2019 U.S. FOOD IN DEMAND SERIES: RESTAURANTS CBRE RESEARCH INTRODUCTION Steady restaurant sales growth has been fueled by increases in consumer spending, delivery options and technological innovations such as “ghost kitchens” and dining-in services. 3 | CBRE RESEARCH © 2019 CBRE, Inc. | 4 ABOUT THIS REPORT INTRODUCTION This third installment of CBRE’s Food in Demand series examines expected changes that will impact fundamental operations and real estate strategies of the U.S. restaurant industry. KEY TAKEAWAYS A NOTE ON TERMINOLOGY Total restaurant sales are reported under the Food Service & Drinking Places classification by the U.S. Census Bureau, which consists of the following industry groups: Full-Service Sales Growth Fast Food Restaurants, Limited-Service Eating Places, Special Food Services and Drinking Places (alcoholic beverages). Restaurant sales growth Fast casual and fast food continues to outpace total remain highly competitive, as retail sales growth. new operators have entered the market and consumers demand healthier options. Food Delivery Ghost Kitchens Rising consumer demand for Investment in technology and restaurant delivery options is delivery-only “ghost kitchens” causing dramatic shifts in restaurant is creating cost-effective ways operations and partnerships with for restaurants to expand and third-party providers. increase customer reach. 5 | CBRE RESEARCH © 2019 CBRE, Inc. | 6 KEY PREDICTIONS While restaurant sales Restaurants will continue Rapid growth in fast- Fast food continues growth will continue refining solutions to delivery casual dining will evolving to meet to outpace total retail challenges, including the continue among consumer demand sales growth based on exchange of consumer market traditional concepts for healthy food and demographic data, as well consumer demand and as data needed to personalize as well as regional options, technological rising prices, landlords in-app services—a critical and specialty startups conveniences and must be careful not to component of partnerships entering the market due modern designs. weaken profitability with between restaurant operators to lower barriers to entry. too many competing uses. and third-party service providers. Delivery-only Restaurant operators As “eatertainment” Diverse food halls will restaurants, known will continue investing operators downsize to expand further into as virtual restaurants heavily in consumer- smaller, tech-driven suburban markets but or ghost kitchens, facing and back-of- formats, they will infill must be executed and will become a house technology to urban locations and be a operated correctly to be primary growth help control rising costs catalyst for revitalization successful. vehicle of restaurant through automation and of urban main streets in delivery platforms. to improve customer select markets. experience. 7 | CBRE RESEARCH © 2019 CBRE, Inc. | 8 PREDICTION 1 While restaurant sales growth will continue to outpace total retail sales growth based on consumer demand and rising prices, landlords must be careful not to weaken profitability with too many competing uses. FIGURE 1: Historical Restaurant Sales & Growth SALES (BILLIONS) Y-O-Y GROWTH Sales ($ US Billion) Y-o-Y Growth $800 800 9% 9% 8.1% 8.1% 8% 8% 700 7% 7% 6.9% 6.90% 6.8% 6.8% 6.1% 6.5% $600 6.4%6.5% 6.4% 6.3% 600 6.1% 6.3% 6.1% 6.1% 5.9% 5.9% 6% 6% 5.8% 5.8% 5.7% 5.7% 5.1% 500 5.1% 5.1% 5.1% 5% 5% 4.4% 4.4%4.4% 4.4% 3.9% 3.9% 4% 4% $400 400 3.2% 3.2% 3% 3% 2.4% 2.4% 300 2% 2% 1% 1% $200 200 0% 0% 100 -0.7% -0.7% -1% -1% $0 - -2% -2% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: U.S. Census Bureau, August 2019. 9 | CBRE RESEARCH © 2019 CBRE, Inc. | 10 PREDICTION 1 While restaurant sales growth will continue to outpace total retail sales growth based on consumer demand and rising prices, landlords must be careful not to weaken profitability with too many competing uses. FACTS $738 BILLION REAL ESTATE Total restaurant sales grew by 6.3% in 2018 to more than $738 billion. Restaurants IMPLICATIONS make up 17% of retail sales, the largest share of any brick-and-mortar retail category.1 Although restaurant deals remain risky, 5.6% vs. 4.4% complex and expensive to build out and operate, landlords are increasingly Restaurant sales have grown faster than all other brick-and-mortar retail categories structuring creative deals to capitalize on combined over the post-recession decade, with an average annual increase of 5.6% expansion of this segment while other retail vs. 4.4%. This trend has been largely driven by consumer shifts toward dining out. uses contract. By contrast, groceries only averaged 3.2% annual growth over the same period. Other retail categories also trailed restaurants, such as clothing and accessories Restaurants are an attractive new class (3.2%), department stores (-2.9%), health and beauty (3.5%) and building material of anchor tenant that draws customers and garden supplies (4.2%).1 to retail properties, promotes social connection and is a key component of CONSISTENT INFLATION successful placemaking. Restaurant price growth has outpaced that of all other retail categories. What a Landlords are converting a greater 1 dollar bought in 2000 took about $1.60 last year. For groceries, it is about $1.40. percentage of GLA to food-and-beverage Although the overall retail industry As reported in Part 1 and Part 2 of this series, restaurant prices have increased uses in shopping centers and malls than is benefiting from continued largely due to rising costs of food, labor, construction, occupancy and delivery. ever before. Owners and investors must Yet there’s a silver lining: price declines driven by supply-chain efficiencies and growth in food & beverage, there carefully curate and delicately balance the will be a tipping point. The growth globalization in key retail categories like apparel, toys and furnishings have freed up mix, menu offerings and concentration disposable income for more expenditures at restaurants and grocery stores. of food-and-beverage operators to avoid of the restaurant category has dilution of sales. fueled many new exciting concepts, MORE OF THE PIE cuisines and expansions. However, Demand for restaurant space is increasing Restaurants (excluding food courts) currently occupy an estimated 43 million sq. ft. competition is fierce and if too of mall gross leaseable area (GLA), up by 18% or 6.6 million sq. ft. from 2007.2 without a corresponding supply increase. Compounded by rising construction costs, many competing restaurants open, this is resulting in higher occupancy rates sales growth may erode. 1. U.S Census Bureau, August 2019. and rent inflation. 2. ICSC, CBRE Research. 11 | CBRE RESEARCH © 2019 CBRE, Inc. | 12 PREDICTION 2 Restaurants will continue refining solutions to delivery challenges, including the acquisition of consumer data—a critical component of partnerships between restaurant operators and third-party service providers. FIGURE 2: DELIVERY FEES ARE EATING AWAY AT PROFITS THIRD-PARTY DELIVERY RESTAURANT APP/WEBSITE 100%% of Online Delivery Sales 100% 80% 30% 90% 37% 33% 42% 70% 48% 33% 30% 80% 37% 57% 42% 63% 48% 60% 57% 70% 63% 50%60% 40%50% 70% 30%40% 63% 67% 58% % OF ONLINE DELIVERY SALES 52% 67% 70% 30% 63% 20% 43% 58% 37% 52% 43% 10%20% 37% 10% 0% 0% 2016 2016 2017 2017 2018 2018 2019 20192020 20202021 20212022 2022 FORECAST Third-Party Delivery Restaurant App/ Website Source: William Blair, 2019. 13 | CBRE RESEARCH © 2019 CBRE, Inc. | 14 PREDICTION 2 Restaurants will continue refining solutions to delivery challenges, including the REAL ESTATE IMPLICATIONS acquisition of consumer data—a critical component of partnerships between restaurant operators and third-party service providers. Restaurant formats and layouts will evolve to expedite convenient delivery and pickup, either directly or by third party. More space will be dedicated to delivery and pickup areas to avoid counter congestion and impact on dining areas, so the in-restaurant dining experience is not compromised. For example, fast-casual FACTS restaurants like SweetGreen and Chop’t have added separate areas for pickup orders and Cava also prepares pickup orders on a separate side of the kitchen. $34 BILLION NATIVE DELIVERY Industrial & logistics also will increasingly support restaurant operations, particularly U.S. food-service delivery sales reached The concept of native delivery, whereby as delivery volume increases. Cold storage will see great growth trajectory not only $34 billion last year, up 13% from 2017.3 consumers use a restaurant’s own digital from home delivery of groceries as reported in CBRE’s Cold Storage Marketflash, Third-party delivery accounts for a growing platform to order direct delivery, is gaining but the proliferation of restaurants with highly perishable farm-to-table offerings. share of restaurant delivery sales. In 2019, traction. More and more restaurateurs are third-party sales are expected to comprise investing in native delivery platforms to 58% of all delivery and will increase to 70% offset third-party fees and provide more by 2022—up from just 37% in 2016.4 About personalized in-app experiences than are 38% of U.S. adults and 50% of millennials generally possible through third-party say they are more likely to have restaurant platforms. While third-party delivery will dominate, restaurants will food delivered than they were two years ago.5 Controlling the delivery process also Delivery is considered to be the new drive- invest in the physical and technological infrastructure provides a unified brand experience for thru by industry leaders, including Modern customers. Restaurants are teaming up with required for a direct-delivery platform to control the Market founder Anthony Pigliacampo.6 ordering and app development platforms brand experience, build upon loyalty programs and collect THIN MARGINS to offer their menus and loyalty programs directly to consumers.