(Bloomberg Opinion) — Covid-19 turned the U.S. into a takeout-food nation. Companies that have seized on the pickup and delivery trend — such as Chipotle Mexican Grill Inc., Domino’s Pizza Inc. and Shake Shack Inc. — are betting that people-avoidance will play a persistent role in the future of dining and that consumers will remain willing to pay up for it. But the pandemic’s turbulent effects haven’t finished running their course through the economy, which means fast-food CEOs risk serving up the wrong order.
Restaurants, like many industries, are contending with staff shortages, rising inflation, supply-chain paralysis and surging virus cases tied to the delta variant. For now, large chains have weathered this by raising prices and investing in traffic-driving and profit-enhancing conveniences that smaller independent restaurants simply couldn’t. These include online ordering, curbside pickup, new drive-through and walk-up windows and delivery. Some are finding that these digital adaptations, along with consumers wanting to grab their food and go, may alleviate some of the need to cave further to wage pressures. “The stronger you were in digital, and the stronger you were in off-premise, the better off you’re doing,” Domino’s CEO Richard Allison said last summer. That’s still largely the case.
In light of that, it’s surprising that the same executives who are betting big on the takeout trend are pointing optimistically this earnings season to the return of in-store dining and the lunch-break crowd as vaccines loosen lockdown behaviors and some of their business starts to shift back to cities from the suburbs. “It shows people are going back to their normal behaviors,” Chipotle CEO Brian Niccol said on a July 20 earnings call. There’s a sense that consumer appetites will be large enough to keep both modes of business growing, so executives are less hesitant to make bold moves even with the broader economic uncertainties. Chipotle raised its hourly wage to $15 in June, then instituted a 3.5% to 4% increase in menu prices to cover the cost. “We saw very little resistance with the price increase,” Niccol said. But how long can the industry have its guacamole and eat it, too?
Takeout has been so popular that it has inspired branded pickup methods, such as Shake Shack’s Shake Track for fried-chicken-sandwich aficionados. The upstart chains that once eschewed the drive-through — a concept popularized some 50 years ago — have now stamped their names on it in a way that longtime megachains McDonald’s and Burger King never did. Of the 200 restaurants Chipotle plans to open this year, 70% will feature drive-through “Chipotlanes.” It’s no small wager.
McDonald’s Corp., which is expected to report earnings this week, has more than 13,000 locations in the U.S. alone — Chipotle has only about 2,900 total. That potential growth opportunity is why Chipotle’s stock trades at 61 times earnings, a 130% premium to McDonald’s. The concern is that restaurant valuations aren’t reflecting the uncertainty of whether these chains can sustain breakneck sales growth while absorbing the impact of higher ingredient and labor costs on their margins, Bloomberg Intelligence analysts led by Michael Halen wrote this month.
“There are many factors externally outside of our control that are difficult to predict,” Domino’s Allison said following earnings July 22, which nonetheless sent shares of the pizza maker surging 15% to an all-time high. While Domino’s has benefited from higher demand in less-affluent markets that rejected other quick-service chains’ price increases, staffing challenges caused its own delivery times to slip “a minute or two,” he said. In August, investors will get to hear from Shake Shack executives; analysts predict it had a 54% recovery in same-store sales.
Chipotle’s Niccol is waiting to see how long inflation persists before raising prices again, saying there are “a lot of unknowns” — except that the chain will keep growing. Because there’s little overlap between digital customers and store customers right now, he sees room to drive one type to try the other method, calling each “different occasions.” But what seems equally plausible is that Americans who adopted a habit of weeknight drive-through dinners at chains such as Chipotle and Shake Shack during the crisis might grow tired of maintaining that frequency afterward, whether because they’re back to being a lunch-break customer or eating out is getting expensive. And while the end of government stimulus may bring back workers, it could also mean fewer customers.
Corporate leaders won’t hazard to guess how long any of this lasts. Taken together, they seem to be suggesting America’s appetite for fast food simply knows no limits. But there are only so many “occasions” in a week for takeout burritos and only so much customers will pay.
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Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.