The Restaurant Dive Outlook on 2021

Though 2020 has been a year of incredible disruption and instability, the trends that dominated the restaurant space were already in motion long before the pandemic struck. With no end in sight for widespread dining room restrictions or consumer wariness of traditional restaurant experiences, analysts expect these trends to further crystallize in 2021. 

Unsurprisingly, all of these movements are rooted in digital technology, reflecting diner demand for contactless and mobile-enabled restaurant engagement. 

"Digital technology is really what's going to drive value creation going forward," Lauren Silberman, senior analyst at Credit Suisse, said. "It's really the combination of consumer-facing technology with … curbside, drive-thru, delivery, and also plays into the real estate and labor piece as well, because it's all interrelated. What you're seeing is this permeation of a holistic digital infrastructure."

That value creation is crucial as the pandemic wanes on, especially for restaurants without deep pockets. 

"COVID is a liquidity event, in a sense," Bill Fahy, senior analyst at Moody's, said. "There's not a competitive response to what’s happening. If you’re a small business, you only have six weeks of liquidity. We’re going to see a lot of them go bankrupt."

Analysts predict some of these trends could help restaurants grow sales even in a tumultuous market environment. Curbside will become a powerful digital tool for restaurants without drive-thrus. Restaurants are increasingly interested in white label deals with third-party aggregators as a way to retain customer data while some are eyeing smaller locations and ghost kitchens to cater to off-premise demand. 

Even with these opportunities, restaurants will continue to juggle labor costs and rising minimum wage, which will only become more of a challenge. 

Learn more about the six trends predicted to define the restaurant world in 2021:

Diners will seek out digitally integrated curbside channels as a faster, cheaper alternative to delivery

Curbside has proliferated because it is a relatively low-cost way for restaurants without drive-thrus to launch their own off-premise channel. It also offers a key benefit to diners and restaurants: unlike third-party delivery, it provides convenience at no extra cost per order. 

Curbside is a powerful option for restaurants that don’t have drive-thrus, Silberman said. This is part of the reason fast casuals had higher digital mixes even going into the pandemic, she said. 

Generally, consumers are willing to pay $4 in delivery fees, Jean Chick, principal and U.S. restaurant & food service leader at Deloitte, said. Diners are also more interested in curbside pickup if the restaurant is within a 10-mile radius of the home because it could potentially be faster than having their food delivered, she said. 

The category is still much smaller than drive-thru, and analysts agree that it is unlikely to ever drive the same volumes as that channel — and especially not in 2021, because diners haven't fully acclimated to the experience yet. 

Customers are more familiar with queuing up in a drive-thru and ordering on the spot, Andrew Charles, a director at Cowen focused on the restaurant segment, said. Some diners may even see designated curbside parking spots, assume they are 15-minute parking spots and then order takeout inside the restaurant, he said. 

But as curbside becomes more widely adopted, there will be opportunity to make it a solid percentage of sales. For example, Target makes about 4% to 5% of its sales from curbside. The channel also comes with the added benefit of being a digital transaction, which tends to be 20% to 25% higher than an in-store purchase, Charles said. 

"You're going to have a much bigger focus on takeaway," Fahy said. 

But because COVID-19 has also accelerated consumer adoption of mobile apps and technology for reservations, menus, payments and tipping, diners will expect curbside to be digitally integrated as well. 

"We're seeing a huge investment in digital on the restaurant side for 2021 to enhance that customer experience, because if that is the only experience that they get, they want it to be a positive one because they can’t control the third-party deliveries," Chick said. "If it's a curbside pickup, it's a very quick interaction [for] customer experience and so they want the digital experience to be far and above the best experience that customers have so they'll have a repeat customer."

Chains will more easily adopt the curbside channel as a result of the technology investment required to make the channel as efficient and polished as possible, Charles said. Legacy brands like Dunkin' and Starbucks offer sophisticated technology that allows customers to click on their mobile device to alert the restaurant that they have arrived. Panera, for example, adopted geofencing technology during the early days of the pandemic. Chains can integrate curbside pickup with their loyalty programs as well, he said. 

Independent restaurants will likely have customers call to have their orders brought out to them since they may not have the budgets for similarly robust technology, Charles said. 

Curbside could also prove to be disruptive when it comes to competition between fast casual and QSR chains, though analysts are split on how much of a threat a fast casual with a digitally enabled curbside offering could pose to a restaurant with a drive-thru. 

Chick believes that curbside capabilities can "absolutely" help fast casuals challenge fast food rivals if the customer experience is digitized, whether through QR codes for menus or contactless payments, to compete with QSR convenience. 

"Customers want convenience, they want an enhanced digital experience, they want contactless payments," Chick said.

But Silberman is skeptical because these segments attract different consumer types. And QSR investment in new double-drive thrus, personalization at the digital menu screen and other efficiencies will keep the channel a step ahead of curbside growth, Chick said. 

"QSRs have focused on getting their drive-thru times down. … If that happens, your curbside pickup is not going to be growing at the same rate that it has in 2020 because if you’re going to drive to the restaurant anyway, you might as well just go through the drive-thru," Chick said. 

Despite high unemployment, labor costs will rise amid wage hikes and changing labor pools

Labor and rising minimum wage costs will be a challenge for restaurants in 2021. Before the pandemic, labor inflation was 3% to 5% per year, Fahy said. Florida recently approved a $15 minimum wage, and Chick thinks the restaurant industry will be looking to see how Florida restaurants react and how they manage those new labor costs. In late 2020, Starbucks committed to providing at least $15 an hour within three years, further illustrating the momentum to increase wages. 

But a $15 minimum wage wouldn't necessarily work in all states, especially ones like Alabama where the cost of living is much lower than places like New York and California, where wages have been going up, Fahy said. 

A lot of QSRs are still struggling to staff their restaurants as well, Chick said. Historically, restaurants would draw from a labor pool made up of high school and college students, and that has dried up over the years. So restaurants are struggling to adapt to that labor drought and this will be even more challenging if a $15 minimum wage comes to other states. Restaurants are also having to pay more for personal protective equipment, health insurance and wages that would retain good employees, Fahy said. 

Chains will shift their focus from urban markets to suburbs and seek smaller footprints

With over 110,000 restaurants closed, real estate site selection and leases will experience changes in 2021. The restaurant industry will also continue to see new prototype expansion as restaurants try to optimize their portfolios after closing underperforming locations during the pandemic, Silberman said. Taco Bell, McDonald's, Arby's, Del Taco and Burger King have all said they are looking into restaurants with smaller dining rooms and larger drive-thrus. 

Pre-pandemic, rent was 95% fixed with a 5% variable cost, but landlords are more willing to increase the variable percentage based on revenue, which has been limited with dining room closures, Fahy said. 

Landlords have also been favorable to deferrals, but not necessarily abatements. This means rent that might not have been paid from April to June is just tacked onto the end of a lease with the addition of three months, for example, or spread the costs over time, Fahy said. 

Some landlords may be incentivized to keep current tenants instead of trying to fill an empty space during a down economy, Fahy said. But experience overall will depend on how many properties a landlord owns. Landlords are less likely to be accommodating if they own one or two properties and this is their only source of income, Fahy said. 

At the same time, restaurants that are looking into new locations are shifting their appetites. Chick believes there will be a decrease in demand for restaurant real estate overall, especially in urban areas around offices. Chick predicts those workplaces won't ever return to 100% capacity after the pandemic, and hybrid work models that offer virtual work will hurt foot traffic. 

"We're seeing almost all of our restaurant clients look at different real estate footprints for any new location … and whether they'll have any dine-in or whether it will be only takeout and delivery or it will be a very small, limited dine-in experience," Chick said. "We're seeing that cross QSR and fast casual, not as much in fine dining because fine dining is a [premium] experience."

While many chains and restaurants have generally slowed down building new sites, access to Class-A sites will likely get easier, especially for bigger brands, Fahy said, because restaurants in prime locations are going out of business. Many casual chains are looking for better sites, many of which weren’t available until now. Brands are now focusing on suburbs and lifestyle centers, Fahy said. 

Third-party partnerships are here to stay, but white label deals will rise amid fight for diner data

Prior to the pandemic, delivery only made up around 8% of sales for the industry, so there is plenty of opportunity to grow this channel on the other side of COVID-19, Charles said. 

"We're going to enter 2021 with dire restrictions," Charles said. "So delivery is going to be a critical component in a quarantining world."

Free delivery promotions will likely continue to be a tool to market these offerings, especially since sales tend to be higher even after the promotion ends as awareness grows and people stick to the behavior of ordering delivery, Charles said. 

"The question that ultimately comes into what we're looking at in 2021 and 2022 is about the stickiness of the consumer because you are seeing delivery menu prices inflate," Silberman said. 

In many places, delivery and service fees are increasing, brought on by restaurants and third-party companies, Silberman said. But for QSRs and many public restaurants that appeal to customers' desire for value, delivery can undermine that offering because of the extra fees, Silberman said.

The number of restaurants that have traditionally done their own delivery, with some like Jimmy John's vowing to never team with a third-party platform, now partnering with aggregators also reflects the growing power of this segment, Silberman said. Self-delivery is expensive and operationally taxing, and it makes sense for a restaurant to outsource that part of their business, she said. 

But restaurants will still want to keep control of the brand experience and of consumer data, so she predicts that 2021 will see an increase in white label partnerships where customers journey through the restaurant's website to access delivery. Using that data can provide restaurants the means to better incentivize customers to keep coming back, which has been a challenge for many restaurants since they don’t necessarily have the infrastructure in place to do that, Silberman said.  

"How will these restaurant companies get a delivery transaction and try to ultimately convert that to a more creative pickup transaction or otherwise? Maybe that's not 2021, maybe that's 2022, but I certainly think that that's going to be an important part of the story and to do that they really need to integrate delivery in their apps in order to get the customer information," Silberman said.

White label relationships offer the best of both worlds, Silberman said, allowing restaurants to retain customer data while outsourcing delivery. Shake Shack began testing app-based delivery late in 2020 at three locations in the Miami area. 

"So that's the first step and then the second step of that is, okay we now have a digital customer, how do we then decide where that customer actually … makes the transaction," Silberman said.

Virtual brands will benefit chains that have the bandwidth to balance brands

Based on the success companies like Brinker International — which expects It's Just Wings to generate $150 million in annual sales — have seen from their virtual brand concepts, Silberman predicts that major chains will continue to experiment with online-only offerings. 

While there will be more virtual brands popping up over the next year, the biggest challenge for restaurants will be making both a virtual brand and a regular restaurant co-exist, Charles said. This will be especially true five years from now, when the market recovers to pre-COVID-19 volumes, Charles said. Restaurants are already reaping the benefits of increased sales from adding virtual brands, so they won't likely want to remove that channel when dining rooms go back to full capacity, he said. 

But restaurants will have to balance maintaining a high level of customer service expected from dine-in guests with their virtual brand, Charles said. 

That could mean that restaurants will have to increase labor in the back of the kitchen when dine-in business picks back up. 

"If you're juggling balls, you can juggle two balls pretty easily," Charles said. "By the time you get to four and five balls, you're going to need another hand to help you do that."

Ghost kitchens will benefit brands that are mature enough to have robust delivery channels

Ghost kitchens have become an increasingly popular model for chains to expand their footprints and offer new menus without investing in more brick-and-mortar real estate.  

These concepts also require less labor than a traditional restaurant, often requiring only two to three employees, Charles said. Benefits like this will continue to drive restaurants big and small to the channel in 2021 as operators look to grow their digital sales and reach new customers online, and the trend will likely take hold in cities. 

"The explosion of ghost kitchens in more urban areas [is] going to happen first and then potentially spread out to the lower-cost real estate areas that are more suburban and more rural," Chick said. "Ghost kitchens really kind of generated their first concepts in the San Francisco area because the real estate cost is so high."

There is some concern over how consumers will react to a spike in restaurant brands that only exist online or via third-party delivery marketplaces, Chick said. 

"The business model is there, it's just a question of whether or not the consumer will accept it. … For a new brand … something that’s not as well-established that just opened a ghost kitchen and has not created a digital presence or [digital customer base] and is trying to do that in a ghost kitchen, I think it will be harder," she said. 

Restaurants that already have robust delivery sales and a strong digital presence will perform well at ghost kitchen outposts, Silberman said, but it would be a challenging environment for an independent or a chain that isn’t digitally savvy to put down roots and grow. 

It's unlikely that ghost kitchens will "take over the entire restaurant industry in 2021," Chick said, but she expects to see strong growth in the market based on 2020 investment in the space and diner demand for delivery and digital accessibility.

When Inspire Brands bought Dunkin' Brands for $11.3 billion in October, it signaled that restaurant merger and acquisition activity hadn’t been completely extinguished by the pandemic. While activity stalled in March and April, it started to percolate in the late summer as same-store sales showed signs of recovery as dining rooms reopened. 

After almost a year of adjusting operations, shifting to off-premise and working with a reduced labor force, many chains are seeing profitable margins and are starting to look to the future. Experts expect dealmaking to only ramp up with all eyes focused on the chains that are surviving.

"There are going to be absolutely specific circumstances where there are well-capitalized strategic players that are looking to participate more fully in the limited services side of the landscape and will be aggressive to buy strongly performing businesses," Josh Benn, managing director and global head of restaurant, food and consumer corporate finance at Duff & Phelps, said. "M&A is going to continue to build."

Private equity remains hungry for both franchisors and franchisees, and deals that were stalled during the pandemic could occur in 2021, Tom Wells, managing partner at private equity firm 10 Point Capital, said. Predominant transactions will likely be buyouts of the whole business, similar to the Inspire/Dunkin’ deal, Wells said. Lenders still have an appetite for restaurants and supporting buyouts, he said. 

More potential sellers are willing to sell now, especially after enduring the impact of the pandemic, said Greg Seltzer, partner at Ballard Spahr, who works with midsize restaurant organizations.

It's just a matter of when buyers will be ready to pull the trigger on deals, he said. 

"There are probably clients in my sphere that would entertain a deal at the right price," Seltzer said, adding that there weren't a lot of buyers committing cash to deals last year. 

The types of deals that won’t likely happen

Some firms, for now, will be wary of concepts that haven't done well during the pandemic. The kind of high-growth, minority deals that have occurred in 2018 and 2019, especially with experiential concepts, will likely have to wait until consumer traffic goes back to normal, Wells said. 

For example, Cracker Barrel pulled out of its $140 million investment in Punch Bowl Social after the dining room closures dramatically impacted the once high-growth chain’s operations. Several months later the eatertainment chain filed for bankruptcy.

But interest in concepts like Punch Bowl Social, which appeal to younger demographics, will likely return quickly once the pandemic ends, Wells said.  

Some firms are moving away from restaurants all together. In 2020, Sun Capital filed for bankruptcy or sold five restaurant brands, including Boston Market, Johnny Rockets and Friendly's, according to The Wall Street Journal. Its only remaining restaurant investment at the start of 2021 is Smokey Bones. 

Large groups that have notoriously grown through leveraging transactions with debt will probably be fewer and farther between, especially because the pandemic exposed weaknesses of balance sheets that have too much debt and tripping covenants, Shauna Smith, CEO at private equity firm Savory, said.

A lot of transactions will need to be creatively structured with less debt this year, Smith said, adding that Savory does not use debt and acquires businesses with cash from its fund. 

Large investment firms are also showing interest in smaller brands and providing smaller investments, Smith said. These firms have traditionally invested in leading brands with 20, 40 or 50 units and are now more willing to invest in companies that are younger, Smith said.

Overall, Smith expects consolidations, bankruptcy transactions, opportunistic investing and strong brands gaining more traction during 2021 based on activity she observed at the end of 2020. 

Cheap deals available with distressed businesses

Some concepts may have no choice but to sell. Those that were challenged before the pandemic could have run out of money or had issues with lenders, Wells said. 

"There's been more acknowledgement that there's generally a reason some of these brands are failing, [be that] consumer trends [or] long-term management," Wells said. "Those are really, really hard to fix and there's definitely an acknowledgment of that."

More distressed M&A activity is expected in 2021, especially with the second wave of COVID-19 taking its toll on the industry, said Joseph Humke, a partner at Ballard Spahr, who works with private equity clients.

"I'm not sure that industry players who made it through this far are going to be able to endure another significant shutdown," Humke said. 

This is creating more circumstances where buyers can come in and pick up these businesses at a discounted price, Seltzer said.

Friendly's declared bankruptcy in November and agreed to a $2 million sale to Amici Partners Group while Le Pain Quotidien’s U.S. arm declared bankruptcy in May and sold itself for $3 million to Aurify Brands, for example. Aurify Brands also bought substantially all of Maison Kayser's assets out of bankruptcy and plans to convert those properties into Le Pain Quotidien locations. 

"Bankruptcies, especially in the dining and hospitality area, will certainly increase … into the winter months [with] some of those concepts realizing that there's not going to be this quick turnaround through the winter months as some people optimistically hoped for," Craig Ganz, partner at Ballard Spahr, said. 

While distressed deals could be in vogue during the early months of the year, deals out of bankruptcy aren’t likely to be prolific, Seltzer said. Buying a concept out of bankruptcy has inherent risks, including the likelihood the company could return to bankruptcy at a later date, Ganz said. 

Instead, buyers are likely going to determine which organizations and small chains are close to liquidation or bankruptcy and make a deal with its board of directors to acquire the company before it hits bankruptcy, Seltzer said. 

"Filing for bankruptcy is very expensive," Seltzer said.

Seltzer anticipates distress is going to be regional and seasonal, especially when it comes to winter. This fractured state of distress could last through March or April, he said. 

How closures are increasing buyer appetites

As bad as some chains are doing, independents are doing far worse, Michael Schaefer, global lead for food and beverage at Euromonitor, said. Thirty percent to 50% of independent, full-service restaurants shutting down in the U.S. by the end of the year is not out of the question, he added. 

"I think at least in the near- to mid-term — in the next two to three years — we absolutely could be seeing less diversity and less diversity in chains, too. Not every chain is going to come out of this," Schaefer said. 

Chains with some financial resources are much better to ride this out and benefit from an upswing when the industry is smaller in terms of stores, Schaefer said. 

That may not necessarily be a bad thing for surviving restaurants, analysts said. 

"When the dust settles, the supply/demand balance that you will find is going to be considerably different than what was happening from 2010 to 2019 … when you had a massive oversupply of restaurants in the market," Benn said.  

Fewer restaurants will lead to comparable store sales growth on the other side of the COVID-19 period, Benn said. Less supply will mean more real estate opportunities that are giving financial investors more conviction if they can find a good business that might have a troubled balance sheet or fallen on difficult times, but is a business that could flourish post-pandemic.  

Businesses that don't really differentiate from others likely won't be attractive to buyers, Benn said. These include some legacy casual dining establishments, which often don't have tech integrated well into their operations and where alcohol represents a small portion of business. They also don't typically draw the coveted millennial crowd, Benn said.

But those businesses, whether it be full-service or fast casual, that appeal to younger demographics, have strong technology backbones and communicate effectively with their consumer base will attract attention, Benn said. 

These restaurants will likely have strong alcohol sales of 30% to 40% since that means they have an environment that this consumer set wants to experience, Benn said. Asian concepts are also highly attractive, especially sushi because people aren’t likely to make sushi at home, Benn said. 

"When it is clearly safe to go out and the virus is more under control than it is now, you’re going to see a flood of demand to go back to those types of restaurants," Benn said.

Betting on the best concepts

Companies that will be top of mind for an acquisition are those that can or have already combined takeout and delivery and have steady consumer loyalty, Schaefer said. Dunkin', for example, had all of these attributions, as well as the contactless experience. 

Because of the pandemic, many restaurants have also found ways to make their business models more efficient, especially with their personnel, Seltzer said. These operators are able to better address their labor needs, even with reduced staffing, that have helped grow their bottom lines. The utilization of outdoor seating has also helped increase top lines for a lot of restaurants too, he said. 

"I think if you look around some corners in 2021 and 2022, these restaurants are going to operate at a way more profitable rate going forward," Seltzer said. "There will probably have been some elimination of competition [with] some of the less well kept, lower capitalization businesses … not going to make it through."

Entities that have strong brands within a local geographic area that could grow nationally will be targets, especially brands that can integrate with another brand or concept, Seltzer said. 

Private equity firms are also looking to put money behind a management team to help them grow from 12 locations in one geographic location to 100 locations across the country, Seltzer said. 

"I think there are dozens and dozens of brands … that are ripe for private equity to come in and diversify," Seltzer said. If there is a pub or a beer place, for example, it could add a fast casual to diversify their ownership and holdings. That could also mean a restaurant company could lease one space, but have two brands within it, similar to how Dunkin’ has Baskin’ Robbins in some of its locations, he said. 

Restaurants have already been buying other restaurants to diversify their portfolios in the last two months. Saladworks' parent company bought fast casual brands Garbanzo Mediterranen Fresh and Frutta Bowls and formed a new holding company called WoWorks in December. Capriotti’s Sandwich Shop bought Wing Zone in early January. 

Strong brands that may be undercapitalized and need a partner will be among those looking for buyers, Humke said. But buyers are going to have to pay up to get these high quality brands. 

With such a high demand for quality assets over the past 10 years, especially in the past five, sellers are getting much higher values for their businesses, Humke said. 

"I don't think there are going to be bargain-based valuations unless there is a distressed situation," Humke said. 

While analysts expect the coming months to continue to be a challenge, the vaccine distribution gives many hope that things could soon go back to normal with people dining out more.

"Hopefully there'll be a lot of discretionary dollars … once people are excited and able to go out and enjoy a bite to eat," Humke said. 

This could mean a quick return on investment for buyers of these robust brands, and even more activity in the market as buyers think about the future.

"There are transactions that are happening for incredible brands that have just had balance sheets turned upside down," Benn said. "There's a lot of activity percolating."

While visits to restaurants dropped to 707,000 in December 2020 from 2 million last January, according to Zenreach data, investors remain hopeful that the industry will quickly bounce back in 2021. Early data shows that this year is already starting to show signs of recovery — comp sales and traffic for the week ending Jan. 10 were the industry's best since the pandemic began, according to Black Box Intelligence. 

Restaurants, especially in the full-service segment, continue to face an uphill climb this year, but dine-in sales are also starting to recover, according to Black Box Intelligence. Many investors are chomping at the bit to strike deals with concepts that continue to show growth, and are especially bullish on restaurants that quickly grew off-premise channels last year.

"I think the M&A environment is going to continue to be robust through the balance of the year as companies get more certainty around the future and get more confidence in the future," Dave Pace, co-founder of special purpose acquisition corporation Tastemakers Acquisition Corp. said. "There's a lot of money out there chasing deals."

Check out how four investors are approaching restaurant deals this year:

Tastemakers Acquisition Corp. wants to take the next best restaurant public

The special purpose acquisition corporation, which hit the Nasdaq stock exchange in early January, quickly raised $240 million — $40 million more than what founders Andy Pforzheimer and Dave Pace expected. The additional funding will prepare the team to acquire an up-and-coming restaurant brand that is ideally positioned to go public. 

The company will lean on Pforzheimer's extensive restaurant experience, which includes co-founding the Barcelona and Bartaco brands, as well as his relationships within the industry to help find the right concepts, Pforzheimer said. Pace, a Red Robin board member and former president and CEO of Jamba, will provide his experience in the public sphere.

"We are looking for the next growth story in a sector that we know pretty well," Pforzheimer said. 

Half of Tastemaker's target group will include middle-market restaurant concepts while the other half will consist of restaurant technology companies that support restaurants and service companies, suppliers, equipment manufacturers or other tangential companies within the ecosystem, Pace said. The SPAC also isn't planning to step into an operating role and sees this as an opportunity to work with strong CEOs and management teams to help the companies move into the public market and expand, Pace said. 

"We know who we're going to call," Pace said. "We're going to reach out to see if there's interest and we're going to move as quickly as we can. This is a process that has to be right for all parties."

The company is agnostic in terms of restaurant segment when pursuing acquisitions, so long as the company has a well-managed team, a track record of innovation and found ways to successfully navigate the pandemic, Pace said. Concepts that understand that current rates of delivery growth won't last forever and are ready for the next market transition are the kinds of companies Tastemakers is pursuing, Pace said. 

"A good company is a good company," Pace said. "We're not looking for broken companies. Broken companies are best fixed in private, not public."

Going public can benefit companies that have large amounts of capital and additional access to financing, especially since there are only a handful of private equity firms that would buy a $1 billion restaurant company, Pforzheimer said. It also provides additional access to finance and ways to provide shares to employees, he said. 

"If you're on a growth path where you're accelerating and you might need growth capital to expand, maybe the public company … is an option for you," Pace said.

Savory pursues a handful of acquisitions and thinks casual will bounce back

At the start of the pandemic, much like other investors, private equity firm Savory waited several months before it started to entertain any new deals, CEO Shauna Smith said. It also paused growth across its brands, but ended up opening 45 new locations across its five brands by the end of the year, she said. 

"As in many cycles, pandemic or not, those who are prepared to take advantage have jumped right back into investing and do[ing] new transactions and deals, including us," Smith said. "Transaction activity is speeding up and catching up to where we were pre-pandemic, if not even faster.”

Savory ended up closing two deals toward the end of the year with the acquisition of Via 313 and Crack Shack. It initially had some introductory conversations with each brand in February of last year before pausing investments, but continued to stay in touch with the two brands and saw that they performed well during the pandemic. 

Via 313, a full-service pizzeria in Austin, Texas, was among the first in the city to close its restaurant lobbies and switch to to-go orders during the early days of the pandemic, Smith said. While sales volumes declined, the drop was less significant than what its casual dining peers experienced, and Via 313 was able to rebound quickly, Smith said. 

The Crack Shack had a similar experience. The restaurant was initially hit hard by the pandemic, but was able to rebound quickly following an immediate shift in focus to off-premise, Smith said. Both brands also started to see a shift toward positive same-store sales toward the end of 2020, Smith said.

Savory is comfortable acquiring two, if not three, companies in 2021 in the restaurant and food and beverage sphere, which could also include packaged goods or food tech, Smith said. Savory's appetite has been for brands that have proven themselves at three to eight units, Smith said. The company has found its sweet spot in fast casual, even though one of its recent investments was with a casual concept, she said.

"Just based on what we know about human nature, buying trends and how humans operate, we have a belief that sit-down [restaurants] will return and return with probably some sort of partnership to do third-party [delivery] and off-premise to-go orders," Smith said. 

New Spring Capital eyes concepts light on debt, high on value proposition

New Spring Capital developed a strategy to invest in multi-unit companies — both restaurant and non-restaurant and franchise and non-franchise operations — about a year ago, Satya Ponnuru, partner at New Spring Capital, said. The company considers investments in the lower end of the mid-market, or about less than $6 million or $7 million in EBITDA. 

But while New Spring was building up this investment arm, the pandemic pushed Ponnuru and his team to pause and reevaluate what it was looking at, Ponnuru said. 

The core of what New Spring considered didn’t change, though. The company continues to look at brands with compelling company value propositions and concepts that have proven, scalable unit economics, Ponnuru said. It also highly considers companies that can leverage and enhance technology, as well as companies with strong management teams, he said.

The biggest impact of the downturn has been making sure that at the time of its investment, that the business has a strong capitalization structure and very little debt, Ponnuru said. Significant amounts of liquidity is also a strong investment trait as it allows the companies to withstand most challenges that continue for an extended period of time and use that capital to expand growth opportunities that will exist for surviving restaurant operators, Ponnuru said. 

The company has about two potential investments that it is doing due diligence on and is looking at other opportunities that are in advanced discussions, Ponnuru said. Another one or two potential opportunities could go under letters of intent and be potentially completed during the first half of the year, he said. 

"If you're investing in this sector, it's not a surprise to see some level of same-store sales declines during this period," Ponnuru said. "But, generally, all of the opportunities we're looking at are still cash flowing and EBITDA positive."

By investing in these companies, they would be able to take advantage and accelerate their growth opportunities through franchising and unique landlord opportunities, as well as invest in company locations, Ponnuru said. 

While the company has been looking across the board, it is generally finding more interest in fast casual operations that have been able to continue to do relatively well and haven’t suffered huge losses, Ponnuru said. 

"If you're an operator that is able to survive what has really been a once in a lifetime, challenging situation, we think those survivors will have some natural tailwind coming out of this," Ponnuru said.

10 Point Capital looks for its next big investment 

10 Point Capital only invests in franchisors with between 30 and 300 units and is typically the first investor in these companies alongside the founders, Tom Wells, managing partner at 10 Point Capital, said. These businesses have already gotten through the challenge of scaling into multiple markets, have enough data to be able to provide unit-level economics and have already figured out their brand valuation, Wells said. The private equity firm does one deal a year, and looks for high-growth concepts that tend to be in secondary and tertiary markets, Wells said. 

"It's really challenging to be the coolest thing in New York City and take it to the rest of the country," Wells said. But if a concept works in places like Toledo, Ohio or Tulsa, Oklahoma, 10 Point Capital gets excited, Wells said. 

The investor focuses on how to scale concepts faster and more sustainably, Wells said. That could include helping with selling units to franchisees, real estate design and construction to ultimately get strong units, Wells said. 10 Point Capital typically doesn't put leverage or any debt on its portfolio companies and if it does, it is extremely conservative, Wells said. 

The company previously invested in restaurants, including Tropical Smoothie Cafe, which it sold in late 2020; Slim Chickens and Walk-Ons. 

The private equity firm values brands that offer convenience, whether that be Slim Chickens with its traditional drive-thru or Tropical Smoothie’s technology capabilities generating over one third of orders digitally, Wells said. For Walk-Ons, the firm was attracted to the concept's strong to-go channel, high quality food, loyal customer base and differentiation within the sports-oriented restaurant segment, Wells said. 

Walk-Ons, which has 46 units, is already priming for aggressive growth in 2021 with this new investment. It has plans to open upwards of 25 new restaurants this year, and has over 150 restaurants in development in the Southeast and Midwest. 

"The best companies are still able to do a transaction," Wells said. "They're getting the same valuations they were getting prior to COVID because they are growing and this [pandemic] has really validated how they fit in the market and how strong [the] concepts … are."

As the dust of 2020's pandemic disruption begins to settle and a permanently altered restaurant landscape comes into focus, operators are still asking a major question: What technologies will become table stakes for indoor dining?

Restaurant experts and operators agree that amid fluctuating COVID-19 spread, which in turn seesaws dining room restrictions and consumer comfort level with eating indoors, it’s difficult to predict. But it’s clear that technology will transform traditional aspects of the full-service dining room in 2021 and beyond to cater to new diner expectations for convenient, contactless experiences. 

"There’s a reluctance to lose that human component [in the full-service sector] and any technology takes time to realize how you can use it properly," Carolyn Richmond, co-chair of Fox Rothschild LLP’s hospitality practice group, said. 

"But I think the times and the state of the industry is going to financially necessitate that fine dining restaurants also get better at implementing technology, and that will very well be in the dining room."

Sit-down restaurants have traditionally abstained from digital innovations and other kinds of consumer-facing technology out of fear that these changes could cheapen the diner’s experience and undercut their value proposition, but David Sherwyn, law professor at Cornell University School of Hotel Administration and the director of the Cornell Center for Innovative Hospitality, Labor and Employment Relations, said these operators are already changing their approach.

"[In-store technology] reduces labor costs and you can use it as a marketing tool," Sherwyn said. "Some [restaurants] are going to use as much tech as possible to give you an excellent experience with little or no touch."

One-hundred percent of foodservice operators reported in a December Panasonic survey that the pandemic has intensified their sense of urgency to adopt transformational technology, and respondents are implementing tech that prioritizes safety and self-service in response. 

"There's been a lot of technology that's surrounded off-premise, whether that be [for] order ahead for delivery, with… third-party delivery companies. But there hasn't been a lot of technology that has been broadly adopted inside the restaurant. And we think that the time for that is now," Laurent May, head of Ready, a payment and order processing commerce platform, said. 

Much of the restaurant industry’s investments in in-store tech have gone toward contactless payment solutions through QR codes or tableside ordering technology to minimize customer contact with restaurant workers, but operators are also experimenting with cutting-edge air filtration and surface cleaning technologies to make diners more comfortable when sharing space with a crowd. 

"There will be some restaurants that will say 'We've got the greatest air filtering system. We wipe down our tables with this… solution that kills all viruses for 90 days… and you can have an experience here without ever really interacting with the server,'" Sherwyn said. "The question is, will my kids… tell their kids about the days when servers used to come to your table and interact with you… or will keeping the air clean and the touchless stuff be more based on cost, convenience and desire and less on fear."

QR codes are proliferating, and some diners accept them as standard

Forty-percent of restaurant operators surveyed by the National Restaurant Association say they added a contactless mobile payment option since last March to minimize person-to-person contact, according to the group’s 2021 State of the Restaurant Industry report.

This prioritization seems to directly reflect diner sentiment, with 21% of consumers planning to dine inside a restaurant reporting that contactless payment options would factor into their restaurant choice. This is especially true for younger consumers: 29% of Gen Z diners said contactless payment solutions would influence where they eat compared to 24% of millennials and 18% of Gen X consumers. 

Restaurants can streamline these solutions and further cater to diner interest in reducing touchpoints with waitstaff and traditional, physical menus by implementing tableside ordering solutions as well, experts suggested. CardFree, for example, is a company that sets up restaurants with a combination of contactless solutions including pay-at-table QR code technology and text-to-pay technology.

"Consumers are not only expecting [this kind of technology] and wanting it to be there going forward, but the brand is also realizing 'Hey, I'm turning tables faster, tickets are already going up,'" CardFree CEO Jon Squire said. “They are realizing the convenience and saying ‘Why did I wait so long?'"

Though many low-tech restaurants are often hesitant to implement new payment technology, diners can easily adapt, Richmond said. 

"[Ordering at a table is] not all that inconvenient. If you’ve ever traveled overseas outside of the U.S., credit cards are dealt with at the table with technology," Richmond said. 

Many restaurants have quickly implemented this solution by adding QR codes to their tabletops. MustHaveMenus CEO Jim Williams said that his company, which helps restaurants design menus via its online design tools and printing service, rushed to offer the technology shortly after the start of the pandemic in response to surging operator demand. 

"It was like a bolt of lightning. The interest in QR codes happened overnight. It was really a scramble for restaurants," Williams said. 

Fifty percent of full-service restaurant operators said they have added digital menu access via QR codes since March 2020, according to NRA’s 2021 State of the Industry Report. But it hasn’t become a point of differentiation in the mind of the consumer — only 1 in 5 diners said the option of accessing a restaurant’s menu through their phone or a QR code would make them more likely to choose one restaurant over another in the next few months. 

Michael Jacobs, partner at New York-based, upscale restaurant chain The Smith, said the company has seen mixed success with QR code menus since rolling them across its locations last spring. 

"We’ve found that a number of guests do not want to do that. We keep… paper with the menu for those that either didn’t have a smartphone, didn’t want to deal with the QR code and weren’t comfortable with it. Some people just wanted a piece of paper," Jacobs said. "While we offer it… my sense is that it is something that will not continue much beyond pandemic times. Certainly it will be available, but so many people are used to sitting down and having a physical menu in their hand."

Diners at The Smith often won’t search for menu subcategories through QR codes, either. 

"Depending on the type of restaurant and the complexity of the menu, guests have questions. … There’s only so much that you can put on a menu that people will read on a small device," Jacobs said. "People were less inclined to look up drinks, cocktails and wine through the QR code, so more often than not we would drop the beverage menu with each guest [that featured] a QR code for the food menu, and if they wanted a [physical] food menu it was available upon request."

Menu QR codes are printed on small tabletop tents and are posted at the host stand at The Smith, and payment QR codes are printed on the checks dropped off at the end of the meal. Diners can then pay with their Apple device, Google Wallet or credit card. 

Jacobs said that some diners have also been reticent to use QR codes to close out their dining experience. Prior to the pandemic, The Smith deployed tabletop payment devices to customers who wanted to be able to close out on their own time, and the restaurant offers these as an alternative to QR code payment. 

Some consumers also simply request that waiters take their credit cards the traditional way. Jacobs said that use of QR codes, pay-at-table devices and traditional payment is an even mix between customers. 

"I do sense that that technology will stick going forward because I think people have appreciated the ability to close out the check and take care of things on their own. It definitely has sped up the process," Jacobs said.

WIlliams argues that QR codes are an easy way for restaurants to become digitally integrated because they are inexpensive and easy to implement, adding that MustHaveMenus can have a restaurant client set up with QR codes for digital ordering in about three minutes. 

"We've just trained a whole consumer culture to look for QR codes. And that training is a big deal," Williams said. "The reason QR codes didn’t take off in the first place is because people… just didn’t bother. But now we have to… and it’s really opening a door for restaurants."

Restaurant perspectives are evolving as well, with many operators now beginning to value digital integration above table presentation, May said. 

"Evolution of both consumer adoption and merchant adoption of technology was forced by the pandemic… we heard [pre-pandemic] 'We don’t want an ugly QR code on our beautiful table, that’s part of the hospitality experience,'" May said. "Those attitudes have completely changed. The functionality of an NFC tag or a QR code on a table brings so much digital transformation opportunity that maybe the aesthetic that used to be a primary concern is now a secondary concern."

Alexander Washut, co-owner of two-unit Jake’s Restaurant in Massachusetts and MustHaveMenus customer, said that making his menu available via QR codes has saved on printing costs, and that younger consumers have been vocal about their appreciation for a contactless way to browse Jake's offerings. 

Once the pandemic ends, however, Washut hopes that QR codes can supplement traditional hospitality instead of replace it. 

"[QR codes] do lose that connection with our servers… that banter, that spiel at the table, that connection. So I think there’s a balance going forward, even years after. I don't think it’s going away, but I don’t think it’s going to take the center stage [like it has] for the past 10 months or so," Washut said. 

Self-service ordering can increase ticket size, customer satisfaction

May sees this technology as a supplement to, not a replacement for, waitstaff at sit-down restaurants whether in the casual or fine dining segment. When given the option of ordering from a waiter or from their phone or a tablet at the table, most diners still prefer the waiter, NRA research shows. And among diners who plan to eat inside a dining room or fast food concept in the next few months, 64% say they would sit in the section that offers traditional table service. 

The convenience of the technology, even as a supplement, comes with hospitality challenges. 

"It's always been our thought process to create an experience for the guest, and that has a beginning when they check in, a middle as we go through service, and an end when we thank them and we say farewell," Jacobs said. "The challenge with pay-at-the-table is you come back to wish them farewell sometimes and they’re not there anymore… it does feel a little impersonal at times."

This concern about impersonality is why The Smith does not offer QR codes for ordering. After viewing the menu, guests still place their meal requests with a server. 

"That’s something that, certainly fast casual or casual restaurant chains, national companies, would use… it's another opportunity for there to be as little interaction, which goes against everything in my hospitality genes," Jacobs said. 

Allowing diners to order and pay at their tables without a waiter, however, could have a material impact on sales and diner satisfaction, he said, because it takes pressure off restaurant employees and diners when the dining room is very busy. This is especially valuable now, as restaurants contend with a major labor shortage. 

"Restaurants need to become more efficient and run their operations with less labor. When you're able to match service levels with demand through self-service technology… we see customer satisfaction going up, we see average order size going up and we see labor costs going down. And that’s a pretty wicked value proposition," May said. 

This can also be achieved through self-service tablets at the table, an extension of the kiosk technology that had become widely adopted by QSR chains prior to the pandemic to cut down on lines, free up employees for tasks beyond taking orders and reducing operator reliance on labor. 

Order-at-the-table devices were already being deployed by casual chains prior to the pandemic as a way to streamline the ordering process for waitstaff. For example, Red Robin CEO Paul Murphy said at a recent ICR conference that the chain’s handheld ordering technology — used by its waiters, not customers — has sped up the ordering process and allowed diners to order more than before, raising guest satisfaction levels. Murphy also believes that the technology will help lift alcohol sales because increased waiter availability allows diners to order a second beer or glass of wine before their food arrives. 

In a pandemic and post-pandemic environment, self-service ordering and payment technology can achieve similar results, May said. 

"There was a stat we were able to generate that paying on your own device rather than waiting for a server to drop off the check actually saves 21 minutes of table time on average across our network… and that’s great for a restaurant because they have the ability to increase their revenue per hour per seat," May said.

Digital integration at the table also primes diners to become more loyal customers and gives restaurants greater customer ownership in and outside of the restaurant, May said. 

"When I sit down and pay my bill, I can scan the QR code, and I can sign up for loyalty automatically, just by signing in with Apple Pay or Google Pay. I can automatically redeem my offers and my coupons from a loyalty program. And from a digital transformation transformation perspective, I'm now a user within that restaurant's ecosystem," May said. "So that means online I can be provided offers that are tailored and personalized to what I had [during] the meal at the restaurant."

Clean air could help peace of mind, give a marketing edge

While many diners are looking for front-of-house solutions to reduce their proximity to waitstaff at full-service restaurants, fear over shared breathing space with fellow patrons — even in dining rooms with reduced capacity — could remain. But in some ways, this stumbling block is easier to overcome because the solutions are rooted in back-of-house technology that doesn’t disrupt the traditional upscale dining experience, Sherwyn said. 

"Especially in places that don't have an outdoor component… they're using extremely efficient and effective air filtering… [and] it’s going to become a point of advertising," Sherwyn said. "Because [it adds] safety but it doesn’t diminish my experience."

Restaurateur Ivan Kane, who owns Forty Deuce in Ohio, installed an AiroDoctor air filtration system as soon as he was allowed to reopen his dining room in May after initial COVID-19 lockdowns. The system cost about $4,000, which Kane said is well worth the peace of mind that the technology offers both his employees and his customers. 

He keeps the system, which kills 99% of viruses including the coronavirus, in the main dining area, and says it isn’t disruptive. 

"I'm trying to do everything in my power beyond government mandate to keep customers safe and keep employees safe… it gives a sense of security to the customers knowing we have this technology," he said. "You can’t leave any stone unturned because this is an unprecedented situation with revenue dropping drastically, so you’ve got to do everything humanly possible to drive business."

Kane added that he believes his marketing around the filtration technology has attracted more customers. 

Kane also uses hospital-grade, ultraviolet, germicidal lamps to clean surfaces within his restaurant. The lamps are so powerful that if someone were to look at them directly the light would burn their corneas, so the lamps are only used after hours and are set on a timer. He has 15 lamps spread throughout Forty Deuce to ensure every part of the restaurant is fully cleaned after each day.

Some experts believe that air technology within restaurants could eventually become featured design elements as well. In a recent interview, designers at restaurant design-focused Blueplate Studio at Wilson Associates said they envisioned a futuristic dining concept that uses motors to force strong air currents from floor to ceiling that could create a wall of air pressure between tables to prevent airborne particles from floating between parties. 

These kinds of technologies could help increase diner confidence so restaurants can take full advantage of strong pent-up demand for indoor dining experiences. According to NRA data, 85% of adults believe going out to a restaurant with family or friends is a better use for down time than cooking at home, and 67% of consumers surveyed between Dec. 4-6 reported they aren’t using restaurants as much as they’d like. 

"I just think at this point… we as guests don’t know where our heads are or where they’ll be, and the restaurateurs are doing their best to anticipate what the demand is going to be," Sherwyn said. "Consumer adoption and merchant adoption [of technology] really came together through a crisis… A new standard has been set. And everyone is going to expect some level of technology in the restaurant moving forward."