Morgan Stanley
  • Research
  • Jul 17, 2020

COVID-19 Era Serves Up Big Changes for U.S. Restaurants

COVID-19 and social distancing have changed consumer behavior, bringing structural changes to the restaurant industry that could last long after a vaccine is found.

COVID-19 and social-distancing measures have left a number of consumers’ favorite activities out of reach, such as a night at the movies or major league sports events. But perhaps most noticeable is the disappearance of indoor dining in many U.S. regions. 

Delivery penetration was already gaining momentum before the pandemic. Now, a transformation that was projected to take years is happening in months.

The restaurant industry has adapted, ramping up outdoor dining, curbside pickup and greater adoption of food delivery apps. But even after a viable vaccine is found, has the pandemic changed consumer behavior enough to serve up a new normal for restaurants?

While it’s still early days in assessing the fallout, investors may want to note a number of structural changes, says John Glass, lead equity analyst covering the U.S. restaurant sector. “These changes range from the positive, such as market-share growth opportunities and an acceleration of digital transformation, to potentially more painful transitions in real estate and the shift to work-from-home.”

While many unknowns lie ahead for the industry, five trends appear likely to outlast the pandemic:

Digital and delivery penetration was already gaining momentum before the pandemic. Now, a transformation that was projected to take years is happening in just months. “We see total online food delivery—through online delivery platforms and restaurant self-delivery—of $45 billion in 2020, vs. our prior estimate of $41 billion in 2021, reaching 13% of the addressable market this year and 16% by 2022, vs. 2025 in our prior estimate. That means nearly three years of consumer spend is being pulled forward, led by accelerated growth from delivery platforms,” says Glass.

Use of these online platforms—known in the industry as third-party delivery—has surged, thanks to increased mobile app orders. Casual dining-to-go sales volumes tripled or quadrupled in many cases, as of late April and early May, often outgrowing a restaurant’s own delivery efforts. This could be a positive for the industry, since mobile use can result in higher margin, lower friction transactions and greater retention of customer data. 

Delivery share may have moved forward 2 to 3 years due to COVID-19
(Online Delivery Penetration Share of Total Addressable Market)

Source: Euromonitor, company data, Morgan Stanley Research estimates.

Working from home may shift how, when and how often consumers spend on restaurant food. Working from home has risen to roughly 50% during the crisis vs. 15% before, according to the U.S. Bureau of Labor Statistics, and is likely to remain elevated even post-pandemic.

This has broader ramifications. It could mean, for example, lower demand for weekday breakfast and lunch, as well as coffee away from home, particularly in densely populated areas. One positive: Spending on dinner may partially offset those declines, especially if consumers continue to use off-premises eateries at a higher rate at both suburb-focused casual diners and traditional fast food.

Restaurant chains’ market share could consolidate. The fate of independents and smaller chains has been one of the most closely watched and debated subjects during the COVID-19 era. Pre-crisis, the U.S. boasted around 370,000 independent restaurants, representing 57% of total restaurants, mostly concentrated in the full-service category. Estimates on how many of these restaurants could close permanently as a result of COVID-19 range from 5% to 30%, or around 20,000 to 110,000 venues.

“Assuming 10% to15% of independents close, we estimate this would put about $20 billion to $35 billion in sales up for grabs, mostly in the full-service category. In fast food, using those same assumptions, we estimate that 2% to 4% of industry sales would be freed up,” says Glass.

For independent restaurants, one bright spot may be how resilient the segment in aggregate has proven in the past. The industry enjoys persistent regeneration, in part because restaurant sites preserve significant sunken costs, such as plumbing, high-volume air-conditioning systems and other specialized equipment, making it cost-effective for a new operator to adapt and open for business.

Real-estate footprints may shrink post-COVID. As chains consider better brand access, questions about store footprints will likely come to the fore, namely, the number and locations of stores and multibrand location strategies where two or more chain entities share one roof.

The acceleration of digital will also make curbside pickup windows and lanes more relevant. Adapting for more to-go business, full-service restaurants may shrink dining rooms, while enlarging takeout areas. 

Consumer spending on groceries (food at home) could keep some of the share this category won during the pandemic. Since about 2015, consumer spending on restaurants (food away from home) has captured around 53% of consumers' wallet share, vs. 47% for food at home. That trend appears to have upended.

“We now predict that these two relative market shares will flip in 2020,” says Glass, adding that food away from home likely won't regain its prior share of consumer dollars until at least 2022. Even then, work-from-home conditions and increased grocery delivery could mean that some of the elevated food-at-home spend has staying power.

Estimated U.S. Food at Home/Away From Home Mix

Source: U.S. Census Bureau, Haver, Morgan Stanley Research estimates

Aside from those five long-term trends, other shifts are also in play. For example, the trend toward “ghost kitchens”—warehouse-style spaces that house multiple delivery-only restaurants—could finally pick up speed. The industry may also see increased mergers and acquisitions, amid the growing value of scale and market share, especially the technological benefits of a shared services model. Lastly, the role of kitchen automation may become more relevant, as worker health concerns remain. 

For more Morgan Stanley Research on the outlook for restaurants, ask your Morgan Stanley representative or Financial Advisor for the full report, “How Will We Dine in the Future? Thoughts on Restaurants Post-Covid-19" (Jun 10, 2020). Plus, more Ideas from Morgan Stanley's thought leaders.