What comes after the Corona Crisis?
I started this commentary in early April, as a prediction on what the restaurant landscape would look like on the other side of the pandemic. I was writing it with my friend, Alex Robertson, CEO of e-gift card company, GiftRocker. Alex got side tracked and I put it away waiting for his input. So here it is eight weeks later and I decided to resurrect it with a few updates – although surprisingly, fewer updates than I thought would be necessary.
The first two questions I initially posed were “When will restaurants re-open?” and “What sort of restrictions will they operate under?” Since many restaurants have reopened or are on the verge of re-opening, the question of when and how restaurants will open is being decided by municipal guidelines. So I skipped the “when” and changed the restriction question to thoughts of how the effects of the pandemic will continue to be felt.
And as long as I have your attention, everyone, please stop describing restaurants as having “razor-thin margins” while asking for bail-outs and promoting rescue plans! There is nothing to be rescued If restaurants cannot operate profitably. I’m sure that not a single restaurant investment pitch or bank loan application included the promise of razor-thin margins. The truth is, restaurants can and should operate profitably. We, as restaurateurs, need to reject the status quo of 70% prime costs and start looking at our costs and profitability in new, innovative ways so that we can deliver profits in a more consistent manner.
So here are my thoughts:
Besides occupancy restrictions, what other factors will affect my business? The biggest hit to revenue for upscale, full-service restaurants will be a restriction on banquets and private dining. Until there is an effective vaccine in place, bringing groups of people of any size (larger than 10?) is probably not a good idea. As restaurants go back into operation and, I think assuming no banquet business is a conservative assumption for the next 6-12 months. On the other hand, one of my clients is predicting that he’ll see an increase in outside corporate catering.
Other factors that will affect sales will be the reduction in business travel, conventions, concerts, theater and other performances, movies, sporting events, etc. Some of these daily functions that we previously took for granted will come back but we’ll need to take into consideration the public’s confidence in their own safety. How many people will be willing to go to a restaurant, attend a ballgame or get on a plane, prior to the introduction and wide-spread distribution of an effective vaccine? All those factors are going to cut into sales. Restaurants need to plan for that.
My takeout/delivery business has soared over the last two months. Will that continue? In a word – No. People are being very supportive of restaurants at the moment because restaurants have been so visibly affected by “shut-down” and “stay-at-home” government orders. However, with unemployment projected to grow as high as 30%, the luxury of carry-out and delivery restaurant meals will dissipate.
Frankly, I’ve always questioned the profitability of delivery and take-out for full-service restaurants, especially when using one of the third-party services for delivery. Adding the high commissions paid to UberEats, Caviar, DoorDash, GrubHub, etc., and it doesn’t add up as a profit center. Those operating restaurants for take-out and delivery are to be admired for keeping team members engaged and employed during the “shut-down”. As restaurants head back into service, operators need to think about the effect on bottom line and how carry-out/delivery represents their brand. Clearly, food shows better when presented in the restaurant. Carry-out can be a positive revenue generator when it is creating ancillary sales. Once business is allowed to resume and dining rooms are allowed to re-open, my suggestion is to create a carry-out program with menu items that can be a positive reflection of your main business. If carry-out/delivery orders are competing with serving people in the restaurant, causing long ticket times or requiring additional labor, the program needs to be re-focused.
What about competition from Ghost Kitchens? The growth of “ghost kitchens” or virtual restaurants has been largely fueled by private equity (as has 3rd party delivery) and as a sub-section of the restaurant industry, has not yet proven to be a profitable business model. My guess is that by the full re-opening of the economy, private equity investors are not going have an appetite to fund losses for these start-ups, which should slow the growth of virtual restaurants considerably. I also believe that consumers are going to trust existing restaurants for their take-out meals over imaginary restaurants operating out of a warehouse or basement somewhere.
Ok, doesn’t sound pretty for the near future. How do I survive? Here’s the absolute truth; this too shall pass. The restaurant business will recover. It will change but it will recover.
Start by creating a financial and operating plan and share it with stakeholders (employees, customers investors, banks, vendors). Show them that this situation is temporary and that you have a plan to go forward.
First step is creating a realistic revenue projection. Assume that things are going to suck for about a year. Now put together a budget for the next 12 months based on that projection. Ask your team to help with suggestions as you consider what cuts are needed and how your restaurants can operate under these new numbers. No one knows your business as well as you and your team. Put all ideas on the table. Your team may create ways to save money or even better, bring in revenue, that you haven’t thought about.
Once you have a new budget and projections, immediately speak to your bank, investors and landlord. Be transparent and show them the financial plan. If you have investors, let them know that you need to suspend distributions and interest payments. If you have bank loans, speak to your bank representative. Beyond the assistance offered by the CARES Act, your bank may be willing to accept interest-only payments for the foreseeable future or otherwise adjust your loan agreements so that they can help you survive, which is good for you and good for them.
Communicate with your guests. Make sure they know you are there to serve them and that you look forward to welcoming them back to the restaurant. As you’ve seen, expressing the sanitation practices you are instituting to protect your guests and employees, is important in making both groups feel at ease in the restaurant environment. If your team members aren’t feeling good about being back in the restaurant, there is no way they can make the guests feel comfortable.
Contact your landlord. Give them an honest and full disclosure of your situation. Share your projection and let them know what you can afford to pay now and over the next 12 months. If you can cover the pass-through expenses, that is better for them than having the space empty (and sadly, there will be lots of empty restaurant spaces by the end of this.) Just like the old saying that the most expensive item in a restaurant is an empty seat, no landlord wants their space to be vacant. If you can show them that you have a plan for how you will recover, you are their best option. Forcing you into a financial position that you cannot afford is not in theirs or your best interest.
As part of this financial plan, look to your own financial needs. You are asking others to adjust their expectations. You need to make sure your own financial needs are covered but it may be awhile before you get the “financial rewards” you deserve for getting through this mess.
Once you have these immediate needs addressed, you’ll be able to address your other creditors such as key vendors. Don’t forget to contact your insurance broker and adjust your revenue and payroll projections to your new budget so that your insurance premiums go down.
Is there any light at the end of the tunnel?
Absolutely! There is a silver lining in every situation. On the other hand, there is a saying that the problem with seeing the light at the end of the tunnel is that it means you’re still in the tunnel.
The biggest issues restaurants we’re confronting prior to the Corona Virus crisis were finding and retaining good employees, rising occupancy and development costs, too many restaurant seats and competition for the dining dollar. All these issues will be solved because, sadly, there will simply be fewer restaurants on the other side of the crisis. Great employers will have a better pool of candidates, landlords will be more competitive on rents to the tenant’s benefit, and contractors’ costs will be lower because fewer new restaurants will be built. Ron Shaich, the man responsible for the incredible success of Panera, said his highest ROI Paneras were the stores they built after the recessions of 2001 and 2008 because development costs and occupancy were at least 20% lower than normal.
People’s habits will change slightly because of the Corona crisis but they are still going to go out to eat. For those who can endure, business will be better than ever as the US goes back to work because of pent-up demand and simply because there will be fewer competitors. Those operators who have the money to expand their operations will be entering the greatest “buyers’ market” of my career – and I’ve been doing this since 1977!
This momentary recess gives us a chance to think through our businesses. Restaurants will endure and if we do it right this time around, they will once again thrive.