We are hosting a Black Book call on Friday, April 24, at 2 PM ET to discuss our current thoughts on the restaurant industry and the road to recovery!
We hear from a number of people that we are too bearish, and based on how the market is ripping, maybe the speed of recovery will be just as fast as the speed of the downturn? On our call, we will outline the dynamics of what has happened to the consumer and the industry. Importantly, we are trying to understand what the future looks like for the Restaurant Industry.
Based on the current thinking from the Trump Administration, reopening the restaurant industry will be in Phase One of the plan. In our upcoming Black Book, we will take a look at the issues the sector faces as it recovers from the COVID-19 pandemic. The restaurant industry will recover, but we believe it will also look quite different. The industry is not going to recover overnight, or when the PPP and stimulus money hits the bank accounts of consumers. The process of opening a new or old restaurant requires time and careful planning. The following is my list of considerations when thinking about how long it will take the industry to reopen which we will address in the upcoming call:
HOW WILL THE COUNTRY REOPEN – Reopening of the country and the restaurant industry will take time. We will begin by looking at the critical states that could open first. There are roughly 30 states with less than 5,000 cases of CVOVID-19, most of which are in the middle of the county and don't represent and don't represent a majority of the population. The big three are Texas, California, and Florida. Importantly as we have learned, states will band together as regions, and we will frame the timing of when different areas will open. While the industry is in Phase One, there will be initial limitations on gatherings and restaurant capacity. SBUX was the first to talk about a "monitor and adapt" strategy that will likely follow sate and regional guidelines. The other companies will likely follow this approach!
SUPPLY SHOCK RECESSION – As we understand the impact of the pandemic on the supply chain, the demand shock we are experiencing is resulting in less production and lower profitability for producers (farmers and ranchers). Fresh beef looks to be a problem currently. Lower profitability for the producers will lead to further curtailing production. Add to that, whatever current production there is will face issues getting to market/distributors as logistic firms cut costs to address lower volumes. Assuming that supply/demand balance remains for an extended period and reset to a lower level (with 10% unemployment, not a big assumption), an important consideration is what products are being produced. As the pandemic ends, it is going to take time for the supply chain to get filled and get the product to all the stores/restaurants that have closed and trying to reopen. How long will it take for SYY to re-hire all the salespeople and drivers to re-start that company?
INDUSTRY CAPACITY - How many restaurants are closed temporarily, and how many will remain closed? Permanent closures are most likely to the ones operated by poorly capitalized independents and chains with previously weak fundamentals. Also, impacting the ultimate closures count is the hidden leverage in the franchise system. We currently believe the current PPP is not the right answer to bring back a significant amount of closed restaurants. Industry unit capacity will play an essential role in determining how quickly sales will recover and long-term average unit volumes.
LIMITED MENU – For all the reasons above, the current assumption is that restaurants will reopen with limited hours and menus. There is a high probability that many chains will be extending the use of limited off-premise menu's when the restaurant opens. In the short run (balance of 2020?), expectations should be for lower initial AUV. The ultimate driver of this will be the state's restrictions on social distancing requirements.
HOW WILL THE CONSUMER RESPOND? – Are there expectations that consumers will fully appreciate the fun of dining out after being pent-up for so long? Or will consumers be cautious about the dine-in experience? When consumers do decide to dine-in again, will price be a factor? The experience will also need to be top-notch! I don't believe in the theory of pent-up demand in the era of a pandemic.
CONSUMER SURVEYS– We have updated our consumer tracking surveys on how consumers feel about eating away from home.
SPENDING BY COHORT/DAYPART – In the early days of the epidemic, Gen-Z YoY restaurant spend is down -22% compared to Baby Boomers (ages 65+) spend, down -43%, according to Black Box. A significant consideration for the older casual dining brands will be how long it takes boomers to get back to previous spend levels. That's another reason I believe concepts like the Olive Garden's dine-in business will be slow to recover. As usual, routines got increasingly disrupted, the breakfast daypart saw a significant drop in sales. Breakfast comp sales were -70% to -80%, during the latter part of March. Right now, the mid-afternoon sales daypart is holding up the best; late-night is the worst. The critical question is when the pandemic is over, how fast will weekend dinners out return to the fun of eating out?
LABOR PRESSURES – Given that there are 22 million people recently added to the unemployment rolls, what does this mean for future demand? It is also likely going to be a big challenge to bring back former employees who may take other jobs during the closure periods. How were they treated on the way out? The restaurant industry is now competing with the government for labor. The average state unemployment benefit is just over $300 per week. The new federal bonus is $600/week for a total of $900 a week, which translates into about $22.50/hour for a full-time job. Add to that ongoing eligibility for means-tested assistance (EITC, TANF, Medicaid, etc.). What about the dollar value of free time? As Neil Howe phrased it, "the 'reservation wage' becomes at least $25/hour." How is the industry going to get people to come back to work, and how much will they need to pay them?
INDUSTRY SALES – We will have an estimate for how we see the industry sales trends improving for the balance of 2020.
OTHER THINGS TO CONSIDER
INCREASED TRAINING – Adding to the new starting wage, it would be great if 75% of laid-off employees would return, so you don't have to train them. In any case, a considerable amount of training will likely be a must for new employees. As operators are unlikely to enjoy the luxury of being able to remain closed for one week to train new employees, it is likely they will be required to incorporate on-the-job training. Another argument that initial AUVs will be lower initially to maintain excellent customer experience.
AVERAGE UNIT VOLUMES – Once the process of reopening begins, many restaurants will likely be operating at 40-60% of capacity. It may prove a financial challenge to sustain the return of all former employees at once unless the restaurant's AUV reopens at a sufficiently high level. It could take until 2021 to regain lost sales and traffic.
OTHER INCREMENTAL COSTS - It is a good thing that many of the new sanitary operational procedures will remain in place permanently, but it will come at higher costs for labor and supplies.
