Can restaurants weather the coronavirus storm? There's no easy answer

Here’s my biggest coronavirus concern, as it pertains to restaurants. I think it’s fair to say the vast majority of brands didn’t prepare for this (how could they?). Or they’re scrambling to catch up. But you also have to factor in the reality that many operators couldn’t weather this storm regardless. Broadly speaking, restaurants are low-margin businesses where the smallest external factor threatens the bottom line. It’s a fragile sector. All you have to do is read through earnings reports each winter and see how many operators blame weather for soft sales.

Unlike many industries, restaurants rely almost entirely on consumer movement. Sure, delivery is part of the equation. Yet even that is a steepening slope. Say brands witness a huge lift across off-premises channels as coronavirus fears spread—will that be enough to stay afloat and pay employees? It will likely depend on how much of that business diverts to carry-out (a much more profitable avenue) and whether or not third-party was crippling margins to begin with. Operators often talk about “incremental business” when it comes to aggregators as the saving grace for hefty fees. So what happens when that incremental business becomes your only business?

Side note: This story just broke Friday, and kudos to Grubhub. The company said, in collaboration with the mayors of large cities across the U.S. who are on the front lines of the COVID-19 response efforts, it is temporarily suspending collection of up to $100 million in commission payments from impacted independent restaurants nationwide. Grubhub noted the initiative will provide immediate and substantial cash flow relief to qualified independent restaurants 

The issues are broad and we won’t get into all of them here. But mass event cancellations, to me, are particularly troubling. Firstly, it’s going to dent brands that count on yearly boons, like Austin, Texas, concepts that capitalize on the 150,000 people who flock to South by Southwest. Just think of food trucks. I think it’s also a fair concern to start asking whether or not some food trucks will close temporarily or think about adjusting market strategy. Can they go to populous areas anymore, like office buildings? Are the guests still there? What will people think about getting food in such a direct manner, where the food truck operator literally hands it out the window? Is there a solution for that perhaps, like making sure it’s visible you’re wearing gloves? Or have a place to put the food so guests can just grab it, kind of like the contactless delivery options you’re seeing vendors invest in? Questions aplenty.

Buffets are another topic. According to Datassential, close to 50 percent of 1,000 surveyed guests said they believed visiting a buffet would increase their likelihood to contract coronavirus. That was more than food courts/food halls (45 percent), quick-serves (34 percent), casual dining (27 percent), and fine dining (21 percent).

And what’s truly scary about all of this, is the fact restaurants were already struggling mightily with declining guest counts. A rash of bankruptcies popped up early in 2020 as debt piled up for some. Many chains lamented costly lease problems. Delivery sapping their dine-in business. Or foot traffic moving away from massive venues, like malls, where a bevy restaurants planted their flag in past years.

Additionally, how will all the sports cancellations affect bar and grill chains that were already trying to adjust to new viewing dynamics, where more and more people stay at home and fire up the big screen? The end of March Madness is going to hurt brands nationwide. There’s just no other way to look at it. Even if it hadn’t been cut, would people have wanted to park in a packed bar with strangers for hours on end?

Not to be lost in all of this, we have the political uncertainty of an election year to consider—always a challenge for restaurants.

In sum, this is a very shaky time indeed. And many restaurants were already on unstable footing. Yet like always, some will find opportunity in the downturn. Some will not. It’s simply how these things work. Chipotle is offering free delivery, for instance. So is KFC. Expect others to roll out similar campaigns.

There are too many uncertainties right now to predict black and white what to expect. What we can bank on, though, is a challenging near-term arena that will push brand reputation to the limits. And, like many other challenges of late, there’s a good chance it could sink a number of restaurants. As Warby Parker president Neil Blumenthal once said of the retail crisis in 2008: “It’s not the end of retail; it’s the end of bad retail.”

Will the same be true of restaurants? Only time will tell.

This week, I’ll share three coronavirus pieces I’ve written over the past few days, as well as one from my colleague Rachel Pittman. And be sure to check out our landing page for daily updates.

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Where is the Coronavirus Hitting the Hardest? Full-Service Restaurants

I touched on a few of these issues in the opening. Black Box Intelligence released a special report Wednesday on some early impacts from COVID-19. In the market where the first major outbreak was reported (Seattle), restaurant sales dropped 10 percent during the first week. However, the figure only factors in a day or two of heightened public awareness. Black Box said real impact is expected to be north of 20 percent in lost restaurant sales after one full week. It also found that restaurant spending was shifting away from full-service units to quick-service brands, at least initially.

There has also been an increase in to-go sales in the first market affected. Average to-go sales by restaurant locations jumped 10.5 percent in Seattle during the week ending March 1. Black Box said these shifts appear to indicate that, as concerns for coronavirus continue to rise, guests will likely favor quicker or off-premises dining experiences versus extended sit-down meals where they interact with servers and sit among other guests.

The next update is scheduled for March 17.

What Customers Think About Restaurants and Coronavirus

Datassential surveyed 1,000 U.S. consumers to take a look at how guests are really reacting to issues to date. I’ll focus on one section here. The company asked diners this question: “What would make you more comfortable about dining out in the wake of the coronavirus outbreak?”

Here were the results:

• Regularly/visibly wiping down tables, kiosks, other things people touch: 57 percent
• Employees visibly wearing food safety apparel: 46 percent
• If restaurants handed out disinfectant wipes for me to use: 43 percent
• More food covers/sneeze guards/enclosed cold cases, etc.: 42 percent
• No open containers: 40 percent
• If everything came individually wrapped: 37 percent
• More space in between tables/no communal seating: 36 percent
• No ingredients coming from coronavirus-affected areas: 35 percent
• If restaurants made it so you don't have to touch door handles: 32 percent
• Visible food safety inspection results: 28 percent
• If I could order by phone app: 18 percent

If it were me, I’d do pretty much all of these consumer-facing things. Maybe even dedicate two or three employees to just sanitary practices throughout the day. Basically, clean while people are eating; not at the end of the shift. Let them see you clean. Why not do everything you can to alleviate people’s fears?

February: The Lull Before the Coronavirus Storm

Let’s just focus on some labor-related figures for a moment. A need for employees continues to increase for restaurants relative to the rest of the economy. Per the Bureau of Labor Statistics, employment in foodservice and drinking places has grown by an average of 2.4 percent, year-over-year, for the each of the last five years. The overall employment growth in the economy during the same period has been only 1.7 percent per year.

“That is the net growth in employees in the industry, but of course staffing difficulties include the replacement of all those employees that are quitting their current restaurant jobs,” Black Box said.

Turnover rates remain at historic highs. As a result, the number of unfilled positions in restaurants continues to challenge operators.

Black Box’s Workforce Index reported in Q4 2019 that 38 percent of brands witnessed an increased in the number of their unfilled restaurant hourly positions; 30 percent said the same of management roles.

And remember, this was all before the coronavirus scare.

Here’s How Your Brand Should Prepare for COVID-19

My colleague, Rachel Pittman, dove into this to start the week. It offers some great tips on where to begin. One thing that jumped out to me: “… even without high instances of sick workers, hiring and retaining could be issues in the throes of a coronavirus panic. Foodservice employees are exposed to countless customers on a daily basis, and the human interaction element could be the source of higher-than-usual turnover until the virus is curbed. Furthermore, dropping sales could point to lower wages and, thus, fewer available employees for operators.

“Employees relying on tips as a substantial part of their income will experience a drop in income even when they are allowed to work. This can cause uniquely high turnover in the restaurant industry," Droke says.

Stay safe out there everyone!

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