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US restaurants in sales 'purgatory' after Q2 slump as pandemic effects persist

U.S. restaurant chains accelerated their takeaway and delivery service offerings in the second quarter as coronavirus lockdowns continue to batter their sales and experts say much of the industry's recovery will continue to be held back as long as dining restrictions continue.

After suffering losses following lockdowns and closures of dine-in operations in April, restaurant chains had started to see signs of recovery by May and June as states reopened their economies and eased restrictions on restaurants. But a resurgence of COVID-19 cases forced states to reverse course in July sending more shocks throughout the restaurant industry and tempering its recovery.

"Relative to where they were June 30, I don't think there are going to be big pick-ups in Q3," Erik Herrmann, partner and head of restaurant investment group at CapitalSpring, said in an interview. "We're kind of in this purgatory for the foreseeable future for a lot of companies that are being physically limited by restrictions today."

U.S. restaurant chains such as McDonald's Corp., Yum! Brands Inc. and Chipotle Mexican Grill Inc. reported same-store sales declines in the second quarter as revenue and profits lagged the same period a year ago. Following the initial slump caused by widespread lockdowns, the chains said sales grew faster or stabilized as the quarter wore on, but questions remain about whether such momentum will continue.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Expanded outdoor dining and enhanced unemployment benefits softened the pandemic's blow to the restaurant industry, but the prospect of winter and gridlock in Washington could undermine the ability of restaurants to rely on them, David Henkes, a senior principal at Technomic, said in an interview.

"In a lot of parts of the country outdoor dining has been a savior," Henkes said. "If you're in Minneapolis or Chicago or Detroit as soon as October rolls around or even September sometimes, it can be very hard to sustain that, and so if dine-in operations aren't reestablished it could be really bad news for the industry."

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Quick-service businesses focused on less-expensive options and off-premise sales have proven to be more resilient, while fast-casual eateries that pivoted to takeaway options have seen some success, CapitalSpring's Herrmann said. Meanwhile, things remain much more challenging for full-service restaurants that depend more on people dining in, Herrmann said.

"The average full-service is still in a challenging situation just from a profitability standpoint given sustained revenue losses," Herrmann said. "The primary driver of the relative winners and losers in the full-service segment has been geography more than anything else."

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Restaurant reservations for locations that reopened in the U.S. were 66% of what they were a year ago as of Aug. 25, according to OpenTable, the reservation website. Meanwhile, seated dining for the broader U.S. restaurant sector is down 53% as of Aug. 25 from where it was a year ago, OpenTable data show.

Ordering up more takeaway, delivery options

As consumers get more comfortable eating restaurant meals at home, eateries are developing more convenient delivery and pickup options.

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Restaurant companies like Chipotle Mexican Grill Inc. are bulking up their digital ordering and off-premise channels in response to changing consumer behavior caused by the pandemic.
Source: Chipotle Mexican Grill Inc.

Chipotle on July 29 reported it recently opened its 100th drive-thru digital order pick-up lane as part of an effort to ramp up the service at its restaurants, according to regulatory filings. The company expects 60% of its new restaurants will include a drive-thru lane and it plans to continue investing in its digital operations, Scott Boatwright, Chipotle's chief restaurant officer, said in an Aug. 25 email.

"Chipotle is fortunate to be in a position where our brand is growing domestically as well as in Canada," Boatwright said. "Most recently, we announced the hiring of 10,000 employees to support our digital business, which grew 216% year-over-year in second quarter alone."

Yum! Brands' Taco Bell, meanwhile, plans to open in the first quarter of 2021 a new restaurant concept dubbed Taco Bell Go Mobile specifically designed for guests to order ahead through Taco Bell's mobile app. Taco Bell Go Mobile locations will have smaller footprints than traditional Taco Bell locations and two drive-thru lanes.

A Yum! Brands spokesperson declined to comment for this story, while McDonald's did not respond to an inquiry.

Brinker International Inc., owner of the casual-dining chains Chili's Grill and Bar and Maggiano's Little Italy, on June 23 launched a virtual brand called It's Just Wings in 1,050 company-owned restaurant locations in partnership with DoorDash Inc. Brinker International executives expect It's Just Wings could do more than $150 million in sales in its first year, and the company is testing other virtual concepts. A Brinker spokesperson referred a request for comment to the company's fiscal fourth-quarter earnings call Aug. 12.

"We believe this is our opportunity to prove that maybe it isn't overbuilt," Wyman Roberts, Brinker International's CEO and president, said during the call of the casual dining segment. "It's just underutilized."

Brinker's new virtual restaurant strategy will drive a highly incremental, high-margin revenue stream, give the company a competitive advantage over its casual dining peers and provide the business a hedge against a potential second-wave of state-mandated restaurant closures over the fall and winter, Jeff Farmer, a Gordon Haskett analyst, said in an Aug. 21 report.

"Further casual dining traffic recovery over the balance of 2020 will be almost entirely driven by increased capacity limits with the majority of concepts having already aggressively pursued increased outdoor seating and in-restaurant partitions — and doubled or tripled historical off-premise sales levels," Farmer said.

Most experts agree that larger delivery and off-premise operations will continue for many restaurants, but harder to say is just how much of the elevated levels of spending in these channels will continue once things normalize.

"We're very optimistic about the future of delivery and third-party delivery and off-premise more generally," Henkes of Technomic said. "But in casual dining or the sit-down restaurant business, it's never going to replace all of that dine-in business that has disappeared."

3rd-party delivery gains

The acceleration of the delivery channel's rise in the restaurant world is padding the top-lines of companies like Grubhub Inc., which Just Eat Takeaway.com NV is acquiring, and Uber Technologies Inc. even as the economics of meal delivery services remain a challenge.

In recent earnings statements, Grubhub and Just Eat Takeaway each reported revenue that grew by double-digit percentages in the first half of the year. Grubhub executives said in a July 30 letter to shareholders the pandemic has resulted in a "permanent catalyst putting our business on a higher, sustained trajectory," as opposed to a temporary demand spike.

Uber, meanwhile, has made a number of changes to its business as part of its attempt to help restaurants as they continue through unprecedented times, including introducing the ability of restaurants of all sizes to opt into daily payments for Uber Eats as opposed to a weekly billing cycle, Meghan Casserly, head of communications for Uber Eats, said in an email.

Like Grubhub, Uber CEO Dara Khosrowshahi said Aug. 6 during a post-earnings call that the company's delivery business grew during the pandemic and is likely to continue once the crisis passes.

"We stand firmly on the belief that pure-play delivery companies can and will be profitable," Khosrowshahi said. "It's only a question of when."