Where Are We Now – The Restaurant Industry One Year After the COVID Outbreak

Senior Managing Director Nishant Machado, joined restaurant industry experts John Lucas, Partner at Pachulski Stang Ziehl & Jones, and Teri Stratton, Managing Director for Piper Sandler | TRS Advisors in a TMA SoCal sponsored virtual discussion “Where Are We Now – The Restaurant Industry One Year After the COVID Outbreak.”

The discussion focused on how surviving restaurant companies were able to navigate the challenges of the pandemic, how certain innovations have been transformational and driven long-term change, and the types of challenges restaurant companies will continue to face as we move into the post-COVID era.

“It was a year in which we all thought there were going to be a number of bankruptcies,” Machado said. Machado went on to explain that the two main factors that stemmed potential bankruptcies were capital constituents being more patient, because in many cases a bankruptcy didn’t really provide a solution, and the infusion of PPP money. The infusion of PPP gave many operators an opportunity to revamp their business, focusing on margin and liquidity.

Machado and the panel noted that while the industry can now see some light at the end of the tunnel, the principal and interest holiday restaurant companies have experienced will likely be short-lived. Coupling debt service with the added pressure of paying down deferred vendor and landlord payables, could result in another wave of bankruptcies.

“The rubber is really going to hit the road a few months down the road, when landlords stop accommodating, restaurant concepts start having to pay current occupancy costs and companies have to start catching up on all the deferrals – that’s going to cause a major cash burn,” Machado said.

The pandemic has been responsible for over 110,000 restaurants closing permanently. These closures have been a combination of single unit operators, chains rationalizing their unit count and certain concepts being liquidated. The survivors through COVID have had a combination of strong and adaptive operators and supportive capital providers.

“The amount of creativity and operational change that took place (during the past year) was incredible,” Machado shared.

Key operational changes during the pandemic that have been highly impactful are likely to remain accelerators of growth going forward, Machado noted, including: continued growth of third-party delivery (TPD) platforms; menu rationalization and simplification; the widespread use of QSR codes; the growth of virtual restaurants; and expanding brand presence and awareness through direct digital marketing and TPD’s.

The panel also noted that increased future growth and performance for restaurant companies will require focus on: improving lease terms and adjustments; active closure of underperforming units; strategic expansion in new markets; effective labor relations, programs and incentives; as well as equity holders keeping an eye open for M&A opportunities to leverage platforms, decrease costs and expand and diversify their customer base.