Haig Barrett has been involved in food and beverage for over 20 years helping customers drive operational efficiencies and enabling strategic advantages through our highly experienced industry team lead by longtime beverage industry professional, Jim Pinzino. We’re delighted to present to you our first food and beverage edition of the Next20. It’s a topic that we’re helping our clients navigate in these challenging times. Please get in touch to help your business thrive.
Haig Armaghanian, CEO at Haig Barrett Partners on LinkedIn: https://www.linkedin.com/in/haigbarrettpartnerswithyou/
How has COVID-19 impacted restaurant chains? Who’s winning, who’s losing, and how are they innovating?
Since February 2020, it’s transpired that restaurant chains are no less immune to the impact of lockdown restrictions that have so severely affected many other industries. On the surface, the figures make for grim reading. In both the US and the UK, the year-over-year decline of seated diners in restaurants was a staggering 100% between March 22nd and May 11th, 2020. Data from the analytics firm Statista shows that in the UK, the month of March 2020 saw revenues for restaurant chains drop by 56.4%. What is particularly concerning is that restaurants were only closed for the last seven days of that month. The imminent release of the April 2020 figures is likely to provide some stunning clarity of the scale of the catastrophe facing some restaurant chains as lockdown measures are gently eased on both sides of the Atlantic.
But the calamity has not spread to all sectors of the restaurant industry. Those with best-in-class takeaway facilities have disproportionately profited; as have those who utilised innovation and ingenuity to find new revenue streams and methods of operation. With that in mind, let’s take a look at who has lost out, who has prospered and how the major chains have had to adapt to the current situation.
The Coronavirus Outbreak and Restaurants: Who Has Lost Out?
There are very few restaurant chains that will emerge from the global pandemic unscathed, no matter how innovative their approach has been in response. Even as early as mid-February, Louisville-based Yum! Brands warned of the effect that the total shutdown of many Chinese provinces would have on their global performance. The parent company of Taco Bell, Pizza Hut, and KFC had to close at least 30% of their Chinese locations (over 3,000 restaurants) for a period lasting several months.
However, where fast-food chains have been able to reinvent themselves to some degree, there’s a segment within the restaurant industry that has undisputedly had to wear the crown of thorns as a result of this crisis; casual dining. Already squeezed by changing consumer dining habits before the onset of the coronavirus outbreak, for many chains, this has been the straw that has broken the camel’s back. Headlines appeared first in the UK as household names such as Carluccios and Chiquitos fell into administration whilst Prezzo, Byron Burger, Giraffe, and Wahaca have all called in the advisors to perform emergency surgery on their finances.
Meanwhile, in America, FoodFirst Global Restaurants, the parent company of the Brio Italian Mediterranean and Bravo Fresh Italian restaurant chains, filed for Chapter 11 bankruptcy on April 10th. The company had already closed 71 of its 92 restaurants as a result of the virus outbreak.*? There are many similar stories for regional chains which were big players in their respective states. Popular Florida deli chain Toojay’s, filed for bankruptcy with debts totalling more than $33 million despite the fact that they received a $6.4 million Paycheck Protection Program (PPP) loan along with a further $31 million secured from private lenders. It’s expected that there will be many more casual dining concepts on the chopping block, with Shake Shack and Chili’s already reporting precipitous drops in sales.
With so many restaurant chains hurting, are there any that have managed to use this global public health crisis to their advantage?
Which Companies Are Making Hay Whilst the Sun Shines?
The clear winners are those already positioned as takeaway concepts. As this model has been used by many pizzerias for decades, they have disproportionately benefited. In their last earnings call, Papa Johns revealed that April 2020 was their strongest month in their 35-year history. In North America alone, the global chain witnessed a 27% increase in like-for-like sales, and it seems that the coronavirus has offered indirect benefits too. CEO Rob Lynch commented that only 10% of the sales growth could be attributed to COVID-19 directly, with the remainder attributed to a 25% increase in transaction sizes from existing customers.
Unsurprisingly, another big winner is Domino’s. In the UK, the franchise-based chain has been able to temporarily move past the bitter war with franchisees over profit-sharing to recoup losses incurred in 2019. A critical decision made last year to turn down the advances of major online delivery companies such as Uber Eats to focus on in-house digital solutions has also paid dividends. Just as is the case with Papa Johns, their in-house delivery model has solidified margins and eliminated the threat of being held to ransom over delivery fees. For some restaurant chains, third-party delivery fees have increased by up to a third of the sale price.
While pizza chains have been recording record months, other segments have had to truly innovate to both stay afloat and prosper.
Innovation as a Form of Salvation
For the fast-food and fast-casual restaurant chains, the onset of the global pandemic has created a Darwinist bid for survival over the last several weeks. Almost every major chain has had to close restaurants and rethink their future operations to comply with new governmental guidelines.
Major fast-food players including Starbucks, McDonald’s, Burger King, KFC, and Taco Bell (to name a few) have all had to close restaurants and implement significant changes to how they operate. At time of writing, in both the UK and USA, McDonald’s, Burger King, and KFC locations are reopening on the basis of drive-thru or take out only (depending on the laws of each specific state). Starbucks, on the other hand, is struggling to adapt with so few locations capable of drive-thru solutions. 50% of their US company-operated stores are closed, as well as over 75% in Canada, Japan and the UK. Pizza Hut is another one to switch to takeaway and delivery only, but the costs associated with maintaining much larger restaurant units than their counterparts (Domino’s, Papa Johns) has seen them report an 11% decrease in like-for-like sales during Q1 2020.
The innovation of the restaurant industry hasn’t just been merely adopting takeaway and delivery-only versions in traditional dine-in establishments. We’ve seen a widespread trend for the introduction of online grocery delivery. Panera Bread, for example, has launched a whole new sub-brand named Panera Grocery which allows shoppers to purchase necessities such as milk, eggs, and baked goods through their existing online delivery infrastructure provided via GrubHub. Subway has followed suit at over 250 stores across America.
Other fast-casual chains such as Moe’s Southwest Grill have introduced a Moe’s Market service that allows customers to buy meal kits to create their own versions of the Mexican-inspired chain’s most popular dishes. Fans can also order staple ingredients used in Moe’s dishes. These moves have come hot on the heels of the trend of temporarily-closed restaurants posting videos showing customers how to make their favourite dishes at home, such as the McDonald’s Sausage and Egg McMuffin.
With a period of a “new normal” set to take place over the next several months while scientists find either an effective treatment or a vaccine, those in all segments of the restaurant industry will need to adapt or face falling by the wayside. When it comes to chains, those with significant economies of scale are much better placed to swallow the drain on their cash reserves. A few restaurant chains (such as Toojay’s) that have found success on smaller or regional scales are already collapsing, and the merciless virus will claim at least one additional major player before the pandemic is over (examples of chains on the rocks include Dave & Buster’s, which only has 10 weeks of operating cash reserves left, despite furloughing more than 15,000 staff members). Time will only tell if a proposed $75 million stock liquidation will be enough to keep them on top of a mounting debt pile, which currently sits at $648 million. With that in mind, we also expect an increase in mergers and acquisitions. Those with the ability to weather the storm will look to snap up those who are struggling to stay afloat. For dine-in establishments, innovation is critical, as many consumer habits developed during the pandemic will remain in place long after the return to normality. We’ve seen restaurants in Berkeley, California apply for licenses to extend their dining rooms into the streets to adhere to social distancing rules as an example.
These are undoubtedly challenging times for restaurant chains on both sides of the pond and we’re looking forward to fostering agility in our clients’ thinking, enabling them to be nimble and flexible enough to try new ideas and business concepts in order to quickly access and gain additional revenue streams. For more information about how we can help your business, please connect with Haig Armaghanian, CEO at Haig Barrett Partners on LinkedIn: https://www.linkedin.com/in/haigbarrettpartnerswithyou/