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Restaurants continue to face grim prospects as they shift business to off-premises, ask for government assistance

Overall sales declines continue while the economics of an all-takeout business not adding up

The outlook for restaurants appears to be getting grimmer during the COVID-19 health crisis. According to a survey conducted by the National Restaurant Association, 11 percent of restaurant owners expect to close units during the coming weeks. For an industry that already lost 3M jobs in March, it is bracing for another 5M to 7M lost jobs over the next few weeks. And according to projections published by Joe Pawlak, managing principal of foodservice consultancy Technomic, in 2020, the broader foodservice industry could lose as much as 27.5 percent of its sales on a nominal basis compared to last year. And much-needed small-business lending has gotten off to a rocky start due to application process problems and near-certain over-subscription of funds available within the Paycheck Protection Program.

As restaurants shift to off-premises business, the inequities of third-party delivery fees, and third party’s lack of sustainability (fees typically range from 25 to 30 percent) for an industry with already-thin margins, has further hampered restaurant chains and independent restaurants. Clearly, there is a weekly threshold at which point consumers will no longer accept the higher prices of third-party delivery, and the willingness to trade off groceries (home-cooked meals) for restaurant food. As an example, for the week beginning March 29, Technomic reported that the number of consumers that expect to order more food for delivery remained unchanged from the previous week at 38 percent.

As chains shift to off-premises, sales plummet; small opportunities surface

However, there is still room to grow off-premises restaurant business. According to the consultancy, its analysis has seen an uptick in takeout and delivery orders. During the week beginning March 29, for example, fast-casual and casual-dining incidence of takeout, drive-thru, and curbside has increased to 57 percent from 49 percent in each segment. For delivery orders in the same time period, casual dining has seen incidence increase to 49 percent, from 40 percent. In fast casual, from 41 percent to 46 percent.

Darden Restaurants is seen as a restaurant company that’s a barometer within the industry. However, the operator of several casual-dining brands, including Olive Garden and Seasons 52, is experiencing the same industry-wide issues. The company recently provided these preliminary comparable sales figures for its last six fiscal weeks, starting with the oldest week: 3.0 pct, (0.2) pct, (20.6) pct, (75.2) pct, (74.9) pct, and (71.2) pct. The result was a fiscal fourth quarter-to-date decline of 39.1 percent in comparable restaurant sales through April 5.

Its Olive Garden chain saw comparable restaurant sales drop by 34.5 percent. By comparison, Olive Garden posted a 0.5-percent comparable sales increase as of February 23, the end of its second quarter and before many of the stay-at-home orders were implemented across the country. Darden’s fine-dining brands had dropped 47.5 percent in comparable sales.

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The company furloughed some support center team members and also instituted reduced pay for remaining corporate staff. Senior executives took a 50-percent pay cut and Chief Executive Gene Lee said he is going without pay at the moment. Darden furloughed about 20 percent of its corporate staff, according to NRN. Rick Jeffers, a Darden spokesperson, told NRN that furloughed employees would receive 50 percent of their pay for three weeks.

Surprisingly, Darden Restaurants has closed only about 18 units. However, due to the massive sales drops, it has furloughed 150,000 hourly workers, notes NRN. Also,the company reported in a statement that It had used a term loan to draw another $270M for its cash balance and has reduced non-essential spending.

BJ’s Restaurants laid off 16,000 workers, according to the Associated Press. One of the more resilient chains, The Cheesecake Factory is painting a rosy picture, but all may not be coming together. Executives reported the company has pivoted well to an an off-premises-only business model, but Cheesecake Factory restaurants are averaging $3M per unit in proforma annual revenue, which is a far cry from the $10.7M average unit volume they posted last year when they had dine-in service.

According to preliminary figures, The Cheesecake Factory will post a 13-percent comparable sales decrease in its first quarter of 2020, after plummeting 46 percent in March alone. The Calabasas Hills, Calif.-based polished casual-dining chain has closed 30 restaurants, including three namesake units.

Independent restaurants ask for more help

Independent restaurant owners are at even more risk, as restaurants across the country continue to shutter and would-be customers shelter in place. Estimates from the national Restaurant Association puts that number at around 3 percent of all restaurants thus far. Restaurant owners have looked eagerly to the Paycheck Protection Program as a lifeline. The Administration and Congress intended the program to provide up to $349B to small businesses. However, both oversubscribed demand and lack of clarity on regulations had made it harder for the smallest of businesses to access the funds. Meanwhile, restaurant companies with up to 500 employees per location can apply through approved lenders, which should provide helpful to struggling, large restaurant chains and franchisee groups.

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As the Treasury looks to infuse another $200B, according to a report from The Washington Post, independent restaurants continue to seek more relief. In an attempt to improve the Paycheck Protection Program, a coalition of independent restaurant owners has sent a letter to House Speaker Nancy Pelosi, Senate Majority Leader Mitch McConnell, Senate Minority Leader Chuck Schumer, and House Minority Leader Kevin McCarthy. The letter addresses the forgiveness period of the Paycheck Protection Program loans, which has become a major issue. The coalition asked for the forgiveness to be extended to up to three months after restaurants are operating at full capacity again; the initial forgiveness period of two months is not sufficient given the current COVID-19 health crisis.

Among other requests, the coalition also asked for the reinstatement of a $500B cap on gross revenues for applicants, which was part of original guidelines. Furthermore, it is requesting the loan repayment period to be extended to 10 years—part of the original CARES Act framework initially established—from two years.

Restaurants across the country are reeling. Hope may be on the horizon, but will it be too late? As a silver lining, state health data has started to suggest a reduction in new hospitalizations for COVID-19, supporting a possible flattening of the epidemic curve. In the meantime, restaurants are operating at major losses as much of their businesses shift to unprofitable sales, weather due to excessive third-party provider fees, severe drops in revenue and/or the operational and logistical challenges and costs related to running as delivery & pickup-only businesses.

Photo credit: Amel Majanovic

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