Why The Restaurant Industry Will Never Be The Same

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Closed dining rooms will be the death knell for many restaurant companies, some of whom were on weak footing to begin with, says RB’s The Bottom Line.

The restaurant industry changed for good on March 15.

That day, after a weekend of seeing photos of customers lined up outside bars in Chicago and Boston and crowding them in Nashville, state and local officials began cracking down. They began closing bars and restricting restaurants to takeout service, all to stem the spread of the coronavirus pandemic.

The shock had already been evident in prior days, as event closures and growing fear of the virus sent restaurant sales plunging across the board, from low-priced fast-food chains to high-end experiential restaurants. And now restaurants face a spring with few customers.

Few industries can withstand this sort of shock and not come out damaged. But restaurants are especially unprepared. Much of the industry is made up of small businesses, including independents and franchisees, who operate on thin margins to begin with.

But a lot of it is run by private-equity firms that deliberately thin the margins, having spent years binging on cheap debt and selling off whatever asset they could.

The industry was on a weak footing to begin with, and now it’s been hit by a giant barge. It will never be the same after this. And it will be smaller. How much smaller will depend on how long our national quarantine lasts.

“I think it’s easy to say that what is happening with the virus is probably the single worst thing that has ever happened to the restaurant industry,” said Craig Ganz, an attorney in the Phoenix office of Ballard Spahr who specializes in bankruptcy.

Weak foundation
The restaurant industry has spent much of the past decade adding capacity. It added restaurants at a rate greater than the population growth in each year dating back to at least 2010, and that number only accelerated the past two years. One problem with restaurants is that everyone thinks they can operate one, and often they try it.

Yet some of that growth was fueled by investment firms who pushed their chains to grow.

All of that growth made everything more expensive because there was a lot of demand for things such as locations and labor. Lease costs, particularly in hot urban markets, took off. Labor costs skyrocketed, too. Profitability declined.

So did traffic. Despite a booming economy, the proliferation of so many restaurants hurt per-store customer count.

Margins thinned. And with so many restaurant companies leveraged to the hilt, it left a generation of concepts with little margin for error.

Seven restaurant companies representing 13 chains have filed for federal bankruptcy protection since late November. Conditions in the industry earlier this year suggested a long period of weakness, with failures dotting the landscape and closures mounting.

Meanwhile, franchisors sold all of their restaurants to franchisees, who themselves loaded up with cheap debt to buy more restaurants and remodel existing ones and build new locations, all at the behest of the brand.

Some of these operators have started having serious problems. Big Pizza Hut and Wendy’s franchisee NPC International was teetering on the edge of bankruptcy. Big Burger King operator Carrols Restaurant Group cut capital spending to conserve cash and pay off debt.

“A good portion of restaurants don’t have the cash position to weather much of a storm, let alone an absolute catastrophe,” Ganz said.

It’s almost impossible to fathom just how much of a catastrophe this is, how quickly it hit and how broadly. Everybody outside of pizza delivery chains and maybe Sonic has been affected.”

On March 8, reservations at U.S. restaurants were down 2%, according to OpenTable. By March 18, just 10 days later, they were down 91%.

Jeff Offutt, a 50-unit franchisee in Missouri, said his Subway restaurants were up 11% on March 11. Three days later, they were down 41%, a 52-point swing.

According to customer engagement platform Thanx, purchase volume at restaurants went from slightly down on March 11 to down 42% by March 16. The problem is evident regardless of sector.

Darden Restaurants’ same-store sales went from 3% in the last week of February to down 60% this week.

“You have a highly leveraged industry with tight margins,” said Keith Miller, a franchisee advocate and owner of Subway locations. “This puts it on the edge of a cliff.”

By Jonathan Maze
March 20, 2020
Source and complete article: Restaurantbusinessonline.com