Restaurant Industry Winners & Losers, Risks & Opportunities

By: Carty Davis
Published: September 9th, 2020

The past eight months have been one of the most challenging times for the restaurant industry in recent memory. Whether you are an operator, franchisee, franchisor, capital provider, or advisor, the roller-coaster ride continues. Just when the economy and the restaurant industry began to reopen, many states began seeing a second surge in Covid cases, which led to countless rule changes and opening delays that have varied across the country.

Nevertheless, winners and losers are emerging within the restaurant industry, as well as within real estate and finance. Smart operators, investors, and brands are looking at a post-Covid landscape with a new lens. Those who were able to successfully navigate the pandemic are now positioning their brands and companies for growth in a post-Covid world where the drive-thru has proven indispensable, and brands that were fully digital-ready and able to maintain consistent and constant contact with their customers rule the day.

Brands with efficient off-premise platforms and those able to maintain profitable operations at lower sales volumes have an edge over the competition. And as the landscape settles, brands and operators must take advantage of growth opportunities by focusing on liquidity, real estate, financing, and staffing.

• Liquidity. Preserve and maintain as much liquidity as possible. Now more than ever, cash is king. Ensure maximum forgiveness of PPP loans. Take advantage of other government relief programs such as the EIDL loans for smaller operators and the Main Street program for larger operators. Work with lenders on longer-term, interest-only facilities or restructure credit facilities altogether if business conditions have not improved. Evaluate expenses with a focus on discretionary spending, service contracts, and consider hiring third-party firms specializing in expense reduction.

• Real estate. Close unprofitable or marginal restaurants. Tier 1 brands such as Dunkin’ and Burger King are accelerating the closures of hundreds of locations as they recognize that these closures strengthen their franchise base and enable their franchisees to reinvest in profitable locations, evaluate new development opportunities, and maximize cash flow. To maximize returns for all stakeholders, operators should be reinvesting in their best restaurants and trade areas. There simply isn’t a seat at the table for marginal trade areas and locations. Unit growth to appease Wall Street is over. Smart, profitable reinvestment will guide high-performing brands and franchisees to the post-Covid winner’s circle. Independent brands are closing at an accelerated pace. Prime real estate locations that would not ordinarily be vacant are becoming available in many markets. For restaurants without drive-thru windows, brands are getting creative on engineering drive-thru sites where possible, and on expanding with a focus on the drive-thru.

• Financing. Winners and losers also are emerging within the capital and lending markets. The landscape going forward can be viewed as a traffic light. Green: Capital providers that see Covid as an opportunity to increase market share in targeted brands and industries. While the credit parameters have tightened, some capital providers are back to approving new opportunities for new and existing borrowers. Yellow: Capital providers that are proceeding with caution. This next tier of lenders is selectively reviewing existing borrowers and supporting creditworthy franchise groups operating in existing brands and regions. Only loans with solid credit parameters are being funded. Red: Capital providers with significant stress in their existing portfolios will be on hold for the foreseeable future, if not exiting the franchise finance vertical completely. Whether they had excess exposure to an underperforming brand or region, their existing portfolio needs help, and they are not open for new business. While unitranche and non-regulated lenders can, and will, fill some of the regulated lender void, this will be an evolving period for the finance industry. As franchisors ramp up development, conversions, and remodeling programs, franchise owners must have a predictable source of debt capital. For operators, this is an opportune time to review your lender relationships and ensure your existing lender can, and will, accommodate your future needs. If you are uncertain how your lender views new capital requests, start asking. How will your lender deal with covenant defaults? Will previously accepted adjustments and assumptions be allowed going forward? Will you still have access to development lines of credit? The answers (or lack) to these questions should help guide your plans moving forward.

• Staffing. The restaurant industry has been, and always will be, a people-driven business. Growth and success are dependent on hiring and retaining the best talent available, and the current environment is an ideal time to upgrade staff and key management positions. Start using benchmarking tools to identify the best employees. Use these tools to improve hiring and retention. Evaluate your key staff members. How did key employees perform in a different operating environment with less face-to-face interaction? Business practices are evolving. Ask yourself whether current top performers will be the same in the future. Where do you need to invest in people resources in a post-Covid world?

Conclusion

The unprecedented nature of the pandemic has forever changed the franchise and restaurant landscape. Still, our industry is full of hard-working, nimble-minded professionals who continue to innovate and figure it out. As the reset evolves, our industry will emerge stronger and more resilient coming out of Covid, especially for the stakeholders who anticipate, adapt, and proactively manage their businesses for the new realities of the Covid and post-Covid world. Our advice is to focus on the future and put your company in a position to grow. 

Carty Davis is a partner with C Squared Advisors, a boutique investment bank that has completed hundreds of transactions in the multi-unit franchise and restaurant space. Since 2004 he’s been an area developer for Sport Clips in North Carolina with more than 70 units. Contact him at 910-528-1931 or carty@c2advisorygroup.com.

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