FMG Industry Analysis: The Dichotomy of Restaurant Performance During a Pandemic
This week we continue our industry analysis series with a look at the restaurant and dining industry. These are the topics we covered previously:
Part 1: Crop Farming
Part 2: Property Management & Real Estate
In addition to the normal stresses that restaurants experience, 2020 and 2021 have posed unique challenges. Typically when Focus Management Group works with a restaurant, we are concerned about food costs and labor costs, and changing consumer tastes and demographics. Those concerns still exist and have been aggravated by Covid-19 shutdowns and lockdowns, and the work from home and new normal trends.
Today we need to build on our normal playbook for restaurant recovery to address these new issues.
Type of Restaurant
The type of restaurant has been a key factor contributing to success or failure in 2020 and 2021. The impact on white tablecloth restaurants is different that the impact on fast-casual, and the impact on fast food locations. Chains and franchisees are impacted differently than privately owned restaurants.
A restaurant that relies on people dining at the facility has been the most impacted. Reopening strategies that only allow 25% or even 50% occupancy do not work with the cost structure of a dine-in operation. Some restaurants have been able to use outdoor dining, take-out and delivery, or a service like Goldbelly to augment the typical indoor dining business.
Many fast-casual and privately owned businesses have invested in a more robust online ordering presence and have encouraged existing and new customers to convert to curbside pick-up rather than drive through.
Chains have granted cost reductions to their franchisees, and have closed certain underperforming locations. The individual operators have not had access to that same playbook for cost reductions.
There are significantly different impacts on restaurants by state and even within a state, by city versus outer areas.
FMG has experienced the closure of many of its favorite city based restaurants. For example, several of our favorite restaurants to enjoy with our banker friends in Minneapolis permanently closed. And a real gem of a restaurant in St Louis struggled through to early December and then it also permanently closed.
That story is being repeated across the country and impacts across the type of the restaurant. The impact is clearly geographically based and impacted by the WFH movement and closed offices and retail spaces, in addition to the lockdowns.
Between states there are significant differences. In Florida the restaurants have been open and have better access to outdoor dining. In Chicago restaurants made use of as much outdoor space as possible but then the cold winter hit. In California restaurants were scheduled to reopen just before Thanksgiving, and after the food had been ordered in, California went back to a lock down and the food was lost and employees were negatively impacted.
It has been difficult for some operators to find people willing to work, and to provide those willing to work with enough hours for the person to make a living. Operators are needing to be even more creative than usual with staff management – planning the open hours, the staffing needs during peak or limited peak periods, and sourcing the personnel.
Some restaurants have increased hourly wages to offset lost tips. Some have paid signing bonuses or weekly bonuses to keep people interested in working during the changing environment.
Increased Operating Costs
The cost to develop or expand outdoor dining spaces has been high. Increased IT costs to develop or expand online capabilities has increased costs from a development perspective and an ongoing website management perspective.
The costs for additional cleaning, for testing employees for Covid-19, and for social distancing approaches such as booths, plexiglass “walls”, etc. has been high when compared to the return on the investment. With the tight margins most restaurants operate under, increasing operating costs pushes overall profitability to the lower limits.
Lenders and landlords have been generous with payment deferrals. Many restaurants were able to procure three to six month payment deferrals. In some cases, depending on type of restaurant and geographic location, that was enough. In other situations that amount of deferral was not even close to sufficient to keep a business operating at or near break-even.
Restaurant owners and operators are typically optimistic and creative individuals, but need factual data on which to make serious decisions about the forward prospects of their operations. This industry needs to combine food cost and labor cost management, the typical issues an operator confronts, with tough decisions about the new normal on a location by location basis.
Identifying ways to reduce costs is always important, but developing the strategy for 2021 and 2022 requires flexibility and scenario planning. FMG is able to deploy its knowledge of restaurant operations, with its understanding of financial performance, with its approach of developing alternative performance scenarios with decision points. During 2020 operators held on as long as they were able – some successfully and some not. We can help operators and their lenders evaluate performance capabilities and structure decision points to ensure all stakeholders make the best use of available data and available options as we enter 2021 and the new normal.