Restaurants US Restaurants: Where Do Restaurants Go From Here?

US Food away from home spend surpassed food at home spend in recent years. But with COVID, grocery dollars recently increased relative to restaurants. We expect share of stomach spend to return closer to prior levels in time.

22 Jun 2020

Food at home vs. food away from home expenditures

Source: USDA, UBS

This line graph compares expenditures on food at home to expenditures on food away from home, from April 2017 through April 2020.

Examining restaurant industry demand and themes over the next 12 months

With restaurant industry sales on the path back toward pre-COVID levels, we take a look at puts and takes for the next 12 months. We believe restaurants will continue to regain lost share from grocers, even as some share loss will likely persist into 2021. Quick service restaurants (QSR) should continue to be advantaged, as capacity constraints have less of an adverse impact on the segment, relative to casual. We expect convenience through digital & off-premise, brand strength & trust, value, and ops/throughput will remain key sales drivers. We're cautiously optimistic the sales & earnings recovery can continue, even as further momentum is likely dependent on overcoming headwinds in the coming months (unemployment, stimulus abatement, 2nd wave risk). With the shares largely reflecting a continued NT sales recovery & varying '21 EPS rebound, we believe continued resiliency & recovery, and depressed rates, support further gains.

What are risks to Consensus' forecast v-shaped sales recovery? Is there upside?

Consensus is currently modeling a largely v-shaped recovery, with QSR reaching pre-COVID same store sales levels by 1Q21, and casual dining (CD) by 2Q21 (but profit recovery lagging). This is closer to what we might consider an optimistic top line scenario. Current estimates likely don't reflect a significant adverse impact from a possible 2nd virus wave, decreased disposable income as bills are paid & stimulus & enhanced unemployment run out, elevated unemployment, & the potential impact on public brands from small chains & independents reopening. Upside to estimates could come from: traffic gains from value offers, higher digital sales mix & customer behaviors that could support elevated ticket even as traffic rebounds, & improved breakfast/late night with limited cannibalization.

At $2.7 per kg, hydrogen is at energy cost parity with oil at $45-50/bbl (UBSe)

Our analysis suggests final energy delivered from hydrogen could be at parity with oil at $45-50/bbl, even ignoring the various taxes applied on oil today, the environmental cost of carbon, and the potential additional revenue streams for hydrogen producers (e.g. storage or ancillary services to the power grid). Including these would surely mean we are already at energy cost parity today (although fuel cells are still more expensive than combustion engines). As power and fuel cell costs fall, a scenario therefore comes into view where green hydrogen might start to cap the future price of oil.

Will unit growth recover and how quickly?

Following the '08-'09 recession, US unit growth only declined ~200 bps from the prior 5-yr average (~2.5%). But we anticipate significant contraction post-COVID, as well as slower industry growth rates at least into 2021. Some industry contacts have suggested up to 25% contraction, but we anticipate lower construction & real estate costs, lower interest rates, and recovering sales/profitability could support fewer closures. We expect well-capitalized chains & franchisees that are recovering faster will benefit from smaller chain closures, with run-rate growth closer to pre-COVID levels by late '21 and into '22.

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