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COVID-19: Reshaping the restaurant industry, today and tomorrow

 

As the COVID-19 outbreak continues to reverberate through North America and the world, BMO Capital Markets and Restaurant Finance Monitor co-hosted a conference call with a number of leading privately held restaurant chains in the United States to discuss what they are seeing in their markets, and how they are addressing operational and financial impacts during these trying times.

The call was hosted by: BMO Capital Markets restaurant sector Equity Research Analyst Andrew Strelzik, and Director and Head of Restaurant Investment Banking Ashish Seth. Panelists included Chad Spaulding and Jim Balis, Managing Directors at CapitalSpring, Landon Eckles, Co-Founder & Chief Executive Officer at Clean Juice, Joe Kahn, Founder & CEO of Condado Tacos, Andy Howard, President & CEO of Huey Magoo’s Restaurants, Atul Sood, Chief Business Officer at Kitchen United, and John Hamburger, Founder & President at Franchise Times.

“Over the past week or so we have seen an unprecedented level of disruption in the economy, driven by COVID-19, and restaurants have been at the front line of the impact,” Seth said to open the call. “At this time we believe the sharing of information and collaboration amongst us all is more important than ever to help the restaurant industry manage through the crisis.”


 An audio playback of the call is available

Subscribe to BMO COVID-19 Insights for a podcast of select reports, conference calls and insights. 


Here are some of the key takeaways from the call.

Uncharted Waters

The industry is experiencing a never-before-seen situation, but panelists were united in the belief that the crisis will change the face of the sector as we know it, likely leaving fewer players than before the outbreak.

“We talked for years about the restaurant business having too many stores and being too hard to staff. Well, that’s changed, and there’s going to be thousands of restaurants that are not going to open up again and what that means is that when the all-clear is given, for people who have stayed in business, you are going to have a lot of business,” said John Hamburger, Founder & President at Franchise Times.

“We don’t know how long this is going to last, how long restaurants will be operating at reduced capacity or in some cases how long they are going to be closed … Your chances are much better coming out of this by staying open rather than closing.”

Reviewing a cross-section of the industry, Hamburger said QSR (Quick Serve Restaurants) are still functioning but operating at reduced capacity, while Fast Casual and Casual Dining are now basically delivery and “to go” dependent. Fine Dining, for the most part, is shut down. On the other hand, people are still ordering, and positive areas of note include pizza delivery, drive-through delivery and “to go” traffic, which have actually seen a pickup since the outbreak gained steam over the past week.

Drive-Through and Pickup

“The big thing is drive-through,” said Joe Kahn of Condado Taco, who noted that preexisting capabilities are not limiting them as they are turning their parking lots into drive-throughs where necessary, and offering curbside pickup, where clients call in orders and then text the restaurant when they arrive so food can be brought out to them.

He predicted that third-party services that are doing deliveries will likely become overwhelmed. “We are trying to take back a little piece of that and we are starting to experiment with delivery ourselves,” he said, which has the added benefits of improving margin and helping address employee furloughs. “We are doing everything we can to get the consumers’ confidence —everybody is scared right now but we are starting to see improvement and I think in the next few weeks we will have a plethora of to-go and pickup so that is what we are doing.”

Atul Sood, from Kitchen United, echoed those sentiments, saying the company has seen an uptick in demand for pickup and delivery options, and urged restaurants to experiment with more family-style meals to better cater to this consumer segment (families) as they deal with new “shelter in place” requirements.

Landon Eckles of Clean Juice discussed how the company has launched curbside pickup and created a family pack to cater to changing consumer needs. The company has created a “Buy and Blend” product that allows consumers to purchase unblended juice ingredients so that they can prepare drinks at home and consume them as desired over the course of multiple days. Eckles also noted how his chain has just come off its best week ever as consumers looked to “eat healthy and improve their immune systems.”

At CapitalSpring, Jim Balis said the business is working with its portfolio companies to refocus marketing to reflect the shift to off-premises, and to make it as profitable as possible, including driving customers to native apps and other “direct” ordering methods rather than using third-party delivery services to place orders. The firm and others represented on the call also discussed repurposing employees to delivery functions and scaling back menus to improve cost effectiveness and speed of service, and reduce prep times and food waste.

Labor

As companies have had to cut back on staff, panelists discussed ways to think in the short-, medium- and long-terms.

“We’re noticing generally that the business is ending earlier, people are staying home. They are not going out later at night, so generally the hours of operation, certainly during the week, have narrowed throughout the course of the day,” said Balis.

In some cases, operators are trying to reduce employees hours instead of letting them go completely.

Panelists said they are trying to be creative to keep what staff they can and to communicate to those that are let go the benefits that may be available to them. 

Joe Kahn of Condado Tacos said he has given up his own salary even as the company put non-essential HQ staff on furlough and asked everyone who stayed on to take a pay cut.

“We explained to [furloughed employees] that we have to do this so that we can have a job for you when this does break,” he said.

In the bid to reduce costs as much as possible Andy Howard said Huey Magoo’s is trying to push to do more deliveries themselves and called on restaurants to negotiate with third-party delivery services to change their commissions structure. Capital Springs said restaurants can also focus on driving as many sales as possible to native ordering and delivery.

Long-Term View – Working with Vendors

Whether it’s working with landlords or suppliers, panelists agreed on the need to be proactive and have plans that they can communicate to key stakeholders. Restaurants must take a long-term view that ensures they do not end up in a situation where they defer payments and end up emerging three or four months from now with unmanageable accounts payable.

Panelists said restaurants and operators are reaching out to landlords to have conversations about the crisis and, for the most part, agree that “everyone understands that we are in this together.” While they noted that definitive agreements have yet to be finalized, the discussions have begun and for the most part have been positive.

Landlords have in many cases been open to arrangements, offering anywhere from three to four months of deferment, either in full or in part, that is then amortized to dates as far out as a year from now.

Future Implications

COVID-19 has thrust the restaurant sector into what appears to be its worst crisis in living memory, and will likely lead to thousands of U.S. restaurants being closed, especially those with already challenged balance sheets. But the industry that emerges, once the dust has settled, will come back, different but reinvigorated. Panelists predict that it may create more frequent customer visits as segments other than millennials learn to embrace off-premise dining and view app-based ordering as a viable option.

Finally it was important to note that while panelists may be very focused on survival right now, they have not taken their eyes off of potential future growth and expansion plans.

The restaurant business is not going away, the question is how it will look on the other side of COVID-19.

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Ashish Seth Director, Food, Consumer & Retail
Andrew Strelzik Restaurant Analyst



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