How restaurants can adapt to a future in flux
Cities draw people from workers to tourists who rely on restaurants for meals and entertaining while restaurants are often destinations in themselves. But the remote work era has disrupted this symbiotic relationship and neither can thrive on one mealtime or occasion. Hudson Riehle, senior vice president of research at the National Restaurant Association, says the ultimate fate of these establishments and business districts depends on their ability to adapt, embrace change and cater to the evolving needs of patrons.
Kate MacArthur: What’s the biggest issue you are anticipating for commuting and restaurants?
Hudson Riehle: Even if the hybrid model is sustained and in-office workers come in three, maybe four days a week, it still has and will continue to result in lower levels of traffic potential for these restaurant operators in the city center areas. However, some of these lost meal occasions in the city center areas are displaced out to the more suburban and rural locations because these individuals are resident and remote. It is a demographic shift which has and will continue to play out over the years ahead and have substantial implications for both restaurant operators as well as restaurant patrons.
MacArthur: How has remote work reshaped the restaurant economy?
Riehle: Pre-pandemic, 61% of restaurant traffic was off-premises, and the industry defines that as being take-out, delivery, drive-thru and curbside. The pandemic hits and that 61% escalates to close to 90% as the depths of the pandemic come on. Currently, that proportion has moved back to 74%. Is it going back to 61%? Extremely unlikely. There has been a fundamental shift in how consumers use restaurants and part of that shift is a greater patronage of these off-premises options, and these are what we call convenience-driven.
MacArthur: To what extent do city restaurants rely on office workers?
Riehle: The most important driver of restaurant sales in the end is personal income growth and the most important driver of income growth is employment growth. So the restaurant industry closely monitors what goes on with employment patterns. Before the pandemic hit, much of the growth and employment was in the city center areas. As a result, the restaurant community followed that employment growth and developed a lot of smaller independent operations in these city center areas. Now you have the opposite occurring.
MacArthur: And looking ahead?
Riehle: With the income growth and employment growth having changed historical patterns, it means that future restaurant growth and where it occurs is going to be different. Because even if in that hybrid work model people come back three to four days a week, you’re looking at a 20% to 40% decline in potential traffic.
MacArthur: Can city centers survive if the hybrid work mode continues in the foreseeable future?
Riehle: Obviously, yes. But in many ways the industry could be a leading indicator for how the city centers have to adapt. In D.C., some of the office buildings are being converted to residential and that that can help. If that is a megatrend for the future, and with what you see going on with occupancy rates in these commercial buildings three-and-a-half years out, and you look at what’s going on with the valuation of many of these commercial properties, it’s a dramatically changed landscape now. So as the city centers reconfigure and reestablish a new order, it’s certainly logical that there will be new restaurant operations that establish themselves to deal with not only the changed demographic, but fundamentally how the city centers operate, who is in them and who is traveling to them, and their needs for food away from home.
“Even if the hybrid model is sustained and in-office workers come in three, maybe four days a week, it still has and will continue to result in lower levels of traffic potential for these restaurant operators in these city center areas.”
MacArthur: How can cities support new business models for lower traffic or frequency in the city?
Riehle: Thursday has, in essence, become the new Friday. And Tuesday, from what the data shows, is the highest-traffic day commuting into these city center areas. But if you look at office employee occupancy rates, the best they’ve really come to is roughly 50%. So that commuting is a very important determinant from these employees’ perspectives.
MacArthur: So, what changes going forward?
Riehle: Ultimately, how this migration settles down. The consensus is that it will never, ever go back to the extremely high levels that it was pre-pandemic. But if the office space is converted to new utilization and part of that is residential, then you have additional populations moving into these city center areas which may not be as focused on business-centric restaurant solutions, but more on socialization restaurant experiences. It still is and will continue to be in flux for several years to come. Through history, the restaurant industry has really demonstrated an extreme flexibility and innovation to respond to rapidly changing consumer wants and needs.
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