The clinking of glasses, the aromas coming from the kitchen, the chatter within the room and music playing overhead. People are laughing and catching up on the day. This was a typical scene for an evening out at a restaurant in early 2020.
I believe we can all say we are glad 2020 has ended. The global pandemic is not over but there is hope that the end is near given the rollout of vaccines. Back in 2019, the Restaurant Leadership Conference theme was “Disruption.” Little did the industry know just how much disruption was to come in 2020. Many initiatives related to off-premise dining were already in motion by operators then, which helped restaurants adapt more quickly as indoor dining was shut down and/or significantly reduced. The industry also realized how vulnerable it was to government regulation that was out of its control. We have learned a lot about politics – from the local to the national levels. Many operators became industry activists working with their elected politicians and state restaurant associations. Here in Ohio, the Ohio Restaurant Association was instrumental in how the state re-opened and policies implemented based on the input from operators statewide. A big thank you to John Barker, Tod Bowen, and his ORA team for working tirelessly for Ohio operators.
Given all of the struggles and uncertainties, restaurant operators have adapted to a new “normal” and continue to reinvent the dining experience while keeping their employees safe to stay in business. Some operators were not able to adapt to the changes needed to survive and were thus forced to close. That is never an easy decision to make for an operator and hopefully, those operators can restart someday. The driving force of the restaurant industry is its passionate, forward-thinking entrepreneurs and employees. It was amazing to see the innovation that resulted from the pandemic. While it may seem normal now, think about the outdoor dining expansions, to-go alcohol drinks, family feast menu items, QSR menus, carry-out/drive-thru options, and the leveraging of third-party delivery apps. Operators also streamlined operations, driving efficiencies and bottom-line profits after cleansing expense line items. Several of these initiatives will likely continue post-pandemic. Still, there is much to analyze on how to drive profitability around these initiatives.
Depending on what segment or geography you operate in, your financial results could vary significantly. Quick Serve Restaurants (QSR) soon proved they were pandemic-resistant as the mighty drive-thru capabilities allowed customers to be served safely and efficiently. Drive-thru efficiencies were key to overall profitability. Many QSR brands also slimmed down their menu offerings and limited indoor dining which drove labor efficiency and profit margins on the menu items offered. Pizza did very well as it was already a delivery-oriented concept. Certainly, sit-down restaurants, bars and entertainment concepts continue to struggle the most, having to rely on creativity as it relates to offering a safe dining experience with as much capacity as possible. Geography also comes into play as each state had its own restrictions in place and some re-implemented those restrictions after the initial lockdown. Staying on top of the restrictions for multi-state operators proved challenging in an effort to remain compliant.
Let us not forget the Paycheck Protection Program (PPP) rolled out in late March 2020. For several operators, this was a godsend to stay alive. Although the program rollout was not smooth and required many changes along the way, it did provide much-needed assistance to operators. Now, the SBA is beginning to roll out the second round of PPP for those meeting the eligibility requirements.
So, what does 2021 look like for operators?
Even with the approval of vaccines, the rollout will not be immediate and will likely go through the summer before “herd immunity” is achieved. With the colder months ahead and people spending more time inside, the CDC expects COVID-19 cases to increase, resulting in additional restrictions put into place as some states, including California, have already done.
Continued focus on cash flow management
None of us are out of the woods on the pandemic. A continued focus on cash flow management is necessary, making sure you have an adequate cash reserve should you require it, given the high probability that you may need it. Certainly, round 2 of the PPP will come in handy for those eligible. Operators already scrutinize the P&L, but a continued focus on cutting nonessential expenses and driving efficiencies will result in better profitability.
Profitability of third-party delivery services
There is a love-hate relationship with third-party delivery providers. However, the majority would say the delivery services continue to be paramount to the survival of businesses, allowing restaurants to “plug and play” if delivery services were not offered prior to the pandemic. City governments are currently advocating for limited fees charged by third-party delivery providers, which could result in a bigger movement. Now is the time to revisit the arrangement you have, evaluate menu pricing and analyze the cost-benefit of the service.
Adaptability to future seating constraints
I would like to believe another pandemic would never happen, however, I think we all know better now. Now that we have gone through this tumultuous time of chaos, let us take the time to make a plan to better adapt to future seating constraints. Many operators have built carryout windows or a drive-thru for those customers who do not feel safe dining on premise.
Labor issues continue even with unemployment levels higher than usual. Many restaurant employees left the industry due to the uncertain paycheck caused by closures and restrictions, moving on to construction or delivery service jobs. Additionally, there was internal conflict among those receiving favorable unemployment benefits that paid more versus what working employees were actually earning. Many states’ minimum wage levels increased effective January 1, 2021. However, most operators were already paying more than minimum wage but with a trickle-down effect for any type of increase to existing employees. Employee retention will remain a top priority as well as improved training of managers to facilitate this.
Cost of sales
Most operators did slim down their menu offerings throughout 2020, which gave them the opportunity to focus on the overall gross margins. Higher gross margin menu offerings that are popular among customers are what you strive to sell and there are some lost leaders needed as well. Balancing a restaurant’s menu is always needed. Right now, it doesn’t appear as though 2021 will have any overwhelming negative trends when it comes to commodity costs. As supply chains recovered during the last half of 2020, commodity costs were able to stabilize and decrease for the most part.
With capacity restrictions in place for most of the country and the customers’ concerns about the safety of on-premise dining, QSR and pizza establishments have an advantage over full-service dining. However, this may shift during 2021 as vaccines continue to roll out and customers’ concerns begin to wane. We all know there is pent up demand by customers who wish to dine out.
There were also new habits formed in 2020, and limited-service restaurants reaped the benefits, ultimately resulting in increased customer loyalty through improved service and product innovation. It will be interesting to see how the restaurant dollar spend shifts during 2021.
Mergers and expansion
We saw some deals during 2020, and this is likely to continue in 2021, especially in the QSR segment. Until we get past the pandemic, it will be more favorable for full-service restaurants to wait and stabilize. Our panelists discussed these trends during our webinar presented in November.
Even with many restaurant closings, there have been several new restaurants opening as real estate becomes more widely available. Growing brands with a solid balance sheet seized the moment, and this will likely continue into 2021.
Technology was already a big focus pre-pandemic and it continues to be, as operators require better information regarding operations, reduced manual inputs, and ways to address labor issues. There are so many technology innovations for restaurants and the pandemic brought some to light as they assisted with providing a touchless experience or utilized less labor. The automation of accounts payable continues to be on the rise for adoption. There is always a balance between your culture and technology decisions made. Be sure your culture recognizes the benefits and implements them fully to reap the bottom-line advantage.
COVID-19 was the ultimate disruptor that none of us could have ever anticipated. Amid the many challenges and struggles the industry faced, there were some silver linings as everyone was forced to reinvent themselves and revisit every facet of their P&L and future strategy. This is certainly not what operators would have imagined for their establishments, but they reacted and adapted to the new “normal.” It is our hope that vaccine rollouts go well, restrictions are lifted and customers who so desperately wish to dine out are able to do so with peace of mind throughout 2021.
GBQ and its dedicated team of restaurant industry experts standing ready to assist you. To discuss this information in more detail, please contact Dustin Minton or other members of GBQ’s Restaurant Services team.
Article written by:
Dustin Minton, CPA, MBA
Director, Restaurant Services