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May 11, 2021
State of the restaurant industry

How COVID is fuelling a Canadian Restaurant Resurgence

Many restaurants are thriving despite a challenging economic environment. The key to success has been pandemic-inspired takeout service innovation - and it’s quickly becoming part of the new normal.

To the casual observer, it might look like the economic impact of the COVID-19 pandemic has been particularly hard on the Canadian restaurant sector. After all, in many areas of the country, no one can go out for a sit-down meal; even where they can, restaurants can often only accept a relative handful of customers. Yet the reality is perhaps startlingly different, according to Jacob Mancini, AVP, Franchise Restaurants at CWB Franchise Finance. In fact, Mancini says, many Canadian restaurant operators “have had their best year ever.”

How can that be, when COVID continues to restrict so much of what Canadians used to do, including going out for meals? “It’s really a tale of two market segments,” says Mancini, who oversees the restaurant-lending division for CWB and has worked in the sector for 20 years. On the one hand, full-service establishments have indeed faced a host of challenges, and those that have been unable to pivot towards off-premise take out will not survive. On the other hand, quick-service restaurants (QSR, for short), which comprise about two-thirds of the market, have enjoyed both robust sales and lower costs. Meanwhile, full-service restaurants that shifted to takeout service have recovered material portions of the revenues they lost through forced closures. 
The reason: the pandemic has changed how, when and where people consume food. And over the longer term, Mancini says that shift – along with owners’ ability to adapt to it – could open new opportunities for the entire sector. 
Not surprisingly, the key determinant in whether a restaurant has seen a “pandemic boom” has been whether it offers takeout. When the pandemic hit and just about everything was shut down, those QSRs that already offered drive-through or had established takeout services – think pizza chains – reaped immediate rewards. “They saw a massive increase in sales,” Mancini says. Branded QSRs in particular saw as much as 20-30% increase in revenue, and while “that has come down a little bit as the economy gradually opened up, sales are still very high and probably better than they were before,” Mancini adds. Not all QSRs have done so well, of course; for instance, those that operate in downtown food courts have been decimated. Others that rely on breakfast or coffee sales have also been hurt, simply because people are no longer going to work. But even those QSRs are seeing more business in the mid-afternoon and other non-peak periods. “They’re seeing a pickup in what we call snacking day parts,” he explains. “People aren’t buying coffee, but they are grabbing something in the afternoon, because they want a break and a chance to get out of the house.”

For many restaurants, the pandemic has meant not only higher demand, but also lower costs. When COVID hit, owners moved quickly to review and reduce costs. “It forced owners to make a lot of difficult decisions, and it made some operators realize that maybe they had been running a bit fat because things had been going so well before,” says Mancini. Perhaps even more importantly, owners have been innovating, especially when it comes to physical space. 
“Takeout and delivery is so important now that everybody is looking for ways to reduce seating and focus on delivery,” he explains. Some are adding more drive-through lanes; others are repositioning dining rooms, for instance by taking away seats and creating space for third-party delivery services to make the takeout process more efficient."

Innovation, Mancini emphasizes, will be key to the future of full-service restaurants, as well. Many have already re-engineered their operations to provide takeout, and they are also exploring how to operate more efficiently and reduce their footprints. “If you’re a full-service operator, you might be thinking that takeout might be 10-15% of your business going forward, where before it was two percent or less,” he says. “The question is how to right-size your dining room, your kitchen and so on for the new reality, so that you’re not wasting space.”

That ability to innovate is one reason Mancini says he is optimistic about the full-service segment. Another is pent-up demand. He points to last summer, when most restaurants across the country could open at reduced capacity or for outdoor dining.

“Even though they were operating at only 50% capacity, many owners were doing 85-95% of their previous sales,” he says, because customers spent more money per visit and stayed at the restaurants longer. 
This year, “those full-service restaurants that can get through this are thinking that this summer is going to be just as good,” Mancini says. “We’re going to have bigger patios, a longer patio season, and people will want to go out.”

Over the longer term, the picture might be even rosier. For QSRs, the pandemic has provided an opportunity to consolidate their advantage by expanding takeout and drive-through services. “You’ll see a lot more growth in QSR,” Mancini says. He expects a resurgence in investment even in the full-service space, not just because customers will want to go out for meals, but also because so many independent restaurants that have failed to pivot will close because of the pandemic. Many owners, Mancini says, will be looking at a less competitive landscape, with the added benefit of more accommodating rents.
“I don’t think operators are looking at what’s happened and saying restaurants aren’t for me,” he adds. “I think we’ll see a boom in growth in 2022 and beyond.”
The question, of course, is how long a post-COVID rebound will last, and whether all the pandemic-inspired innovation around takeout and delivery will continue to pay off. Mancini thinks there will inevitably be some regression to the norm, but he also suspects COVID will change the industry fundamentally. He likens the situation to e-commerce, which has exploded as the pandemic forced consumers to buy online. “For restaurants, all these trends were already happening – the move to takeout and delivery, smaller square footages, and so on,” Mancini says. “But it took COVID to put them into overdrive and make it happen in six to 12 months instead of six to 10 years.”