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Restaurants should brace for a grim spring

As local governments take steps to limit the coronavirus and sports teams cancel games, the industry faces a dramatic downturn, says RB’s The Bottom Line.
Photograph by Jonathan Maze

The Bottom Line

This is going to be a tough spring for the restaurant business.

Every major professional and college sports organization canceled or postponed seasons and tournaments Wednesday and Thursday, hoping to slow the spread of the novel coronavirus that is now a worldwide pandemic.

Broadway went dark. Major concerts were called off or postponed. That came after large events and conferences around the country were delayed or canceled, including those that had a major impact on their communities and the restaurants in them, such as South by Southwest.

For much of the country, this has been a surreal moment, a realization that our lives are going to be dramatically different. We will be spending a lot more time at home, working on our sofas or taking online courses.

For the restaurant industry, this is a potentially serious problem. All of these people staying at home—not going to work, not attending sporting events, not going on business trips—means restaurants are not getting the foot traffic they need to stay in business.

That means they’re in for a brutal few weeks. And many are not prepared for it. They likely have too much debt, costly leases or thin margins. Probably all the above.

Consider what may well happen to a lot of bar and grill chains, which have been among the hardest hit over the past few years as consumers shift many of their dining visits to at-home occasions.

Many of these concepts relied heavily on the NCAA men’s basketball tournament to bring in groups of customers gathering together to watch a few games. Now they face a March with no Madness, meaning that occasion just vanished.

Restaurants near baseball stadiums around the country now face an opening day without the rush of customers they typically get before and after MLB games. NHL fans won’t be crowding their favorite bars. NBA fans won’t be grabbing a quick bite on their way to a game. None of them will be watching those games at a sports bar.

While movie theaters have yet to close, that seems all but inevitable, and already many major movie studios have delayed important movie openings. Many restaurants rely on movie crowds for a surprising amount of business.

And many restaurant chains have already killed off or altered important annual marketing events.

Blaze Pizza called off its Pi Day offer of $3.14 pizzas inside of its restaurants, shifting it to a mobile order deal. Ben & Jerry’s isn’t giving away ice cream this year.  

There are opportunities, of course. Pizza delivery chains seem destined for a short-term boost in sales as customers opt for delivery. And pizza remains one of the best values in the restaurant business.

Chipotle Mexican Grill is already taking advantage, offering free delivery all month. Companies such as Jimmy John’s and Dickey’s Barbecue Pit are implementing contactless delivery. Chains with drive-thrus can expect plenty of business through those windows as customers avoid touching anything other than their bag of burgers.

Yet it’s difficult to look at the next few weeks and not see steeply declining sales and with them closed restaurants. Chains in China were hammered after that country’s draconian steps to limit the spread of COVID-19.

Restaurants in South Korea and Japan were also hit hard, with sales falling 50% or more in many cases and some locations shutting down altogether. Restaurants in Europe are already facing similar challenges.

As my colleague Heather Lalley reported yesterday, restaurants in Seattle are closing either permanently or temporarily as traffic plunges. Black Box Intelligence said this week that same-store sales in that market are likely down 20%.

But restaurants in places such as San Francisco and New York are already seeing empty tables as people stay home. As outbreaks spread in more communities, that seems likely to become commonplace around the country.

Just eight days ago, before all of this happened, we looked at the industry landscape, particularly the one for full-service restaurants, and saw a potentially bleak future.

Many restaurant companies loaded themselves with debt over the past decade in buyouts or expansion strategies or to pay themselves a fat dividend. Others agreed to ridiculous lease deals in the name of expansion to satisfy their private-equity sponsors’ thirst for growth at all costs.

Franchises sold off thousands of restaurants to franchisees who borrowed heavily to buy them, then borrowed heavily to remodel them and borrowed heavily to build more units to satisfy franchisors’ demands for growth.

The result is a generation of companies that are ill-prepared for the shock of weak traffic and sales that are likely coming.

Customers working from home, not watching sports, not going to events and potentially not earning a paycheck are brutal for an industry that needs people out and about, enjoying their day-to-day lives.

It will be particularly brutal for restaurant companies that left themselves no room for error.

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