Restaurant Industry Analysis for 2022
Robin Gagnon, CEO and Co-Founder of We Sell Restaurants
The restaurant industry is slowly recovering after taking a major hit in 2020. Over the last year, we've seen restaurants find new ways to satisfy customers. Increased drive-through service and delivery have been supplementing sales and earnings while restaurants adhere to social distancing rules and limit indoor dining. The many strategies that restaurants are implementing show just how hard the industry works to persevere despite the pressure. The data from the BizBuySell Insights Report show the breadth of the recovery and demonstrates the overall health of the industry when measured by transaction growth, selling prices and sales by region.
The BizBuySell Annual report of restaurant sales is hot off the press and the overall theme is Bounce Back. The data demonstrates that in 2021, restaurant sales were on the rebound, despite some regions of the country remaining slower. This article analyzes the past year in the restaurant industry and offers insights for the future.
ACCELERATION
By mid to late 2021, for many restaurant owners, fatigue had set in. Continuing mandates in select markets have increased tensions between customers and staff. In some areas, restaurant staff is now responsible for requesting proof of vaccination before drink orders. Managing employees who must enforce these rules is enough to drive any owner a little mad.
At the beginning of 2021, restaurant owners were trying to return to business as usual, which was difficult when wave after wave of COVID-19 forced them to close their dining rooms and adjust their service over the previous year. The acceleration of deals into the third and fourth quarters demonstrates that restaurants began listing and selling later in 2021. This led to a 38% growth in transactions in the fourth quarter. After a rocky start of the year with sales down a whopping 35%, businesses slowly began to recover as 2021 progressed. Each quarter grew beyond the tough start and overall transactions were up 7% over the prior year. The third quarter was buoyed by the CARES Act, which required funding by September 30th.
QSR IS KING
The data illuminates strong growth in the Quick Service Restaurant (QSR) sector, fueling sales overall at the main street level. This occurred in the merger and acquisition marketplace with restaurant deals announced at a breathless clip in 2021. These ranged from the buying spree of Fat Brands who acquired four different concepts to the billion-dollar acquisition of Firehouse Subs by RBI. Other deals announced in the sector included Capriotti's acquisition by Wing Zone, Nothing Bundt Cakes' purchase by Roark Capital and BurgerFi's expansion into the pizza segment with the acquisition of Anthony's Coal Fired Pizza and Wings. These are only a few of the several dozen deals taking place.
The common headline among many of the acquisitions is that the QRS space is the place to play. These large players entering the marketplace are sending signals to the main street community that "buy" is a good word, and restaurants are not going anywhere anytime soon. These impressive deals, despite the struggles of government closures, limited capacities, and new pressure to ask patrons to mask up and have proof of vaccination further cements the belief that restaurants are here to stay and offer a singular experience that cannot be matched in a take home and carryout environment.
Quick Service Restaurants proved to be most resilient during the pandemic and in particular, franchise brands. The nature of QSR's allowed the businesses to deflect some of the pandemic's worst effects that decimated other full-service businesses. Many QSR's were already implementing online ordering, curbside pickup, and third-party deliveries. Other QSR franchises were also upgrading their drive-through processes to make service even faster. QSR's are also relying heavily on technology to sustain the industry. Artificial Intelligence, kiosks, and automate lanes are playing a large role in delivering quick and accurate service, even down to determining traffic fluctuations of drive-throughs.
REDISTRIBUTION OF SALES BY REGION
There are clear trends in the data consistent with what We Sell Restaurants saw by state and region. Buyers are choosing to make moves into less locked down areas. BizBuySell's quarterly insights saw a 3% percentage point change in the distribution of sales by region. In 2020, the Northeast region sales accounted for 21% of all restaurant sales. By 2021, this fell to 18%. The market activity moved south, which picked up 3% points, moving from 39% to all transactions in 2020 to 42% in 2021.
Many restaurants for sale in southern states, particularly Florida, Texas and Tennessee, are not on the market for long. Relocating families benefit from scenarios where one spouse now works from home and there is flexibility in determining where they will ultimately call home. Housing values are also driving relocation with those choosing to cash out able to walk away with good sums to both acquire businesses and purchase homes in states with a lower cost of living.
The COVID crisis also has some families re-evaluating distance from relatives whether based on a need to care for aging parents or a desire to move closer to siblings to share home schooling responsibilities if school shutdowns return or in some cases, continue.
Meanwhile, the Northeast continues to feel pressure from the government over when and how they can operate, which affects both price and velocity in restaurant sales. The Pacific region is also reflective of this trend, showing a drop of 1% point in transactions, but a median cash flow decrease of more than 20% percentage points. This exposes the state of the restaurant business in the Pacific states, particularly California. California has been quite open about being one of the more restrictive states for restaurant operations.
National trends for population shifts support this trend, with states like Texas and Florida experiencing an influx in people moving in, as reported by the U.S. Census Bureau.
SELLING PRICES TRENDED UP AND FINANCIAL FUNDAMENTALS WERE HIGHER OVERALL
When analyzed quarterly, selling prices moved higher for restaurants. Quarter 1 2021 data from the Insights Report shows median sales prices were down 25.5% over the prior year, which was to be expected. By Quarter 2, this jumped to 33.3% improvement in selling prices and leveled out over the entire year at an 8.3% improvement.
The impact by region is clear in the reporting of selling prices. The median sale price in the Pacific region was the only drop reported, but it was a significant 11.4% decline compared to the previous year. All other regions demonstrated selling prices that were either even or up significantly. The Midwest, Mountain, and Northeast all posted double digit gains while the South was flat. This reflects that restaurant sellers are seeing higher pricing even though the reported median cash flow was lower overall by 7% percentage points.
The driver for the loss in median cash flow was, once again, the Pacific region. The median cash flow, mentioned previously, was down 20% while every other region posted gains. The Mountain region was up 13% followed by the Midwest at +4%, the South at +4%, and the Northeast region up 1% point.
Transactions by region expose the impact of government decision making on the marketplace. While overall restaurant transactions increased 6.5%, the Northeast and Pacific regions posted losses. Sales of the Pacific region were down 1.1% in units turned over for the year while the Northeast wad down 6.6%. Contrast this with the South which was up 15.4% in units sold and the Mountain region that posted gains of 24.5%. The overall marketplace was strong but regions where lockdown measures remained in place affected the overall number of restaurants sold.
Nationwide, days on the market for restaurants improved. Median days on markets reported by the Insight report showed restaurants turned over 38% faster than 2020 with the average days on the market decreasing from 254 down to 159.
RESTAURANT PROFIT & LOSSES ARE LEANER AND MEANER
The silver lining to the to the COVID-19 crisis is the discipline and focus of restaurant owners on their operations, which required that they improve their metrics overall. There was a necessary paring of some items from menus that continued to be expanded over time, (with no subsequent reductions), as the latest and greatest dish was added. The crisis has caused many owners to be more thoughtful about the product mix, cost of goods and profit margins.
While there is continued discussion on labor shortages, the positive outcome on this issue is a focus by the operators on their staffing and culture to upgrade working conditions, improve pay, and develop staff. For some, it has meant pulling back operating hours, which weren’t adding much to the bottom line but had the same costs per hour as the busy dayparts. For others, it means taking a page from Chick Fil A and choosing one day to be closed rather than fighting for every single daypart and day of the week.
There has been a tougher focus by operators on every single fundamental, including rent and occupancy. Many owners have realized that they cannot and should not go back to large dining spaces as the dining landscape is forever altered. A change in occupancy costs and reduction in rental rates long term have had significant impact on bottom lines if units are able to resize and reduce their footprint.
LOOKING TOWARDS THE FUTURE: VIRTUAL RESTAURANTS AND GHOST KITCHENS
Virtual restaurants and ghost kitchens existed before the pandemic, but not nearly on the same scale. The change in the dining experience has allowed what was experimentation to quickly become a desirable way for patrons to eat. Virtual restaurants are commercial food businesses with concepts exclusively available online. Instead of servicing customers in a brick-and-mortar store, they cater to on-demand orders via delivery and pickup. Meanwhile, a ghost kitchen is where food is prepared only to be delivered. There is no dining room, no tables, no counters, no drive-through. A single ghost kitchen may be home to a number of different virtual restaurant brands.
The evolution of restaurant trends is nothing short of remarkable. In the face of an unprecedented pandemic, the industry is adapting quickly and in inspiring ways to reshape what we traditionally knew as the restaurant experience. The business models and emerging concepts will only continue to grow and evolve to meet patrons where they are.
The data from the BizBuySell Insight Report supports the overall conclusion that the Restaurant Industry is on the road to recovery. Buyers are making acquisitions at a faster pace than the previous year. In addition, the overall lift in median asking prices and median selling prices point to continued strong financial fundamentals as an industry battered by a crisis demonstrates resiliency in the marketplace.
Robin Gagnon, CEO and Co-Founder of We Sell Restaurants