The Future of Restaurants When Business Reopens

Wednesday, April 29, 2020

By Fritz Nelson, editor-in-chief

 

 

 

These past few weeks have been particularly trying for restaurants. We’ve heard tales of struggle. We’ve seen some restaurants thrive, but we’ve seen many more face the challenge of closures by doing things they’ve never done before: selling ingredients instead of meals, selling meal packages aimed at families, selling alcohol for takeout, building e-commerce storefronts in days, dabbling with contactless payments. We’ve even heard stories of struggling restaurants raising money not to save their own businesses, but to deliver food to those in need or to those on the front lines of the coronavirus battle

It might be a bit early to do so, but you start to wonder what the industry will look like as businesses reopen and stay-at-home guidance begins to relax. Surely, it won’t look the same.

That was the tenor of my discussion with restaurant industry expert Chris Keating, who serves as group president for restaurant media and events at Winsight LLC, which runs, among other events, the National Restaurant Association Show — canceled this year, like so many other big industry events.

In the video above, we discuss some of the early data about closures and the state of the business in general and what sorts of restaurants and food people are likely to desire when they can get out again. We talk about layoffs, furloughs and the impact of the shutdowns in the context of industry trends, such as dark kitchens.

Watch our conversation with Keating in the video above. 

 

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Here’s the full transcript of our conversation:

Fritz Nelson: Chris, we continue to read and hear about the restaurant industry being so hard hit by all the shutdowns required because of coronavirus and social distancing. And even though this is kind of a moving target, what are you seeing? What do some of the numbers look like?

Chris Keating: So context, the industry, last year Americans spent about $940 billion on food and beverage in a food service environment. Only two thirds of that is restaurants though, the rest is college, university, K-12, also down very dramatically obviously. Healthcare, et cetera. Of that 650, there are a couple of really big numbers that got a lot of play, which I think were too high. The National Restaurant Association I think originally projected $225 billion drop in three months. They've recently dialed that back a little bit. And again, that's not in restaurants. That's the whole industry.

And I think Tom Colicchio, the famous chef, said to a reporter 75% of restaurants are going to close. Love Tom Colicchio. That number is not based on data. He just made up a number. It's going to be bad though. I think the last five recessions, the industry didn't shrink in four of them, in terms of real dollars. With inflation a little bit. In 2009 it did shrink by 1.2%. we're projecting now shrinkage of between 14 and 28% total revenue. And that range depends on when the shelter at home stops. So we originally were saying 11 to 28% but that 11% assumed that in mid April shelter at home stops. And so it's clearly not stopping this month. So we're expecting from revenue, somewhere in the 15 to 30% range call it.

In terms of restaurant closures ... I mean there's 650,000 restaurants in the United States, we're anticipating a net loss of about 15%. Now that doesn't mean 15% will close. Significantly more will close, but a whole bunch are going to reopen. There's going to be some healthier concepts that take advantage of some of the real estate that gets freed up. But like you said, it's a moving target, but we feel pretty good about the 15% as a total drop in restaurants. But that's a net loss, not a gross loss.

RestaurantsThe restaurant industry is anticipating a net loss of about 15% due to COVID-19, according to Keating.

Fritz Nelson: Is there a way to characterize these losses into buckets like types or sizes of restaurants? Geography? Anything like that?

Chris Keating: Yeah, all of them. Service types is the biggest one I think. So you've got quick serve restaurants and full serve restaurants. Quick serve restaurants, fast food, but also fast casual like Chipotle, et cetera. And full service, which would be anything from casual dining to fine dining to most independent restaurants. Quick serve is doing so much better than full serve. They have drive-throughs first of all, which is huge. They have moved much more aggressively and earlier to delivery. They were in a position to take advantage of that. And they're less expensive and we're probably in the throws of a very deep recession right now. Full service is going to struggle more, certainly.

The other way you look at is chains and independents. And independents do tend to be more full service oriented. 80% of all independent restaurants are full service restaurants. They're struggling. And then I think the other thing, regardless, whether or not you're a chain or full service or anything else, you needed to be strong financially entering into this and you needed cash reserves and you needed access to capital. And so you might even see franchisees at stronger concepts that are going to struggle because they went into the downturn in a rough spot. Peter Romeo, one of the editors of Restaurant Business magazine, which is one of ours, and he has a great observation which is certain concepts went into this with a preexisting condition to use the language of the moment. And if that preexisting condition was highly leveraged, low margin, this outbreak's more likely to put you out then than not.

Fritz Nelson: The more restaurants we talk to, I mean it sounds like so many of them do operate on thin margins. If you had to describe, I mean other than lack of cash, which is the obvious one, what are the pain points that some of the restaurants in all categories are facing?

Chris Keating: I mean, it's really just one pain point, which is a catastrophic loss of revenue. And I mean, look, McDonald's as an example reported 22% same store sales down. That's globally. And that's for the month of March. And that's pretty bad. It's not 100% though, obviously. But obviously, we're now... I think we're tracking at about 50% of all restaurants are temporarily closed. Right? That's a 100% drop in revenue. So it really does come down to that much, that simple. Just a complete evaporation, destruction of revenue, coupled with, well, do you have the means to weather the storm?

Fritz Nelson: And how are you seeing the ones that are surviving, even if it's a big drop, what are the things they're doing to stay alive and work their way through this?

Chris Keating: Well, the good news, and there is some sort of good news in this, one is that unlike other segments of retail, food service restaurants have been classified as an essential business. So a lot of them are open. Clothing stores aren't open. Your nail salon isn't open. We all need a haircut. So restaurants were a little lucky in that they can be open. They've got three main sources of expenses. One of them is labor. That's dropped dramatically, sadly, as many staff have been let go or furloughed. The second is food and beverage supplies. So everything you get from your distributors. That has dropped considerably to zero if you're closed.

And the third is rent. And rent is an interesting one. I think it was interesting when Cheesecake Factory was sort of the first chain people have heard of to say we won't be paying our rent April 1st. And there was a lot of funny stuff on Twitter about who knew Cheesecake Factory would be leading the revolution when it came? So all those three groups of people that restaurants have to give most of their money to all have a vested interest in that restaurant’s survival. So a big mitigating point is expenses vanishing or at least shrinking dramatically, or maybe who you owe the money can work with you. Beyond that, obviously, we've talked about delivery, which was already a big thing going into this. Curbside pickup has become huge. It's interesting to watch.

This is where the location of your restaurant comes into play, right? If you have a restaurant that's in a mall on the third floor, you're not doing curbside pickup, right? But if you have a standalone restaurant with a curb, you can do curbside pickup. So a lot of these factors have come into play, but there's also a lot of sort of ... I mean, look, great calamity usually inspires innovation, right? You're seeing restaurants do grocery type business now because they've got this food that's going to waste. Subway's has sort of pivoted to grocery with it's perishable produce.

You see some restaurants trying to create the dining out experience in. There was a concept in China that moved to sort of a fondue at home type experience. And so you are seeing some interesting innovation and great calamity often inspires that. Certainly war does. And this will too.

Fritz Nelson: Yeah. I see with the ability, some more flexibility, let's say around selling alcohol, it creates an environment where that come pick up a night out and bring it in has become something that we're hearing as well.

Chris Keating: Yeah. And something that would have been unthinkable a month ago, the idea that you can do takeout booze and a six pack with your pizza, fixings for cocktails. I think there was a meme going around that, not too long ago, in our grandparents' lifetime at least, alcohol was illegal, and now it's deemed an essential business. And well, thank God for that.

Wine glass and pizzaMany businesses have started to offer takeout alcohol, a concept previously nearly unheard of.

Fritz Nelson: You talked about some of the experiences that restaurants have in take out. Some of them have had to figure that out and not just because of their location, but just the technology, whether that's contactless payments or even some of the smaller restaurants that don't do any take out business creating some kind of e-commerce experience. What have you heard ... And many of them have done it pretty quickly. What have you heard in terms of their ability to flip a switch on so quickly?

Chris Keating: I think that probably one of the things that to restaurant operators is a big deal that to people out... People outside the restaurant industry look at restaurants and they think mostly of the food, obviously, the ambiance, the atmosphere. But for the restaurant operator, we use the word operator for a reason. Operations is king. And it's been interesting to watch Darden in particular. So Darden's the biggest full service restaurant company in the world. Olive Garden is their largest chain, but they have Capital Grille and Bahama Breeze and 52 Seasons, the whole bunch. They're going to be an interesting case study as a chain that pivoted really beautifully to... I think they had 86... So whenever I say any number on this Zoomcast, it might be right. I'm in the ballpark.

I think they had like 86% same store sales drop the first week of shelter at home. And I don't remember the number, but they pivoted to delivery and curbside quickly and effectively. That's a company that is operationally at the top of their game. But yeah, a lot of them are doing it with bandaids and rubber bands right now. And week by week, look, we're all doing it, right? I mean hopefully. Hopefully everyone's doing it, doing takeout and eating out. I've seen the places I go to every week they get a little better. But it is, it's all ad hoc innovation right now except for those that were already big into delivery. This is going to continue I think for a few years that they'll sort of moved the game real time to meal delivery.

Fritz Nelson: One of the other things they've had to figure out is sanitization. And most restaurants know that from having to be sanitary in the first place, right? But they've had to effectively tell people the steps that they're taking and they've had to actually take those steps, extra training. What have you seen restaurants doing in this regard?

Chris Keating: Yeah, so Technomic, again, our research arm, has actually been surveying restaurants and consumers repeatedly throughout this. And right now they're saying about roughly half of the operators they are talking to have up all parts of their game, retraining their employees, greater sanitization of everything within the restaurant, et cetera. Think about how hard that is though. They're doing it while their business is falling apart, right? Everyone's at health risk and now they're introducing this as well and it's... I don't know, some heroic work is happening, I think. But I think when all is said and done, it's going to be interesting to see what lasts. Did you watch the latest season of “Curb Your Enthusiasm”?

Fritz Nelson: I did not.

Chris Keating: Oh, you must. It is incredibly funny. But anyway, Larry David opens a restaurant called Larry's Lattes. It's a spite story. He's opened it just purely because he's mad at the guy who owns a coffee store next door. And he was onto something. I mean, right now there are a lot of entrepreneurs, I think, thinking about what a post-coronavirus restaurant looks like, and Larry David hit on it last year. I mean it's essentially a restaurant designed by a germaphobe for germaphobes, with anti-bacterial on every table. That's going to be on the table now perhaps next to your ketchup and mustard. But Larry was there first.

Fritz Nelson: I like it. Let's talk a little bit about some of the relief that is being provided. And I think in the restaurant industry at least I've seen some of the greatest examples of that. You've got CORE, which I think stands for Children of Restaurant Employees. And you had the Great American Takeout, which is still going on. The National Restaurant Association has a relief fund. There's a James Beard effort. Lots of communities coming together to support their local establishments. What are you seeing?

Chris Keating: Yeah, most of the things you've talked about plus some of the government initiatives like the Paycheck Protection Program and the CARES Act, which apply to all small businesses, but most restaurants are small businesses. And not just your local place, but even your local McDonald's is likely a franchisee that is a small business so it fits under a lot of this. Restaurants have a big advantage again over maybe your apparel store or your nail salon is that there's a romance to the restaurant industry. We all love our restaurants that we go to. We have a special connection to it. It's been interesting to see.

I've even friends who even before I started sort of rallying everyone I know to support their local restaurants that were going out of their way to dine out at the restaurants they liked in their town to make sure they could survive this. We're particularly supporting the National Restaurant Association, their efforts and we want to focus our efforts, our organization, particularly on employees who've been battered and that's one of the places we're going to be putting our efforts.

Woman working at tableRestaurant owners have found aid through government loans, though the process is fraught with complexities.

Fritz Nelson: The inspirational stories of whether it's innovation or people lending a hand are pretty incredible. What are some of your favorites so far? I promised not to make you cry.

Chris Keating: I know. I did something last week where I was talking about this one store and I did get a little choked... We've all gotten choked up a lot these days, haven't we?

Fritz Nelson: Sure.

Chris Keating: You know, I think one of my favorites was, and I think I first saw it in New Jersey and then it extended some other places, then it got stopped in some places, is people calling their local restaurants and placing orders to deliver to healthcare workers. I am going to get a little choked up. All right. We'll edit that, right? Anyway. And it's like everyone wins, right? The restaurant gets a little bit of much needed revenue, the healthcare workers get their meals paid for and delivered and those of us who feel useless feel like we can do something anyway. And that was probably my favorite one that touched me quite a bit.

Fritz Nelson: Yeah. There are a lot of people reaching deep to make those things happen. It is very inspirational. How does the restaurant engine industry emerge from this? I mean other than sanitizer on every table, what new ideas do you see coming from this? How will the restaurant businesses build resilience so they have more cash? I mean, let's hope there's not another pandemic anytime soon, but certainly everybody's kind of feeling like they need to build a little bit of resilience into their business. But what does it all look like?

Chris Keating: Well to use one of our favorite words of the moment, pivoting. As I pivot from sort of a sensitive person to ruthless business person. There are too many restaurants, and there had been for some time. About 10,000 restaurants shut down during the great recession and we have built far too many since then. We're building restaurants faster than we're growing population. And so everyone in the industry has expected that when the next recession came, there would be a shut down of restaurants and it was sort of necessary. We're trying to spread too little business among too many restaurants. And so part of what...

Right now everyone's losing, but I think what's going to happen is there will actually be some winners, some winners and losers. You've got restaurant chains, 30 or 40, 50 restaurants who have barely showed a profit for 10 years, and they always find investments somehow. They're going to go away. And well funded, higher margin concepts with stronger consumer demand, like Shake Shack as an example, is going to sort of be interested in their vacated real estate positions.

There's a decent chance that we're going to see record numbers of restaurant closings in the next year and also record numbers of openings. And some of that will be existing strong concepts. Others will be, maybe you know, this is always an endlessly creative industry. Like I said, someone is in their work at home environment right now drawing plans for new restaurants that will open. You're going to see some different I think architectural approaches. There was something that was already starting to happen, which was smaller dining rooms, bigger kitchens, right? Because if you're doing a lot of takeout or you're doing off premise or any kinds of...

Think about Chili's To Go as an example, right? So Chili's has built this little side door where you can go and do your takeout. Well most Chili's restaurants or anyone like them, they've built their dining room and their kitchen to scale. Well, what if you're serving more meals than the size of your dining room and not as many people are dining out? Or maybe even less after this is over. Well, maybe you start to scale that kitchen and dining room a little bit differently. You may have to also factor in that people are not going to want to be piled on top of each other in the near future.

So I think we're going to see some design changes. We're going to see probably some things that will go and some things are going to go away forever, I think. I don't know. Are you going to see a lot of salad bars in the future? I'm thinking not. We talked to a lot of college and university food service directors who were already going to phase them out in a big way. But there's stuff that we haven't thought of yet and that's what I always talk about calamity inspires ingenuity. We're going to see some stuff that none of us have thought of yet.

Fritz Nelson: In talking with some restaurants, especially in places like New York and LA where the rents are just so high, like out of proportion anywhere else in the country, the cost of space as a percentage of your overall spend is dramatically higher. And with restaurants, obviously some of them closing, some of them refusing to pay rent, some of them may be going out of business. Do you think that that will change how... Maybe the better way, will rents go down?

Chris Keating: I mean, you have to assume so, right? I think... And we might also see a really radical change in how companies use office space. There are a lot of CFOs right now realizing, "Oh, we can all work from home. Interesting. Why do I have that gigantic rent on my balance sheet every year?" Yeah. So there's this interesting... Of course we have a lot of people who have maybe simplistic ideas about how economies work and that, "Hey, I just won't pay the landlord and screw him." Well, guess what, the landlord owes the lender money, right? So there is this sort of cycle that happens. You can't just not pay the landlord and think everything's going to be fine for the landlord either.

And then you've got the franchise or franchisee relationships. You've got this sort of interesting mix of everyone is in it together, to use another of the cliches of the moment. The tenant, the landlord, the lender, they're all sort of dependent upon each other a bit. But it's certainly reasonable to assume we're going to see some decreases in rent. Our old, well, my old boss, I don't know if he was ever your boss, but I think they were always the first person who said the line to me, "If I owe you a dollar, I have a problem. If I owe you $1 million, we both have a problem." And the tenants and the landlords and the lenders, they all have a problem and they're going to have to somehow work together to solve it.

Fritz Nelson: Chris, you and I have talked about ghost kitchens or cloud kitchens. You spoke earlier about new architectures, new dining arrangements. Could that be something that takes off in this sort of environment?

Chris Keating: Yeah, definitely. And again, it's so hard to project how the consumer's going to act. Are we going to return to normal six months from now, 12 months from now, or is there some permanence to some of the ways we approach dining? You have to bet that there's going to be, for some consumers, some permanence, which means a significant demand for off-premise dining. And all of a sudden ghost kitchens, which is this idea of no retail face, just a commissary essentially through which you operate a delivery business. Boy, it starts to make a lot of sense.

The trick though... It'll be interesting to see if diner's attitudes towards brands change though, right? Because we tend not to like generic food, right? We get attached to a brand. We might like a sandwich from a local deli or a sandwich chain. No one will admit how much they love McDonald's, but we spend $40 billion there every year. We love McDonald's. And so a lot of these ghost kitchens will be connected to restaurants. And there's still that sort of brand component, which is going to be interesting. But yeah, I think the idea of spending even less on rent by not having a retail facing operation... Particularly with the future of malls sort of in an interesting spot now. Retail shopping is a big driver of food service as well, and obviously restaurants and malls. This idea of having these lower rent, non-retail-facing places to just drive your cooking for delivery is an idea that may start to accelerate.

Fritz Nelson: Sure. I want to end with this notion of where we come out of this, who wins, what wins, what type of food, what happens to labor... Make some predictions for us.

Chris Keating: Well, anyone who thinks or says they know what's going to happen is a liar or a fool, or both. But that doesn't stop us from guessing. I think that on the food side, yeah so there's two arguments on the sort of what happens with menu and dining, right? One is that this, and you see it in what we're buying in retail now, right? You can't find any baking goods on the shelves, right? So this sort of comfort food, indulgence we're seeing a little bit now, will that continue or will we come out of this with a little more of a New Year's resolution approach that I need to eat healthier now?

But I think what we really believe is we're going to be most likely in a deep, and I don't want to say prolonged, I don't know, but certainly there's going to be high unemployment for some period of time. And we know from 2009 what that does is it drives value purchasing in food service. And so I think there's going to be this sort of mix of value and indulgence with not much middle ground. The middle ground is at risk. Casual dining... Some not all. There are certainly thriving casual dining restaurants, but they sometimes are at risk of that middle ground. QSR can drive that value and convenience.

The very best independent fine dining restaurants will always be fine, in certain places anyway. But there's going to be a little bit of that sort of low end and high end might do a little bit better than the middle, I think. As far as labor goes, boy, this is a really interesting one because we just went from historically low unemployment to historically high unemployment, like that, right? I mean just overnight. And so if you asked any restaurant operator pre-corona what was their biggest problem, it was finding, training and keeping good people.

Well with now 13% and likely higher unemployment, well you should be able to do that, right? Except that at least in the short term, the unemployment benefits are very generous. They actually project to about a $50,000 a year salary, which is very hard for restaurants, especially in certain parts of the country to compete with. So it might make more financial sense for some people to stay home and collect unemployment until it runs out than to go back to work and take a pay cut.

So now think about that confused and strange and unprecedented labor situation while you're trying to reopen a restaurant, which is something also you've never done before. So as someone said recently, we've been using the word unprecedented an unprecedented amount of times lately, and this is all new ground for people. So we'll see.

Fritz Nelson: Yeah, it'll be interesting to see what happens. Hopefully we come out of this quickly, and certainly for restaurants, we'll all be hungry and wanting to get out and do something normal again.

Chris Keating: Yeah. And I hope everyone at least supports their favorite local restaurant so when this is all over, they still have their favorite local restaurant.

Fritz Nelson: That's right. Chris, thank you so much.

Chris Keating: Thanks, Fritz.

 

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