A December 7th report from KeyBanc Capital Markets discusses the influence of the just-coming-into-its-own Millennial cohort on the restaurant industry. KeyBanc analysts Chris O’Cull and David Carlson highlight that this generational shift to Millennials has major implications for the restaurant sector, especially the larger, established chain segment.

The Millennials are coming!

O’Cull and Carlson begin their report by noting that Millennials will start to enter their peak earning/spending years in 2016, and will represent close to 26% of the peak spending population by 2020. They argue that “this generational shift will have a profound effect on restaurant companies during the next several years, resulting in new leaders for many industry segments.”

Key considerations with the rise of the Millennial generation include:

Millennials

Millennials

As Millennials begin to move into their peak earning/spending years (35-54 years old) and overtake Gen X as the largest generation in the American workforce, it will have a significant impact on the restaurant industry given their numbers and notable dining preferences. Keep in mind that Millennials tend to dine out more frequently, care less about traditional restaurant attributes and expect strong digital engagement with restaurants. O’Cull and Carlson point to new restaurant concepts emerging to meet the needs of Millennials, such as “clean label”, organic or “green” menu offerings, more convenient service and delivery models and authenticity.

Millennials

Millennials

The KeyBanc analysts also highlight there will be more capital flowing into the sector. Ongoing changes in consumer spending are evident in the capital markets, where several chains with Millennial appeal have come to the public markets in the last few years. Private equity has also been active in nurturing new restaurant concepts, providing capital, management expertise and advice to support budding entrepreneurs.

Millennials

Millennials

O’Cull and Carlson also argue that established restaurant brands are stuck in “velvet rut.” They note: “We believe the low interest rate environment has allowed companies with established brands to avoid making transformational decisions that would improve the appeal of their brand to other cohorts. Despite weak traffic trends, many of these companies have been able to appease investors with large share repurchases funded by low interest-bearing debt, selling company-owned stores to franchisees, and aggressively cutting costs and capital spending as the poor health of many of these brands do not portend meaningful unit growth potential. In our opinion, a number of these chains are catering to an aging Boomer population, which is spending less at restaurants, and will either need to re-invent themselves or change their business model to maximize cash flow distribution.”

They also argue that at least moderate market disruption is likely, and restaurant brands are likely fighting for market share until at least 2020. The KeyBanc analysts highlight a challenge for restaurant spending (particularly the casual dining segment) has been the drop off in the number of Baby Boomers. Given that the Baby Boomer cohort was much larger than Gen X, as Boomers age out of peak spending, the decline has not been fully offset by the Gen X cohort. Demographics suggest this will continue until 2020, when the larger Millennial cohort will more than compensate for the exiting Gen X cohort.

By 2020, the U.S. population aged 35-54 will begin to move up again, and given historical Millennial spending patterns, this is good news for the restaurant industry.