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John Gordon - April 2021



Restaurant Reality 2021

by John A. Gordon, Principal and Founder, Pacific Management Consulting Group

Our industry depends on people having money and moving around

Economic conditions are moving along nicely right now. After many downs and some ups in the COVID year, both QSR and the sit-down space are moving along—not perfectly in the casual dining/fine dining space, but better. Several things are happening now that are finally showing a broad-based sales lift—not versus 2020 which we know now is a very flawed base, but 2019, which is more realistic. Consider:

  1. Economic stimulus payments flowing into the economy.

  2. Better weather and “spring fever”.

  3. Vaccinations clearly on the rise, reaching critical mass soon.

  4. Documented improved consumer confidence in dining out.

  5. Tourism and non-business related travel up.

Looking ahead, I’ll be watching for any sales fall off after the $1400 stimulus is spent out, and the typical May-July US restaurant seasonal appear. Also, movie, special event and sporting event attendance, business conventions, and business travel are essential drivers to the wellness of the rest of the industry.

Labor Shortages, Capital Spending, Store Economics: Everything Relates to Everything Else 

With the surge of business underway, operational conditions in many units have gotten difficult. Difficulties have been building for some time, but staffing levels have fallen to be critically short since early this year. Employees leaving such a up and down industry as ours, parents not letting their kids work in restaurants, better unemployment terms than working, and difficult work conditions manning a restaurant shift with so few employees (read that as really hard work) are all taking a toll. Even the New York Times has taken note.<1>

What is vital right now is that restaurant brands and especially franchisors double down on efforts to customize remodel and new unit location specifications to the actual conditions and economic realities that now exist. I note especially “especially franchisors” because the primary company-operated brands can change their capital spending mix more quickly, “on a dime”;  while changing franchisee capital spending plans takes longer.

With this labor shortage and the likelihood of more wage rate driven action because of market or governmental actions, many restaurant brands have taken action to simplify menus and operations within the four walls. At the same time, there is a need for more outside and less inside restaurant space. Sound crazy? Yes, but that is reality. In many markets, guests want to eat outside but the 1970s-1980s footprints didn’t allow for that. This is exactly the time to do the double drive-thrus with reduced seating if you are a QSR; it holds down the CAPEX and staffing at the same time. Yet an international franchisor recently told a client of mine that the program was not available to him for some reason. Petty bureaucratic mess-up?  Perhaps.

Capital efficiency measurements such as sales to investment ratios are critical in our business. Others like simple payback, cash on cash return, and NPV analysis likewise so. More investment monies are lost on missing these metrics than missing several points on food or labor costs. Once the building is built     ( burden 1) and the debt service is locked in (burden 2) it is the most fixed of expenses and really adds up.  Anything to reduce the burden is welcome. In my opinion, a 1 to 1 sales to investment ratio is not good enough anymore with higher construction costs and operating costs, I’d think 1.5X is necessary now.  This is the time to fix store footprints throughout the industry.

Forward Looking

My friends at Restaurant Research noted in their TrafficCast that consumer plans to dine out increased 28.5% year over year over the next 4 weeks, one of the strongest absolute results ever. Hat tip: @RRupdates. However, food at home CPI (basic food inflation) is on an upward march throughout the balance of FY-21, due to proteins. A close watcher of cable TV noted that Burger King earlier banging on a $1.00 menu for some reason, has now reverted to buy one sandwich and get a second for $1.00. The astute restaurant observer @McD_Truth noted BK was the only national brand blasting at such low price points at such a surge in business.

About the author:

John A. Gordon is a long time restaurant veteran with 45 years experience in restaurant operations, financial management corporate staff roles, and management consulting roles. His consultancy, Pacific Management Consulting Group, was founded in 2003 and works complex operations and financial analysis engagements for clients.  He can be reached at 858 874-6626, email jgordon@pacificmanagementconsultinggroup.com.

<1>   As Diners Return, Restaurants Face a New Hurdle: Finding Workers, New York Times, April 8 https://www/nytimes.com/2021/04/08/dining/restaurant-worker-shortage.html?smid=tw-share

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