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John Gordon - September 2020



Foundational Elements for Restaurant Recovery

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

Now six months into COVID-19, the diversity of the restaurant industry shows clearly. Some restaurant brands, mainly some chicken and pizza QSR brands have stronger sales trends today than they were before March 12, due to menu and to their operating model strengths. Others, in the sit-down segments such as chain casual diners and fine diners, are working greatly, some doing well, others doing their best, and building for tomorrow. Many independents have been swamped and are down, with the National Restaurant Association reporting this week $165 billion in sales loss March through July 2020, with 100,000 restaurants, potentially closing this year.<1>

Chains have generally done an excellent job of reacting in the short term. However, there are longer-term deferred needs and now emergent required investments, some of which that affected the industry for years before 2020, have to be worked over time, to build a solid foundation for growth. after the initial COVID wave hits.

I’ve assembled a commonly mentioned actions and investment themes list from my analysis and engagements, conversations with clients, and other operators and experts. The list has to be prioritized by each brand’s circumstances; not all factors apply equally to every brand and location. Some apply to every brand.

Restaurant Recovery Elements

  1. Solving the cost and low customer sentiment problems associated with third party delivery.

  2. Invest in restaurant Concept and Product development HQ function no matter whether a brand is mostly company or franchised.

  3. Finding a replacement for the bar in the sit-down space and the sales, profit, energy, and staging area that it provided.

  4. Adding pickup windows, popup drive-thrus, and other access features.

  5. Add attached patios, and outside dining among other features. <2>

  6. Enhance to world-class HVAC systems to promote safe air circulation.

  7. Divest debt; reengineer the M&A process to remove leverage and risk.

  8. Find ways to lower store lease costs.

  9. Migrate units out of central business districts and out of weaker malls.

  10. Get serious about human capital beyond lip service.

Comments

These are all needed investments in time, energy, focus, and funds to varying degrees. Some of the initiatives have been underway forever, such as finding ways to lower lease costs. But post COVID-19, with lower demand in some segments likely for a time, there is renewed urgency. Operators and observers know, rents have formed a painful bubble in the last 10 years and the only way to burst the bubble is via strategic closings and dark locations.

Several of these factors, including relocating out of central business districts and out of weaker malls, adding pickup windows, and implementing enhanced HVAC systems are CAPEX funding intense. Significant new funds will be required, but short term and long-term ROI can be seen resulting from these investments. Relocating units will take lease payoffs. Supreme coordination of effort between asset-light franchisors and debt heavy franchisees who have borne the bulk of operating risk since March 2020 has to be recognized.  Honest guidance to security analysts and investors that the industry’s post COVID growth paradigm will be on a different curve than the 2010-2019 cycle seems smart.

The Human Capital equation will always need work, particularly with only one company, Cheesecake Factory, routinely named to the Fortune ”Best to Work For” list and only one restaurant CEO, YUM’s David Gibbs, named to the Wall Street Journal’s most influential business leader group.<3> We have far more good leadership going on than what is represented. The trick is to get the best leadership practice to the unit General Manager, whether it be a company or franchisee operated location.

To be sure, there are potential positive developments that will eventually emerge from this most difficult of times. Landlord reps have admitted in several venues that asking rents will eventually fall. In the M&A world, lower price multiples paid for companies imply lower debt service. Both of these positive effects will take time to unfold, and like everything in life, will take moderation and discipline for us in the restaurant world to fully enjoy.

I’ll discuss these factors in more detail over time in future columns, with fresh perspectives and learnings.

About the author:

John A. Gordon is a long time restaurant veteran with 45 years of restaurant operations, financial management corporate staff, and management consulting experience. He founded Pacific Management Consulting Group in 2003 to work complex operations analysis, financial analysis, and strategy engagements for clients. He can be reached at jgordon@pacificmanagementconsultinggroup.com, office (858) 874-6626, website, www.pacificmanagementconsultinggroup.com.

<2>    Restaurant Business Online, Coca-Cola Consumer Study Referenced, September 15, 2020.

<3>   Wall Street Journal ad, September 15 2020.

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