Large restaurant chains will more easily survive the pandemic

While no company is immune to the coronavirus shutdown, it will likely widen the divide between larger chains and smaller ones, says RB’s The Bottom Line.
Photograph courtesy of The Wendy's Co.

The Bottom Line

Recent years have brought about a shift in the restaurant industry favoring the largest of restaurant chains.

While the biggest chains, from McDonald’s to Little Caesars, have been more likely to enjoy sales growth, smaller and midsized chains have been just as likely to collapse as they were to grow.

It makes sense. Large chains have the marketing muscle to break through the advertising clutter. They also have funds to improve their convenience and size to ink favorable deals with third-party delivery providers and other vendors. They have the finances to fund cool things such as artificial intelligence and automated beverage dispensers.

In the words of Wendy’s CEO Todd Penegor, “Scale matters.”

That has never been truer than it is right now. In fact, once the coronavirus dust settles, the largest restaurant chains will emerge with an even more dominant position than they’re in now.

There are some really big reasons for this.

First, large chains have the financial wherewithal to make it through this period.

The biggest way to determine the chances of a restaurant company, or any company, getting through the shutdown is cash. The longer a restaurant company can go with a dramatic reduction in sales, the more likely it is that the company will get through the period intact.

The larger brands generally have access to more cash. Because they are in better financial condition, they have access to credit lines they can tap to get through this period.

Midsized companies are more likely to be owned by private-equity groups, meanwhile, that use aggressive financial strategies such as debt and sale-leasebacks, leaving them little room for error. That means they’re automatically more likely to fail, as we saw with last week’s bankruptcy filing by FoodFirst Global Restaurants.

More fundamental is that large-scale chains were already set up to serve customers in the current shutdown.

Cast aside for a moment the fact that most of the largest restaurant chains are fast-food companies with drive-thrus or pizza chains doing a lot of delivery, though that is certainly a factor.

Larger casual-dining chains such as Olive Garden, Chili’s Grill & Bar and The Cheesecake Factory have in recent years spent millions of dollars to establish their takeout strategies. It’s been working, as all three have strong takeout businesses.

While takeout is certainly not coming close to making up for their lost sales, it is extending their lives. More sales means less cash burn, and less cash burn extends their lives. Companies doing less takeout, by nature, are burning more cash.

And then there is the relationships with third-party delivery, which might be an even larger factor at the moment.

Small and midsized chains, along with independents, have less favorable deals with third-party delivery providers than do large-scale companies, such as McDonald’s and Yum Brands. While many of these chains are inking deals with more providers and are advertising free delivery and other deals, small chains and independents have been left out.

Instead, as my colleague Heather Lalley has pointed out, tensions between independents and delivery providers have only intensified since the shutdown began. Many are turning to local governments for help on their delivery commissions. Some are abandoning delivery altogether.

None of this is to say that large chains are somehow immune to all of this. In particular, heavily franchised chains could find themselves dealing with badly struggling franchisees, many of whom were in bad shape to begin with, given operating conditions.

And there are plenty of large chains that used aggressive financing tactics and will now be looking for ways to get through the shutdown.

Nevertheless, even after the shutdown, expect the big to keep getting bigger.  

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