Restaurant Industry Trends are a Microcosm of Accelerated Creative Destruction

By: Justice Clark Litle

Oct 15, 2020 | Investing Strategies

In a book written in 1942 titled Capitalism, Socialism and Democracy, the Austrian-born economist Joseph Schumpeter coined the term “creative destruction” and called it “the essential fact about capitalism.”

Creative destruction “revolutionizes the economic structure from within,” Schumpeter wrote, “incessantly destroying the old one, incessantly creating a new one.”

The creative destruction process is all too often painful. Entire industries can be downsized, radically restructured, or even swept away completely.

Because of the global pandemic, a tsunami of creative destruction was unleashed. We can see creative destruction in action, in that whole industries are being transformed and some are being wiped out.

Public movie theaters, for example — where hundreds of people sit in a dark, confined space, breathing each other’s air as they watch a giant screen — may be a thing of the past. Big-box department stores may survive, but in far fewer numbers and radically different form.

And the restaurant landscape is being gutted.

According to Yelp.com and The Wall Street Journal, almost 22,000 restaurants closed their doors forever between March 1 and Sept. 10 this year. Three-quarters had fewer than five locations, meaning they were independents or “mom and pop” establishments rather than national chains.

“The silver lining of this pandemic is we are going to emerge stronger,” said the CEO of El Pollo Loco Holdings Inc. The El Pollo Loco chain has 475 locations, and continues to open new ones in 2020.

“Chipotle more than tripled its online business sales in the second quarter,” the WSJ reports, “while Domino’s, Papa John’s International Inc,. and Wingstop all reported double-digit same-store sales increases in the third quarter compared with the year-earlier period.”

And as for McDonald’s, the king of the homogenized food experience, same-store sales for September represented the best performance in a decade. 

As small restaurants shut down in the midst of this pandemic, the national chain operators scoop up the business that is left behind. For independent operators, profit margins were typically in the low single-digits even before COVID-19 hit. With limited seating capacity and reduced consumer traffic, the math became impossible.

“Larger operators generally have the advantages of more capital, more leverage on lease terms, more physical space, more geographic flexibility and prior expertise with drive-throughs, carryout and delivery,” The Wall Street Journal reports. “A similarly uneven recovery is unfolding across the business world as big firms have tended to fare far better during the pandemic than small rivals.”

This is about more than a virus. A forced shift in consumer habits has radically accelerated the opportunity for innovation — and innovation is expensive.

National chains not only have the deep pockets, the financing, and the scale to weather economic turbulence, they have the budgets and the manpower to upgrade their technology-driven offerings, harnessing the power of creative destruction in the process.

On the one hand, the restaurant landscape is going to feel blander, as mom-and-pop establishments disappear. On the other hand, the creative destruction process will continue to push service upgrades at the margins.

For example, another up-and-coming trend is the rise of “cloud kitchens” — highly efficient restaurant options optimized for delivery, with no seating on the premises. This will make it easier to enjoy restaurant-quality food at home, in the same way the movie experience is becoming a home experience (via ever-cheaper flat screen TVs and the rise of streaming services).

One downside to all this creative destruction is the likelihood of permanent job loss.

As the service sector hemorrhages jobs across the restaurant, retail, and travel space — three of the biggest employment areas in the United States — millions of those jobs will never come back.

The U.S. economy has long depended on the growth-and-renewal aspects of creative destruction, with new jobs and new career paths springing up to replace decimated ones. For the high school and college students of today, a great many job titles haven’t been invented yet.

The problem, though, is that the formation of new industries and new job opportunities takes time. Society does better at absorbing creative destruction shifts when the changes are distributed over a period of years, rather than hitting all at once.

This means that, when the gale-force winds of creative destruction are concentrated into the job-loss equivalent of a Category 5 hurricane, economic catastrophe can follow.

Many industries are experiencing a version of what the restaurant industry is going through, with large players experiencing a “winner take all” dynamic and myriad smaller players getting wiped out.

The prospect of permanent job loss, coupled with inevitable budget crises for many U.S. states, is part of the reason why we see trillions more in government spending in 2021, with more to come in the years that follow.

The government will be forced to act as a savior of last resort, not just to counter ongoing pandemic fallout, but to cushion the blow of structural unemployment for tens of millions of Americans. This will not be an optional undertaking, but a means of avoiding social unrest. 

The U.S. economy has a track record of dealing with, and dynamically benefiting from, creative destruction under ordinary circumstances. A global pandemic, by itself, might also be a challenge the U.S. economy can muddle through.

But when you put both forces together, with creative destruction forces accelerated by pandemic realities in a self-reinforcing feedback loop, you get a whole different level of societal threat.

We don’t know what the ultimate answer for this problem will be. We do expect huge spending, and increasingly radical measures taken in response to badly broken systems — and, ultimately, the prospect of runaway inflation driven by a loss of faith in the currency, and a growing sense of uncertainty as to whether the center can hold.   


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