The Pandemic From a Restaurant View
This period has been very difficult for restaurants. The pandemic drove “shelter in place” rules or reduced seating capacity limiting customers. Just to highlight the level of struggles, in March 2020 $30B in sales were lost. In April 2020, $80B in sales were lost. 2 out of every 3 employees lost their jobs; 4 in 10 restaurants were closed. Significant shutdowns and layoffs occurred so that restaurants could survive. Cash became king. Restaurants deferred non-essential payments and protected cash.
Some businesses that were already over-leveraged closed quickly. The PPP Bridge Loans and PPP loans, while valuable came too late for some businesses. Fortunately, judges in bankruptcy cases were taking a wait and see approach. Because the shutdown and struggles happened so quickly, it was insightful to pause for 60-90 days to see how the environment would develop.
A new normal developed. A lot of restaurants changed their models, and new method of operation developed. Take out and delivery became a means to survive and keep employees. Social distancing became a new normal; additional sanitation measures and personal protective equipment became a requirement.
PPP loans finally started to flow. PPP loans were a requirement just to survive. There was no way to pay employees without these loans. It was a lifeline, and many restaurants feel the US economy would have spiraled down without PPP. Another nuance of PPP was the loan terms. It was a huge opportunity for restaurants to tap into these funds; there would never be another time in the existence of these restaurants that they were able to get an uncollateralized loan at a one percent rate. It was smart business to take the loans, even if you weren’t sure it was required. It became a lifeline that kept people employed and restaurants in existence.
Turnaround Opportunities
During this crisis, the struggles created many opportunities for turnaround professionals. A few key areas that we focused on.
First, financials. This is might or might not be obvious, but in restaurants 60% of your costs are tied up in food and labor. During a pandemic, food prices tended to be locked in. Often payments were due upfront upon delivery. Labor costs are somewhat negotiable, but not significantly. On labor, the only real opportunity was to furlough employees. But this was a difficult time, because furloughing employees made you at risk to losing them when you needed them back. When PPP loans finally came in, sometimes the employees to call back weren’t available. But this still was a key item to managing your employee staffing efficiently so as to not burn through costs. But the fundamental action is to negotiate with your landlords and your lender. I could do an entire blog just on negotiation, but the key here is to know your lender well. Knowing your lender well was key to getting PPP funds quickly. Lenders were so busy with their own clients that if a restaurant went to a new lender they were put at the back of the line, which delayed the PPP loans. Its also key to know your landlord. Its important to have a low-cost lease. Be prepared to walk away from your restaurant if you can’t get favorable terms. This sounds drastic, but during COVID many restaurants moved, since they were shut down. They either requested and received a better term, or they moved to a new location with a better term. The biggest and best PPP loans can’t fix bad business.
Second, investments. It is critical to be mindful of what you invest in. An expensive build out can cripple a restaurant, and it’s easy to do. Everyone wants their restaurant to look the best. It’s important to upgrade when needed, but at the same time to watch your investment and ensure you are spending efficiently.
Third, communications and training. It is paramount to communicate well with employees. Many new tools exist to allow texting or emailing all employees at once, especially in the fast-changing world of a pandemic. Communication is key. Its important to keep everyone on the same page, but it also keeps employees happy and engaged. They feel like they are part of the plan and the solution.
Finally, keeping management and key employees. This was new for us. But since employees became so scarce during the pandemic for several reasons, the key was to identify and retain your key employees. The struggle here is when your location is closed how do you keep your management and key employees, employed? This is where a pivot in restaurants occurred. We helped convert many restaurants to take out and delivery using services like Door Dash, to generate enough income to keep those key employees. These employees are critical to keeping the restaurants open and as well to start ramping back up to full capacity.
Restaurant Outlook
Now that COVID is progressing, we are generally passed the lockdown hurdles. Most restaurants have a model in place, and the ability to function. However, the supply chain and commodity prices are creating new struggles. In September 2021, National Restaurant Association reported softening on performance and outlook. The industry gained 29,000 jobs, but the industry remains down 900,000 jobs. Wholesale foods are up 6.3% which is pressuring restaurant margins. 3 in 4 operators say retention is the toughest challenge.
So overall, many challenges remain and must be worked thru including employees, commodity prices, supply chain disruptions, and COVID-19 cases. However, restaurants are working through the issues and are making progress back to profitability.
Maybury Partners, LLC 