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 outlined 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. During the quarantined period the restaurants are more or less hibernating. In phase one the cash burn will be greater for the casual diners and the challenges multiplied.
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THE BULL THESIS:
“They will all (Big cap restaurants) will lose a substantial amount of sales during shutdowns, they will likely gain digital and delivery market share during this period, and will thereby emerge stronger from the crisis.” -Hedge Fund Letter
By owning the well-capitalized, efficient operators, investors can own the survivors that will have a less competitive industry in the future. Restaurants will not go away, but concepts will have to adapt to survive. Less competition.
OUR THESIS:
I agree, but you are early! What you are underestimating is depth and length of the decline, combined with significant leverage in the system. In addition, regulatory (health-related issues) will make coming out of the more challenging and will add incremental costs. Lastly, increased digital sales will not off-set the decline in in-store sales, leaving average unit volumes 10-15% below peak.
The industry was not prepared for a crisis of this magnitude!
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 Black Book, we took 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 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 addressed on the call:
- How will the country reopen?
- Supply shock recession.
- Industry capacity.
- limited menus.
- How will the consumer respond?
- Consumer surveys.
- labor pressures.
- Industry sales.
- Increased training.
- Average unit volumes.
- Other incremental costs.
