire to open new sit-down restaurants remains subdued, perhaps due to the psychological impact and financial damage of Covid.
The eatery sector is sensitive to a public health crisis in an asymmetrical way - the downside is usually smaller than the post-crisis upside, if history is any guide. As reopening progresses, we will likely see more new highs for restaurant sales over the next one to two years.