I vividly recall my last dinner at a restaurant in SF in early March. I was with my wife, Sarah, along with hundreds of diners before the shelter-in-place, and before any of us understood the impact COVID-19 would have on our lives.
So much has changed since then.
In the last few weeks, we’ve all seen restaurants that we love struggle to adapt and even shut down. Locanda, Delfina and many others that we know and love in the Bay Area will not return. Large and small restaurant owners I’ve spoken with are down 60% or more from their usual sales, and as a result, have had to let most of their staff go.
As part of brainstorming solutions to help get people back on their feet, I’ve found myself considering the inevitable lasting impact COVID-19 will have on the food industry. The food and restaurant landscape is one that has long fascinated me. I led an investment in Grubhub while at Lightspeed in 2011 partly because I loved its mission to help small independent restaurants more effectively compete with larger chains. The last month however, has brought a dislocation in the restaurant space that no one could have predicted and I believe will permanently change how we eat, the ways in which we order food at home and the ways in which restaurants interact with their customers.
While its certainly early in the broader cycle of change, here are my thoughts about how the industry is likely to evolve over time and what I am seeing from innovators in the space. A number of these were emerging trends pre-COVID, but have been radically accelerated by the consumer behavioral shifts we will continue to see. Some others are unexpected changes that have created opportunities for the most flexible merchants to still serve customers’ needs regardless of size.
It’s hard to imagine dining in the same way again. Here is what I expect we will see in the coming months and years as we try to re-enter day to day life post shelter-in-place.
Dining in at restaurants become a luxury, and a far more infrequent occurrence
While there are likely to be pockets of the country that don’t take the health implications as seriously and will continue to dine out with regularity, most urban environments will see dramatically lower dine-in traffic for the next 2–4 years as the emotional overhang of shelter-in-place and likely aftershocks weighs heavily on us.
Three factors will drive the success of most restaurants (particularly the high-growth sector of fast casual)
- Drive-thru, pick up and curbside availability. This is must have for most restaurants going forward. In just a few weeks, it’s been incredible to watch restaurant owners add these capabilities where there were none. For example, Jamba Juice franchisees created a new “pop up” drive-thru by setting up a tent outside of the store in the parking lot. These additions are significant in meeting consumers and addressing their need for convenience and safety.
- Rationalized rents and square footage per unit. Smaller ones will likely be able to survive more easily while larger per unit footprints will struggle to replicate their pre-COVID traction particularly if they lack drive-thru capabilities as foot traffic and table density are unlikely to be what they were before (e.g., Cracker Barrel)
- Customer acquisition and communication. Restaurants that can communicate with their customers directly without reliance on “passerby” foot traffic or third-party aggregators will be advantaged.
There will be an explosion of new “products” offered by traditional restaurants:
Restaurants will need to be creative around what “products” they offer their customers. The decision people made to dine out was often driven by one or more of a number of “need states”: wanting to get out of the house, to experience great service, to try new foods that are often more complex than what they could/would make at home, or to simply avoid the burden of shopping, food preparation and cooking. Sophisticated restaurants will recognize those needs and do what they can to serve as many of them as they can. While COVID mitigates the ability for restaurants to replicate the great service that people enjoy from dine-in restaurants, there are a number of ways that restaurants are creatively addressing the other “need states”
- Restaurants will morph into mini grocers, meal kit providers and grab-and-go providers: Many grocers have become mini-restaurants over the last few years with enhanced hot food offerings and their own fast casual concepts. Get ready for the trend to swing the other way. You can easily find ramen shops selling “ramen kits,” sandwich shops like McAlister’s Deli starting to sell cold-cuts, Moe’s Southwest Grill selling taco kits and restaurants adding “grab and go” offerings of pre-made best sellers. It’s happening across independents and national chains. It will continue. They have the labor, the ingredients and the brand credibility and have a need to optimize revenue per square foot and make up for lost revenue from reduced dine in transactions and more space required between tables for social distancing purposes. This is not only tapping into the “meals at home” trend but it also expands the restaurant dayparts to give traditional lunch concepts a real platform to drive nighttime and weekend business.
- Restaurants will seek to drive more delivery and take out volume but reduce their dependency on third party aggregators: The first area that many restaurants will try (if they haven’t historically) to maximize is delivery and take out volume. Many will weigh whether to double down on working with delivery aggregators (Grubhub, Uber Eats, Doordash). While this is a short-term band-aid, I am hearing increasingly from restaurants that the commissions (which have reached >20% on some platforms) have become unbearable. I expect to see a set of new tools that are architected around driving the restaurant direct consumer traffic, providing them better tools to manage those customer relationships and avoid the 3rd party commissions. I also expect this to have the impact of putting pressure on those aggregators to lower commissions across the board
- Safety will be table stakes but can represent opportunities for branding or even unique experiences: We will see restaurants go far beyond the typical requirements and operations of a restaurant with increases in protective equipment and processes in order to build reputation for being clean and safe. These will be important drivers of employee retention and customer satisfaction/loyalty. This will show up in employee uniforms, lights and innovations that automatically disinfect surfaces, anti-viral surfaces, innovative packaging and even new employees that do nothing but “sanitize”. It will require added investment, operational execution and storytelling of those enhanced capabilities. In the way that news of a foodborne illness has crippled sales for independents and national chains alike, stories of illness that are believed to be caused by operational negligence will drive customers and employees to competition to build more trust around safety. In the last several weeks, I’ve spoken to one head of a well-known high-end restaurant group that is actively looking at cost estimates to build private booths for every table in the restaurant which would potentially include protective shields. In general, I expect to see a much more rapid adoption of contactless dining technologies from scannable QR codes that unlock menus for mobile ordering to attempts to replace waiters and waitresses with robots.
- Ghost kitchens (and iterations of them) will thrive: Ghost kitchens are food preparation and cooking facilities that are delivery only. They have been the source of a lot of venture capital investment and buzz over the last few years and I believe that they will play more of a role in the food world after current dislocation. What will be interesting to see is how they show up: Restaurants that close could themselves be repurposed as small ghost kitchens if the location and economics work. They will be well positioned to dynamically launch brands, optimize merchandizing through data and ultimately build big businesses in a way that many independents and even larger chains are unable to. They still require density, as the volume is off premise only via third parties (and less profitable as a result, but it does feed the opportunities for ghost kitchens)
- It’s time to let people cook and sell food out of their homes: This is the time for an Airbnb for home chefs/cooks to thrive. I know it sounds crazy, but I still recall the skepticism in investment partner meetings about how crazy it was to get in a stranger’s car through an app in 2011. COVID has displaced or will displace tens of thousands of restaurant employees in the United States. Chefs, cooks and others that love to prepare food for others and will have nowhere to do it. But what I think about are the millions of people, many of whom may now be unemployed or underemployed, that love to cook food or for whom food is a core part of their culture. In fact, there are likely far more people with a passion for cooking who would happily make and sell food than there are restaurant owners or people that work at restaurants. The issue is that opening a restaurant is hard and scary for most people: securing space, hiring people, securing licensing and insurance and having faith that you can attract customers is not for everyone. Even working at a restaurant as a chef or a cook can require a big-time commitment each week and often rigid schedules.
For years, people have leveraged platforms like Facebook, Nextdoor and Instagram to build private gray market “restaurants” and sell food that they prepare in their homes to local community members. There has never been a better time aggregate all of these talented cooks and chefs onto a single platform providing them a way to earn a living while staying at home and doing what they love. If done successfully, this will serve a core need of the customers to try different (and more complex) forms of food that they can’t cook themselves and offer a variety unmatched by the current restaurant landscape. The regulatory environment has been the key hurdle for this approach historically but with record unemployment and restaurant closings this may be the time it can finally break through. This is also an enabler of another form of independent work that can empower those often left behind in times of crisis. If successful, this has the potential to be one of the more scalable and disruptive models that may emerge on the other side of COVID over the long term.