Reonomy founder Rich Sarkis recently moderated a panel on Commercial Observer about the impact of COVID-19 on the restaurant industry. Read more about the panel here.

The retail real estate sector already found itself in a precarious position leading into 2020.

Now, the looming COVID-19 outbreak has left the sector with even greater levels of uncertainty, amidst a time that some are considering a potential “extinction event.”

Here, we turn to the metrics to see what can be surmised about COVID-19’s impact on retail real estate.

COVID-19 Retail Impact

Hints from the Stock Market

Despite not being hit as hard as travel, food retail stocks were hit worse than the broad market as the COVID-19 virus spread internationally.

Full service restaurant stocks were down 23% relative to the S&P 500 which was down 12% (Feb 19 – Mar 6).

Retail and restaurants dependent on in-store traffic will likely see greater declines as consumers look to reduce contact points in response to the outbreak.

Cautionary or mandatory policies put in place by companies or government to limit the spread of the virus (e.g., work from home, limited or cancelled travel, etc.), will also likely limit traffic to food and beverage retail—even if only temporarily.

Restaurants located in high traffic locations will likely feel the greatest impact.

Also, those with greater exposure to the affected states and cities have seen greater sell off in the markets. Restaurants with greater off-premise sales channels (i.e., web/mobile order, delivery) will be better suited for negative impact mitigation, so long as their supply chains are not severely disrupted.

If business interruptions to restaurants persists and the decline in customer visits becomes more severe, the traditional bar and dine-in food and beverage business models will be tested.

Given that this industry does not operate with significant cash reserves or have significant capital, the traditional model will likely be stressed more than the newer business model with more diversified and digital sales channels.

We would expect to see the popularity of ghost kitchens increase – especially if large supply of commercial kitchen space becomes available as traditional operators leave the market.

Move Towards Digital: Adoption continues, but reasons vary.

Change is afoot in retail—as foot traffic and time spent in store are decreasing, retail spaces rush to create formats with more pick up space, less seating and overall smaller square footage.

Companies are also looking for the best ways to expand their digital efforts, from adopting voice technologies to improving loyalty programs and increasing incentives through digital channels.

Reasons for continuing the push to digital create value and include:

  • Incrementally increase in-store sales (concept of “leveraging the box”) and increase capacity per location through reduced friction
  • Increase the addressable market by increasing the access points with customers, while increasing brand awareness
  • Improved margins through cost savings (e.g., labor scheduling, inventory management, automation, use of physical space through reformatted layouts)
  • Better understand customers through collected data

Ghost Kitchens and Virtual Brands: Cost-effective way to test new market or concept.

A ghost kitchen is where delivery-only food companies exist exclusively online and through delivery apps, operating without a brick and mortar location.

The benefit of the ghost kitchen model is the decreased initial costs when compared to the traditional model. They can be leveraged by both new and existing market participants.

  • Ghost/dark kitchens allow food and beverage industry to minimize initial investment costs to test new markets
  • Virtual brands allow new or existing market participants to try new concepts, without risking their brand (NYC-based salad chain, Just Salad, partnered with Grubhub to launch a digital-only concept, Health Tribes, appealing to specific diets)

By decreasing the barriers to entry, this business model modification may introduce greater competitive pressure to established companies.

Notable companies that are worth watching from real estate perspective:

  • Kitchen United (KU) operates commercial kitchen facilities to support multi-unit operators’ off-premise growth in new and existing markets, with pickup from KU and delivery options available. The company has identified opportunities to build out 400 Virtual Kitchen Centers & install 5,000 kitchens across the US
  • Zuul runs a delivery-only ghost kitchen that provides operational support to restaurants. Opened its first facility in NYC in late 2019, with expectations to open several more in 2020
  • Reef Kitchens –ghost kitchen that houses virtual brands in facility that resembles food carts, building kitchen facilities on parking real estate operated by its parent brand, Reef Technology
  • Other companies to watch include: CloudKitchens, DoorDash Kitchens

For commercial property owners, this means that there is a new tenant type to consider.

This could reinvent old dining retail spaces, create ancillary income sources for real estate owners, or spur development of multi-kitchen facilities.

Other Themes: Protein selection, breakfast, sustainability, branding.

Plant Based Options

Chicken has seen rapid growth in quick service restaurants as it is one of the healthier animal based proteins, which suits health-conscious appetites.

However, new plant-based entrants are likely to change the menu competition.

  • Plant-based protein is outpacing growth within the overall meat alternative channel, with meat alternatives generating more than $1BN in retail sales (entrants, Beyond Meat and Impossible Foods, are forcing established players like Hormel and Tyson Foods to offer plant-based proteins).

Big on Breakfast

There are many attractive reasons to pursue the breakfast market, though it remains a difficult market to break into and prove successful.

  • The breakfast market is the fastest growing daypart in the retail food industry, the most profitable/highest margins, the most habitual meal, and often restaurants have underutilized capacity.

Consider the Environment

Sustainability is becoming more of a strategic consideration for many restaurants, as customer preferences and expectations shift to support brands, companies and products that demonstrate sustainable practices.

  • Business implications of this shift are changes in packaging materials, greater transparency, increased standards, and company commitments to long-term goals (e.g., supply chains, food waste, source of animal products).

All About Brand

Companies are acknowledging and reacting to meet customers’ appetite for greater brand engagement.

  • From opening special experience locations (e.g., Taco Bell launching a hotel), to greater presence at special events (e.g., Shake Shack at Coachella), to more regular engagement (e.g., social media).

From experiential retail to increased remote operations, to a heightened focus on brand, COVID-19’s impact on the retail sector is certainly being felt—even if only accelerating changes that stood to come down the line regardless.

For more commercial real estate research related to COVID-19, visit our Research page.

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