Growing coronavirus cases pose a big threat to restaurants’ recovery

A pullback on reopenings and public fears about the virus’ resurgence could be a lethal setback, says RB’s The Bottom Line.
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Bottom line

The coronavirus is making a summer return to Americans’ collective nightmares. In recent days, the virus has surged in places like Texas, Arizona, Florida and California. Some state and city leaders are beginning to pull back on reopenings.

The resurgent virus is somewhat surprising, given that it was anticipated back in March that a couple of months’ worth of shutdowns and warm weather would give us a reprieve from its spread. Instead we have a comeback.

For the restaurant industry, the prospect of a resurgent virus is a potential death knell. While fast-food sales have all but recovered, concepts that rely on dine-in service are still far off a full recovery.

A resurgent virus over the summer would make things invariably worse, and it might not matter whether states re-close dining rooms or not.

Even if the industry were to fully recover all of its sales gradually over the course of what’s left of 2020, most companies would emerge financially weakened. Chains borrowed heavily to hoard cash to get them through the shutdown. Small chains and independents are closing by the dozen. Those that remain are surviving on what sales they can get and their Paycheck Protection Program loans.

Even with states reopening dining rooms, several thousand restaurants will not resume dine-in service.  Estimates on how many independents are expected to close are frightening. We fully expect a rash of chain restaurant bankruptcies this summer and fall as lease payments come due and private equity firms opt not to increase their investments.

Now pile on top of this a summer in which dining room closures return and it’s impossible to imagine the challenge facing the industry.

To be sure, states do not appear eager to re-close their economies following a reopening, and the simple fact is the economy cannot handle another shutdown. But I’m not sure it matters whether they shut things down or not: Major increases in the virus’ spread could well result in a virtual shutdown as consumers opt to stay home.

A virtual shutdown may well be worse because the breaks that many restaurant companies received back in March may not be there this time around. Force majeure clauses in insurance claims will not be relevant. Lenders and landlords will be asking for back loan or lease payments from companies that do not have the revenue to make them.

The industry is in many respects far more prepared now than it was a few months ago. One of the positive elements of the coronavirus is that it forced companies to develop the takeout strategies they’ve been putting off. They’ve readjusted their businesses and learned on the fly how to deal with these things.

And consumers know better how to deal with it, too. For all of the problems industry sales have been increasing weekly since early April.

Still, a virus resurgence remains awful news, and even the most remote prospect of a return to shutdowns is an awful scenario.

For restaurants, this simply adds to the need to take the necessary steps to prevent the spread of the virus: Keep employees wearing masks, use plexiglass barriers liberally and enforce social distancing. Maybe consider requiring customers to wear masks while they're not eating. And by all means stop crowding customers inside bar areas. 

Though these steps are complex and expensive, it’s better to have a restaurant filled with masks and plexiglass than one that is closed.

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