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Shakeout and takeout usher in new realities for full-service chains

The crisis has been a catalyst for righting supply and demand while also proving QSRs don’t have a hammerlock on off-premise.
Photo illustration by RB

This is the second story in a five-part series examining the long-term impact of the coronavirus pandemic on the restaurant industry.

The full-service chain segment was heading for a reset before the first dining room closed because of COVID-19.  The pandemic just took off the brakes.

The sector is morphing into a leaner marketplace of takeout and delivery kitchens with a smattering of tables between the front door and the bar. Sit-down operations may have been dragged squarely into the off-premise market by social distancing, but many are realizing there’s no reason to backtrack once dining rooms are permitted to reopen.

In pre-COVID-19 days, “we only did 9% in takeout and maybe 2% in delivery,” says Chris Elliott, CEO of the 150-unit Beef ‘O’ Brady’s sports bar chain. “But now all of a sudden everything we’re doing is aimed at off-premise, and it’s working. We just sort of stepped back and said, ‘We need to come out of this as experts in this part of the business, and we’re not going back.’”

Newfound appreciation of takeout's potential has been voiced by a host of chains. The Cheesecake Factory said its restaurants now stand to generate $3 million each in annual off-premise business, the result of an 85% jump in volume over late 2019 levels.

Almost simultaneously, Darden Restaurants revealed that a typical unit of its Olive Garden chain had seen a 162% rise in takeout and delivery, to a weekly average of $39,133, or more than $2 million on an annualized basis. 

To capture more delivery business, Darden dropped its long-standing refusal to cart orders under $75 to homes and businesses or to let a third-party service handle that process. It now has a self-delivery operation in place for its brands, which also include LongHorn Steakhouse and Cheddar’s Scratch Kitchen.

Yet even with the upswing in off-premise, Olive Garden’s same-store sales for the week ended April 5 were running about 60% below the levels of a year ago, a reflection of how the coronavirus pandemic has flattened demand. Bloomin’ Brands’ Outback Steakhouse chain saw its takeout sales triple, and yet same-store sales had declined more than 50% by the second week of April. 

Outback Steakhouse sales fall, but takeout surges

 

Source: Outback Steakhouse

 

But traffic had been an issue for most of the full-service segment long before “coronavirus” entered the popular vocabulary. It was an article of faith that overbuilding had pushed the supply of full-service options way out of whack with the demand for places to have a sit-down meal.

Ironically, observers expect the crisis ultimately to bring down the ratio of seats to customers, with the correction clearly coming on the supply side.

Concepts and locations weakened by what many read as a glut of capacity are clearly being starved out of business. “If you had significant weaknesses as a brand, if you were in bankruptcy or close to it, you’re probably not going to survive this,” says Elliott. “Marginal locations and marginal operators in any concept are not likely to make it.”

A case in point: FoodFirst Global Restaurants, parent of the Brio Italian Mediterranean and Bravo Fresh Italian casual chains. The company was already contending with unacceptably high occupancy, labor, food costs and debt service when a new CEO was hired. The newcomer, Steve Layt, had lined up a refinancing—days before states started shutting down dining rooms because of COVID-19.  Instead of proceeding with a restructuring, the company filed for Chapter 11 bankruptcy protection

“The COVID-19 outbreak truly could not have come at a worse time for our business,” Layt said in a statement. “The mandated dining room closure orders wiped out 60% of our restaurants within days, and since then, we have experienced nothing short of devastating sales declines.”

“If you had significant weaknesses as a brand, if you were in bankruptcy or close to it, you’re probably not going to survive this. Marginal locations and marginal operators in any concept are not likely to make it.” —Chris Elliott, Beef ‘O’ Brady’s

Closings have become more of a norm than an exception for chains of all sizes. 

CraftWorks Holdings, parent of the Logan’s Roadhouse and Old Chicago casual chains, has “mothballed” all 261 of its restaurants and fired employees previously designated as merely furloughed. Operating under Chapter 11 bankruptcy protection, the holding company said it was unable to borrow working capital to stay in business.

Seventy-three-year-old Luby’s has shrunk from 111 restaurants across three brands at the start of the pandemic to just 37 units as of its last securities filing.

Red Lobster and P.F. Chang’s have not revealed how many units have closed because of the pandemic. But the credit ratings of both have been downgraded by the major ratings agency because of earlier financial issues being exacerbated by the crisis.

In addition to whole outlets disappearing, dine-in capacity is likely to be reduced by a need to keep customers and employees farther apart, the result of lingering concerns about viral contamination. Instead of packing tables together, full-service chains are likely to cut down their number of seats and spread them farther apart to reassure jittery customers.

“Make sure there is good enough space for them to dine in,” Lu Lu, an assistant professor at Temple University’s Department of Tourism and Hospitality Management, advises operators.

Employees may also push for more space between stations, to lessen the chances of interstaff contamination, says Lu.But don’t expect those concerns to lessen the importance of the bar to casual operations, says Elliott of Beef ‘O’ Brady’s.

Like a number of concepts that were licensed to sell alcoholic beverages, his charge has taken advantage of state restrictions being eased on the sale of beer, wine or spirits for takeout and delivery. Beef ‘O’ Brady’s sells a big container of premixed cocktails for $50 each, and sales have been brisk, Elliott says. Some have suggested that states will keep those measures in place after the pandemic because few problems have been reported from the change. But Elliott is doubtful that states will permanently loosen their grip. And he doubts the demand will persist in any case.

“I guarantee you that those people ordering alcohol to go would rather sit in a bar and have a few drinks with friends while they watch sports on TV,” he says.

Scott Lawton, co-founder of Bartaco, agrees that people still want that third place to decompress outside of home and work. “We have certainly made some improvements to our takeout menu and how it is executed, but I think people will always want to go out and have an experience as long as they feel safe,” he says.

Also yet to be determined: Whether full-service chains will retain the meal kits and family meals many developed on the fly to maximize off-premise business after supermarket shelves were emptied.  

But Elliott is already convinced that his and other chains will not keep a foot in the grocery trade after dining rooms are reopened. Operators of 20 Beef ‘O’ Brady’s units have started selling supermarket staples, to considerable success, he says. But that’s a whole new business, with its own peculiarities and challenges.

“If the business ramps back up to an order of normal, I think this will fade away because we will have our hands filled running our dining rooms and kitchens,” Elliott says.

“Creating a great vibe and safety for our guests will be what guides our decision-making and what changes are temporary versus permanent,” says Lawton of Bartaco, “and I think that is very likely for a lot of other restaurants as well." 

How the coronavirus will change the restaurant industry

Sunday: Why the coronavirus shutdown will upend delivery services for good

Today: Shakeout and takeout usher in new realities for full-service chains

Tuesday: Will mom-and-pops survive this?

Wednesday: How the coronavirus will change menus

Thursday: With survival on the line, expect restaurants to plan for the impossible

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