The COVID-19 Crisis Will Likely Lead To A Massive Shakeout In The Restaurant Industry

Food & Drink

If you’re feeling a bit of whiplash trying to keep up with restaurant reopening regulations, well, that’s because the state-by-state decisions have been a bit dizzying.

As states from New Jersey to Pennsylvania to Texas begin to re-close or reduce dining room capacity for the second time since March, restaurants are going to have an even tougher time recovering. 

“This is extremely destructive. It is very difficult for restaurant operators right now,” said Dave Bagley, managing director with Carl Marks Advisors, where he leads the firm’s restaurant group. 

A few studies have detailed the extent of this “destruction.” Recent data from Yelp shows that, since March, 53% of restaurants are now listed as permanent closures on its platform, while OpenTable said one in four restaurants were at risk for closure. 

According to the National Restaurant Association, the industry has already lost $120 billion and could lose as much as $240 billion by year’s end. 

Notably, all of these predictions came before the late-June surge in coronavirus cases–and subsequent changes in reopening guidelines–that swept across much of the United States. This means things could be even worse for the industry than those grim forecasts initially indicated. 

Reputationally speaking, it doesn’t help that the industry is implicated in the rise in cases. According to economists at JPMorgan Chase and reported by the Wall Street Journal, credit card spending in restaurants tends to predict new coronavirus cases about three weeks later. This is despite the fact that most consumers aren’t even ready to return to restaurants. A new survey from SafetyCulture and YouGov found that 52% of Americans would feel uncomfortable dining in a restaurant/bar throughout the next 3 months.

Bagley said all of these factors–consumer trepidation, surging cases and costs involved with re-closing–has led to an especially ominous picture for restaurants.

However, not all restaurants. 

“What we’re seeing now is a real dichotomy. You’ve got larger brands, franchised brands and operating groups looking at this as an opportunity,” he said. “We work with mid-tier brands that are looking to buy and expand in a slowdown and we are expecting robust activity in M&A there. Contrast that greatly with family-run, smaller or regional-based companies that have a real dire outlook. Part of this dichotomy has to do with access to capital. I think we’ll see a great wealth transfer to the bigger concepts.” 

A number of signs support this. The Independent Restaurant Coalition has predicted that as many as 85% of independent restaurants could permanently close by the end of the year, for example. Conversely, giant chains like Domino’s, McDonald’s and Taco Bell have gone on massive hiring sprees. 

Concepts with heavy on-premise operations that don’t have the ability to shift quickly to carryout or delivery are in a particularly precarious position; perhaps even worse than March and April when the nationwide lockdowns first went into place.

According to The NPD Group, recovery of restaurant transactions has stalled for a second week in a row because of surging cases across a number of states. For the week ending June 28, total customer transactions at major U.S. restaurant chains are down by 14% versus the same week a year ago. Last week, ending June 21, total transactions were down by 13% versus year ago, NPD reports. 

“It’s apparent that the road to recovery is going to be a challenging one for the U.S. restaurant industry,” NPD food industry advisor David Portalatin said in a release. “Consumer demand for restaurant dining is there as well as a want for normalcy, but there is nothing normal about this situation.” 

It is hard to find a silver lining here, unless you’re a well-capitalized brand with a healthy balance sheet and a strong off-premise business. The industry at large, however, may have been in need of a retrenchment of sorts. Bagley (and plenty of others) have argued that the restaurant industry is and has been oversaturated for years and this crisis will no doubt correct some of that bloat. 

Though the near-term picture is gloomy for independents, closings will likely change the dynamics of the real estate market, causing costs to come down when storefronts become empty and landlords become desperate to fill those spaces. This could perhaps support a resurgence in mom and pop shops, albeit down the road. 

“You’ll see a lot of pain and closings and some of these lower-tier, family-run places will go out of business. But, on the other side of this, somebody will open in a lot of those locations,” Bagley said. “Those places will come back.” 

Of course, this could go the exact opposite way, creating a world in which the big get bigger and gobble up all that real estate well before that “down the road” opportunity presents itself. Chipotle, for example, has indicated that its strong balance sheet will support development opportunities as more real estate options open up from widespread closures. Notably, Chipotle has zero debt.

This is perhaps why celebrity chef Ming Tsai told Yahoo! Finance on Monday that this crisis may leave us “with just chain restaurants and fast food restaurants.”

Still, Bagley is optimistic for an eventual recovery for unique and innovative independents. Consumers, who have become far more sophisticated about their food in the past decade or so, won’t settle for uniformity for long.

“Right now, there is way too much retail space and way too many undifferentiated restaurant concepts. A lot of retrenchment was necessary in a financial sense and an undifferentiated sense. COVID just accelerated this,” Bagley said. “But COVID isn’t the end. The economy will rebound and, eventually, things will return to normal. The best thing about the [restaurant] space is it is resilient. There’s always something new.”

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