Hospitality Market Report: The Road to Come


The theme of accelerated trends and rapid evolution prevailed in the annual State of the Nation address delivered at the virtual Canadian Restaurant Investment & Leadership Summit in early November. The address — based on information from the annual 2020 Canadian Chain Restaurant Industry Review – produced by CWB Franchise Finance, NDP Group and fs STRATEGY — discussed where the industry was prior to the COVID-19 pandemic, how it’s performed since March 2020 and provided an outlook for the path ahead.

“If you had asked me at the beginning of 2020, I would have happily told you the future of the foodservice industry would be changing in so many ways based on current trends,” says Vince Sgabellone, industry analyst – Canada Foodservice, NPD Group. “What I never could have predicted is just how fast that future was set to arrive.”

Jacob Mancini, AVP, Restaurants & Breweries, CWB Franchise Finance, and co-presenter of the State-of- the-Nation address, paints a picture of how the industry looked at this time last year. “[For] example, food halls and entertainment concepts were growing and providing some new forms of customer interaction and engagement, while giving operators access to new revenue streams and different channels they didn’t have before,” he explains. “The real-estate market was very tight and getting harder and there were a lot of brands with aggressive growth strategies driving rental vacancies to an all-time low. And, with such little supply in the market, rates were probably as high as they’ve ever been. And, similarly, the M&A market was very hot — we saw a lot of deals in the restaurant segment — thanks to private equity being more engaged and involved, as well as operators really starting to look at ways to improve margins.”

Fast forward to the present and, says Mancini, “it’s pretty ugly, right? Unemployment reached a high in May [2020], two-and-a-half times what it was before and it’s certainly now twice what it was pre-COVID-19. And consumer confidence that was once so high, has dropped to 60 per cent.”

According to Sgabellone, the pandemic “really did expose some areas of weakness in the industry and I think operators really are motivated to figure out ways to pandemic proof,” he says.

Where We Were
According to the 2020 Canadian Chain Restaurant Industry Review, “The beginning of 2020 was looking like a continuation of the trends established late in 2019. The economy had begun to slow in the back half of 2019, consumer confidence took a tumble in December and the household debt-service ratio continued to rise. GDP was expected to remain positive through the new year, but growth was slowing.”

NPD’s CREST data shows foodservice-dollar growth in the winter quarter (December 2019 to February 2020) was “barely hitting two per cent, which was the same level of average eater-check growth.” This translated into slightly negative traffic growth for the quarter — the first negative quarter in recent memory.

The report states the slowdown can be attributed to a one-per-cent decline in traffic visits within the quick-service restaurant (QSR) market segment. Meanwhile, it shows the full-service restaurant (FSR) segment growing through the year to finish off the full year almost three-per-cent ahead of the prior year in traffic. “But, keeping up the trend of slowing growth, this, too, was below recent years’ performance,” reads the report.

For QSR, the report points to a slowdown in morning-meal growth as a determining factor in the segment’s performance. “This had long been a traffic driver for coffee-loving consumers in Canada and the top operators in this space competed intensely for incremental share of this once-growing daypart. However, 2019 also saw the continuation of the negative trend in ‘consumed-at-work’ occasions, down by two per cent on the year. The work-from-home migration began long before 2020 and it caused a growth slowdown in the two largest dayparts — morning meal and lunch.”

What Just Happened
When the foodservice industry was forced into lockdown by COVID-19 in March 2020, it was impacted “immediately and hard,” according to 2020 Canadian Chain Restaurant Industry Review. “Many restaurants were forced to close their doors entirely due to a complete reliance on dining-room traffic. Others that relied on workers, commuters, students or travellers for their livelihoods similarly faced a lack of traffic. Still others simply closed out of an abundance of caution.”

The impact on restaurant traffic was swift and dramatic. In April, NPD recorded a 43-per-cent decline in restaurant visits and, by the end of August, the decline had been cut in half, “marking some hope for an eventual recovery, but much work remained.”

As people were forced to spend more time at home, the report highlights two main trends that emerged — the shift to off-premise traffic occasions and a surging reliance on digital-ordering platforms.

The report shows during the first six months of the COVID-19 period, off-premise access modes accounted for 85 per cent of all restaurant occasions, with the largest shift in off-premise traffic being at drive-thru windows. “This resulted in long lineups as operators struggled to adjust to the increase in customers, plus an increase in order sizes as more and more family-sized orders went through the window. Operators with the best-developed drive-thru infrastructure outperformed the rest of the market during this time.”

While drive-thru grew most when looking at visits, delivery was the fastest-growing access mode, doubling four months in a row compared to the prior year and reaching as high as 14 per cent of foodservice traffic in April. “This shift to delivery has been a boon for third-party delivery service providers,” state the report’s authors. “Further, it has helped many operators, some of whom never served an off-premise meal before, survive during the early days.”

Independents Are Staying the Course
In the early days of the restaurant restrictions, independents were among the hardest hit. According to the report, “these entrepreneurs are disproportionately represented within the FSR segment, which relies upon on-premise dining for its livelihood. Additionally, this operator group did not have the support of a corporate franchisor to provide a financial safety net. They were largely on their own.”

But, it continues, as restrictions started to lift through the summer and more and more of these operators discovered the possibilities of off-premise ordering, the trends began to look up a bit.

“The independent-operator set was outperforming the smaller chains by the end of August and recaptured four points of traffic share. Make no mistake, this group of operators will continue to struggle, but the signs of recovery are encouraging.”

Where We Go from Here
The question on every operator’s mind, regardless of size or segment, has to be what to do next. “The duration and depth of COVID-19’s impact on the Canadian economy at large, and the foodservice industry in particular, will remain uncertain for the foreseeable future,” reads the 2020 Canadian Chain Restaurant Industry Review, “but one thing is clear: the trends that existed prior to this period and accelerated through 2020 can be expected to continue into the future.”

“Without a doubt, the biggest question facing the industry is how to reinforce your business model and really build a pandemic-proof concept,” says Mancini. “In the end, none of us have a crystal ball and it’s safe to say that, while some [aspects of the industry] will return to their pre-pandemic states, others are going to be forever changed — and there are so many questions that will come from that.”

The report ends off on a bright note, pointing out that although COVID-19 has changed the Canadian foodservice landscape forever — eliminating years of growth and facilitating a decade of evolution — consumers in Canada love their restaurants and are eager to return.

As soon as they feel safe and have the means, it predicts, people will return to restaurants in one way or another.

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