Over the past three decades, restaurant businesses have been the beneficiaries of multiple secular tailwinds. In the ’80s and 90’s, the suburbanization of America, and a large number of women entering the workforce created strong tailwinds for restaurants. Dual working households, higher discretionary incomes, long commutes, and less time at home; made eating out an easy option.
Restaurant businesses who already possessed strong unit economics (What are Unit Economics?) – capitalized on these strong societal trends and aggressively expanded throughout suburbia. As these businesses grew, the scale benefits entrenched multiple moats. They hired the brightest real-estate minds. Access to capital and in-house expertise bought access to the best new locations. Growing sales meant they could afford to spend more on advertising and buy mind share. Scale also brought along purchasing efficiencies for food and commodities. Profitable restaurants also attracted the best managers and provided a deep talent pool to sustain growth. These were powerful tailwinds that most mom and pop restaurateurs could not compete with. Over a quarter century, mass casual dining won a large share of eating out dollars. The successful chain businesses grew from a handful of units into the thousands over multiple decades.
Moats are powerful and they last longer than most investors think. But eventually, even the strongest disruptors get disrupted. Overtime, these chains had to slow expansion as they ran out of the best locations. The decade of mobile phones and e-delivery turned us into immobile couch potatoes – which reversed the secular trends for casual dining restaurants. This way of life invited the delivery aggregators to the dining table.
Mom and pop operators were faster to embrace the delivery aggregators which provided a growing mind share and an even playing field. Population trends also reversed towards urban living for the past decade. The casual dining chains that dominated for two decades, aged, and slowly lost relevance and connection with their customer.
Over the past decade, the mom & pops have won back some of the share they lost over the previous two decades. Until COVID.
Part II Next week.
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I am an investor and these are my personal thoughts on investing, behavioral finance, markets, and sports viewed through the prism of a Latticework