As the foodservice industry settles into what is the temporary new normal mode of operations, many are starting to turn their attention to the economic impact COVID-19 will have on the restaurant industry.
In a letter to President Trump and other leaders within the Federal Government, the National Restaurant Association projected industry sales would decline $225 billion during the next 3 months. This translates into 25 percent of the $899 billion in sales the NRA projected for 2020. But the NRA feels this type of rapid decline will have a far greater impact on the U.S. economy overall. This decline could result in a $675 billion hit to the U.S. economy because, according to the association, every $1 spent in restaurants generates an additional $2 spent elsewhere in the economy. Moreover, the NRA estimates 5 million to 7 million jobs could be lost.
And the first domino may have already fallen with the announcement that Union Square Hospitality Group laid off about 2,000 workers, or roughly 80% of its workforce, on March 17. “Never could I have fathomed a time where the only path forward would be to lay people off so they can receive unemployment, while this company fights to see another day when we can return to our full staffing levels,” CEO Danny Meyer said in a statement.
On March 13, Union Square closed all its restaurants until future notice. Meyer pledged to donate his salary and the money from a “meaningful pay cut” for his executives to a fund for the company’s employees.
Full-service restaurants represent one of the segments expected to be hardest hit throughout this slow down. For the week-ending March 8, 2020 same-store traffic was down 3.7% at full-service restaurants, 0.6% worse than at limited-service restaurants, according to data from Black Box Financial Intelligence. It’s highly likely those stats will continue to worsen as the market research firms provide additional updates.
A growing number of economists now view a recession as inevitable. In fact, several economists have told Bloomberg they now forecast a 10 percent recession for the second quarter. If this comes to fruition, it will be among the steepest recessions on record.
“This does not just impact independents. It affects operators from all industry segments,” said Karen Malody, FCSI, principal for Culinary Options, an Oregon-based foodservice consulting firm. “This is, in fact, creating a domino effect of economic despair.”
To help soften the impact the NRA has asked President Trump and the federal government to establish a $145 billion restaurant and foodservice industry recovery fund. The association also requested $35 billion for community development block grants for disaster relief, assistance in helping businesses defer mortgage, lease and other loan obligations and a variety of other measures aimed at helping the nation’s restaurant industry.
In addition to the industry asking for help, the franchisees could look to franchisors for relief. For example, McDonald’s announced it is “working with franchisees around the world in order to evaluate operational feasibility and support financial liquidity (e.g. rent deferrals) during this period of uncertainty.” That support could take many forms, ranging from McD’s deferring rents to lowering the royalty fees franchisees pay.
The good news for McDonald’s is that roughly 70 percent of its revenues come via the drive-thru, according to some industry observers. This means the chain remains uniquely positioned to weather this period that emphasizes drive-thru, curbside delivery and traditional delivery or, as McDonald’s refers to it “McDelivery.”
Many state and local governments continue to turn the lights out on restaurant dining rooms one market at a time, while some restaurant operators do so on their own. Either way, the many chains darkening their dining areas and shifting their focus to off-premises consumption in the form of app ordering, curbside delivery and delivery directly to customers continues to grow.
Dickey’s Barbecue Pit now offers curbside pick-up at its locations across the U.S. This is available for customers who order via Dickey’s website or its app from participating locations. One of the largest barbecue chains in the country, Dickey’s entered the fast lane that is delivery game back in 2017. Zaxby’s also went to a drive-thru only style of service, while Barberitos allows customers to request delivery or pickup their orders curbside.
While the restaurant industry sees delivery as an important element in weathering this economic storm, the challenges may be greater than initially realized. One cause for concern, customers’ low adoption rates of third-party, particularly those in older demographics. Only 4% of all consumers 18-24 years old placed a third-party delivery order the week ending March 6 and the percentage was less than 1% for those 55 and older, per data from Black Box Consumer Intelligence. In other words, it’s not just operators that have to change their approach for this to work. Consumers need to as well.
Another chain that reports the majority of the transactions at its restaurants being of the carry out variety is Dunkin’. In addition to closing its dining rooms, Dunkin’ plans to have franchisees immediately remove tables and chairs from all restaurants and outdoor patios to prevent the congregation of customers and reduce hours of operations to provide relief to restaurant employees and to allow extra time for deep cleaning and sanitation processes in the evening. Like other chains, Dunkin’ also plans to encourage customers to order via its app and will even look to expand curbside service using its app at select restaurants. Franchisees are also being given the option to temporarily close some locations in markets where there are other Dunkin’ restaurants nearby.
The transition to these forms of service seems to be unfolding in a relatively orderly fashion. That’s likely due, in part, to the fact that roughly 60% of restaurant companies had already established contingency plans as early as March 13, per data from Black Box Intelligence. One challenge this crisis continues to amplify for operators centers on labor. Already a concern on many fronts prior to the chaos caused by COVID-19, operators continue to report staffing difficulties as a result of the outbreak, per Black Box Intelligence. And about one-third of restaurants were already experiencing staffing shortages as of March 14.
