By John A. Gordon, Principal and Founder, Pacific Management Consulting Group
We are all hoping now to get to “the other side” of this brutal pandemic that has impacted us all so unfavorably. While confusion and the “fog of war” are still present, there are some encouraging signs.
For one, medical theory and technology are at the foremost point of development in mankind to allow for the development of an antiviral vaccine. We can reasonably assume a drug will be developed to beat this virus.[1] Not surprisingly, such drug development was the number one wish list factor cited by a series of full-service restaurant concept CEOs panels recently. In another critical dimension, the momentum of same store sales has improved week by week through April. Sales bottomed out in late March and early April in the US and have recovered from there. And many states have begun to reopen to varying degrees.
The issue, of course, is all this will take time. As you will see below, if there ever was a time for restaurant operators to be “flexible” in all things management related, this is it.
The end of the beginning?
The industry’s initial mitigation actions continue. A period of adjustment and workout will continue for some considerable time. Much action continues now on negotiating rent deferrals (an easier sell with landlords) or abatements (a much more difficult sell). Virtually all companies caught with too low cash are trying to get more. The global chain restaurants with strong concepts and historical economics and credit profiles can get additional funds and terms. Others have found new investors via stock offerings. Smaller start-up companies have not found additional funding and are closing.
A few chain restaurants are totally “dark”, that is, no store management, no key hourly employees on duty in the stores. Thankfully, however, most restaurants have skeletal staff present, working take out and delivery. In my opinion, that is smart for several reasons: (1) take out and pick up business has exploded and has become a high average ticket business that customers prefer. It is now often expanded into curbside or even pop up drive-thrus for both casual dining and fast casual operators. (2) This keeps store managers and key hourly employees working. (3). Some offer meals to furloughed hourly associates, as this is another way to keep a connection with that workforce that will be valuable when it is time to recall them.
New unit development has been put on hold and most companies have either slashed or suspended capital spending except for maintenance capital spending. Franchisors have suspended new store development and/or remodeling requirements typically. Advertising has been redirected away from TV to less costly digital. Franchisors are “working” with their franchisees to differing degrees on deferring royalties, ad funds, and rents. Franchisees properly point out that a deferral is not forgiveness but rather a postponement of a cash outlay.
Beware of the Fog of War
As states begin to reopen keep in mind that there will be a mixture of service formats, locations, evolving customer reactions. On the reopening side, all of the reopening states to date have different table density and reopening geographical standards for example. That is especially true reading the Georgia, Florida, and Tennessee restaurant reopens. On the consumer side, consider we are only about 11 weeks into this reaction, given the early March sales weakness that emerged. Humans change their opinions only gradually over time.
We are seeing conflicting consumer data. In a webinar, Dataessential recently highlighted that “dining at my favorite sit down restaurant” lead among proposed post lockdown activities that most excited responders in a March 29-April 27 survey.[2] That factor grew from 41% to 45% over that period. On the other hand, there is am immense amount of consumer research that indicates that consumers will return to eating out in the future when they feel safe. A CBS News Poll in mid April showed 29% of survey responders would be comfortable going to a restaurant or bar, while 71% would not.[3]
So there is a lot of conflicting data. Polling in the US has an implicit Red v. Blue, Trump v. Non-Trump bias baked in it, so be cautious.
I strongly recommend that you pull up a lot of data and look at sales, ticket, transaction, per person data, and the usual store level profitability data versus both current periods, prior period/quarter and prior year. Myself, I’m more of a year to year analysis fan but this is one time the trend movement is more important. In addition to your business data, paid data sets are available via Restaurant Research, Black Box, Technomic, NPD, and others, Miller Pulse has free overall segment data monthly. As you recall from my past columns, I always advise being careful about making decisions without applying relevant semi-fixed costs, including G&A to the store level model. The same is true with leases or capital spending. You have to be very certain of those cash outlays in good times, in periods of declining demand, even more so.
To look ahead, one also has to look behind
We are almost through Quarter One earnings. It was a mixed quarter, with very good trends, almost perfect in many brands, until early March. March results wound up very poor and bottomed out in early April. Pizza and wings operators had very good sales, traffic, and profitability results. YUM US company and franchisee results were not reportable. Most company-owned and franchised brands expect Quarter 2 to be worse because all three months will have some COVID-19 impact.
One line of success seen is that of pick up and drive-thru sales activity, primarily driven by average ticket. Some casual dining brands have replaced 30 to 35% of their pre-COVID-19 sales with takeout.
A global strategy management consulting firm I know well recently circulated some recent learnings from consumer research that apply to restaurant traffic drivers:
Restaurant Traffic Drivers
| Positive Factors | Negative Factors |
| Drive Thru | NorthEast, Urban Core locations |
| Rural, Exurban Locations | Airport Locations |
We will learn more as we go, but we will have to stay flexible.
About the author: John A. Gordon is a long time restaurant industry veteran with 45 years of restaurant operations, corporate staff and management consulting experience. He founded Pacific Management Consulting Group in 2002 to do complex restaurant analysis and advisory projects. He can be reached anytime at (858) 874 6626 (office) and jgordon@pacificmanagementconsultinggroup.com (email).
[1] Dr. Fauci supported this notion in Senate testimony, May 12, 2020.
[2] Nation’s Restaurant News, “Pent Up Demand Grows…”, Ron Ruggless, May 11 2020.
[3] CBS News Screen Shot, Josh Jordan @NumbersMuncher April 23, 2020.