Since the start of the COVID-19 pandemic, few industries have been hit as hard as restaurants and bars. When the lockdowns began, revenues suddenly plummeted to zero for many.
But people still needed to eat and wanted to drink—and grocery stores and liquor stores remained open as “essential businesses.” So while consumers stayed home, they largely shifted spending over to those retailers. Beyond the existential crisis facing so many restaurants and bars, this substitution effect is the big pandemic headline in the food and beverage space. It may continue well into 2022.
Grocery and liquor stores, along with food delivery companies, will continue to be winners as the pandemic continues. The substitution effect appears to have lessened as states re-opened their economies to varying degrees. But spending in restaurants and bars is still well below where it was before March—and as states impose new lockdowns to curb an autumn wave of COVID-19 infections, it will drop back down.
Massive shift in demand
Through the end of May, overall household spending on food and beverage had declined by only 5%, or about $10 billion. Restaurant and bar sales had declined between 9 and 18% across the country, but grocery and liquor sales bumped up 12-13%, according to U.S. Census Bureau data. The substitution effect was remarkably direct, in terms of the spending shift.
There’s good news for restaurants and bars, however: sales have been climbing closer to normal since April. “Food services and drinking places” sales in September were down 14.4% year-over-year—far better than the brutal 52.4% plunge these businesses experienced in April, according to the Census Bureau.
But food services and drinking places spending is still 15%, or $10 billion, below where it was early this year, pre-pandemic, according to the National Restaurant Association. “The total shortfall in restaurant and foodservice sales topped $200 billion during the first seven months of the pandemic,” the organization said in mid-October.
Also worrisome for the restaurant and bar sector is the fact that overall consumer retail spending grew more from August to September than food services and drinking places spending did over the same period. In other words, Americans may be spending more, but they’re not rushing into restaurants and bars.
“If this trend continues in the months ahead, it likely means that the restaurant industry’s recovery will be even more drawn out,” the National Restaurant Association noted.
It also means that businesses in the grocery and liquor store sector facing heightened demand will need to proactively manage their foreign exchange risks. In contrast to the restaurant and bar sector, which is mostly domestic in nature, these retailers “will likely be dealing with a weaker dollar as they increasingly source supplies from overseas,” says John Min, chief economist at Monex. It’s prudent to manage this FX risk through forward contracts that protect bottom lines by locking in the budgeted costs of imports, he adds.
Long road ahead
With no clear end in sight to the pandemic, expect the food and beverage substitution effect to continue. New infection hotspots and re-opening reversals will prolong spending shifts, although to varying degrees in different geographies.
As the pandemic persists, more restaurants and bars are likely to permanently close. Already, a stunning 100,000—1 in 6—restaurants have shuttered, according to a recent National Restaurant Association survey.
This ominous trend is likely to heighten the substitution effect. It’s an open question whether if people’s favorite restaurants and bars close, they’ll find new go-to spots or change habits for the long-term. Either way, a seismic shift in the sector is well underway
