July 30, 2020

Article written by:
Dustin Minton, CPA, MBA
   Director, Restaurant Services

We have experienced quite the whirlwind of changes throughout the past few months due to COVID-19, something none of us have seen in our lifetime.  When the pandemic first hit and restrictions were put into place, there was a sense of helplessness and panic as it all happened so quickly with little time to prepare.  Restauranteurs live in a world where every penny counts, and operations can be scaled up or down based on sales volumes; however, no one expected sales to plummet the way they did.  Even so, operators were able to respond timely and figure out a strategy to keep businesses alive.

Now that we are living in a new “normal” and stores are back open under certain restrictions, we are pleased to share what has been learned, along with anticipated changes on into the future.  In conjunction with our webinar featuring a panel of veterans representing all segments of the industry, we asked restaurant operators ten questions focused on their response to the pandemic, including operational changes and opportunities going forward.  The word “disruption” has been used a lot in the past few years describing new companies or technologies disrupting a mature industry, and we can all agree COVID-19 continues to be a disruption for the restaurant industry, forcing operators to re-evaluate their businesses to survive.

Our survey included 34 operators and spanned across all segments, with QSR being the dominant segment represented.  The survey and its results, however, are not meant to be scientific, but rather used as a tool while the industry continues to navigate the challenges of instability.

  1. What was the most underestimated impact from COVID-19, aside from the loss of sales? (Select all that apply)
    1. Management of the PPP loan proceeds (17%)
    2. Rehiring employees (21%)
    3. Not being able to manage the “unknown” (48%)
    4. Other (14%)

Today we are all operating in a new “normal,” and it was only a few months ago that our world turned upside down. Hence, it is no surprise that managing the “unknown” was the most underestimated impact of the pandemic.  Other responses included (1) long-term impact on consumer behavior, (2) complying with sanitization standards, (3) mental health of employees, (4) governmental influence over your business, (5) productivity gains from the closing of dining rooms and operating pick-up windows exclusively, in addition to overall COVID-19 impact on the health of the community.

  1. What was the biggest weakness exposed within your organization as a result of COVID-19? (Select all that apply)
    1. Inability to scale delivery/carryout fast enough (44%)
    2. Insufficient access to cash to weather the storm (9%)
    3. Technology inefficiencies or capacity to assist with remote working conditions (25%)
    4. Other (22%)

With indoor dining closed until late May for the majority, the dependency on off-premise dining skyrocketed and required an extreme shift for many outside of the QSR and pizza segments.  Technology plays a vital part in the restaurant world, and with no warning, those that were behind on technology felt some pain throughout this ordeal.  Other responses included (1) managing staffing levels based on sales expectations, (2) managing employee morale and anxiety/stress, (3) managing public perceptions of COVID-19 impacts, and (4) managing the rapid pace of change from government guidance and mandates.

  1. How has the use of third-party delivery providers been beneficial to you? (Select all that apply)
    1. Kept business open and top of mind (27%)
    2. Gained new customers (59%)
    3. Provided labor force (11%)
    4. Other (3%)

Love them or hate them, third-party delivery providers were beneficial and necessary during these challenging times, especially for those not set up for delivery.  There was a plug-and-play component to leveraging their services, and the challenge was finding a way to balance the related fees while earning a profit on sales, which was already an issue pre-COVID-19.  Overwhelmingly, gaining new customers was the number one benefit, which hopefully will turn into recurring customers over the long run.

  1. How has the use of third-party delivery providers been detrimental to you?  (Select all that apply)
    1. Increased delivery costs (46%)
    2. Increased paper costs (13%)
    3. Resulted in unprofitable sales (8%)
    4. Other (33%)

For every benefit, there is usually a detriment or sacrifice, and increased delivery costs were noted by many followed by increased paper costs, which is expected as off-premise dining became the only way to sell products.  Other responses related to (1) overall inefficiencies with third-party delivery drivers as new processes were put into place, and new drivers were learning the ins and outs, (2) increased sales tax complexities across the third-party platform models, and (3) some respondents noted no detriments to using third-party delivery providers.

  1. What cost-cutting initiatives will become permanent changes to the budget going forward? (Select all that apply)
    1. Paperless or throw-away menus (10%)
    2. Reduced travel costs (31%)
    3. Better management of utility costs (38%)
    4. Other (21%)

We can all agree that cash conservation became a huge focus for livelihood and forced everyone to challenge their costs.  With some locations closed and partially open, utilities became a significant focus to drive down costs, followed by travel costs that were forced to decrease through stay-at-home orders.  Many businesses came to realize how much store oversight could be done remotely, which saves both cost and traveling time.  Other responses included (1) a focus on renegotiating professional services contracts, (2) challenging dining room operations, (3) labor efficiencies, and (4) implementing “zero-based budgeting” on purchases that are genuinely needed.

  1. What were operational changes made that will likely be permanent going forward? (Select all that apply)
    1. Dining room reduced hours resulting in lower labor costs (47%)
    2. Reduced store opening hours resulting in lower labor costs (18%)
    3. Simplified menu focused on customer favorites and higher margin selections (32%)
    4. Other (3%)

Managing labor costs and cost of sales were scrutinized even more as a result of COVID-19, which resulted in significant labor efficiencies and higher margins from a simplified menu.  Reduced dining room hours and simplified menus will certainly be a permanent change going forward. For QSR, being able to handle the same volume of sales through the drive-thru with a lower labor cost is going to make QSR re-evaluate the dining room model.  Product innovation will continue but may come about as limited time offers that rotate throughout the year.

  1. How are you preparing differently should reopening phases be stopped or rolled back? (Select all that apply)
    1. Conservation of cash (33%)
    2. Maximizing PPP loan forgiveness (24%)
    3. Applying for an Economic Injury Disaster Loan (EIDL) (8%)
    4. Improving delivery/carryout options (34%)
    5. Other (1%)

As much as we all like predictability, we have to be able to operate in this unstable environment.  With COVID-19 surges occurring across the country, the ability to adapt to revised mandates is a necessity to keep businesses alive.  Knowing that these interruptions can happen at any time, businesses are conserving cash and improving the off-premise sales model to remain up and running and avoid significant turnover in staffing.  Another big focus includes SBA loans, specifically the PPP loan and the related forgiveness, that is now within reach for most restauranteurs given the changes made to the program.

  1. How are you recouping the costs of re-opening, PPE costs and materials to achieve social distancing? (Select all that apply)
    1. Offsets other expense reductions (48%)
    2. Increase in menu prices (16%)
    3. Specific surcharge added to customer (0%)
    4. Offset against PPP loan forgiveness of eligible costs (36%)
    5. Other (0%)

Overall, most of these costs are not being passed onto the customer; additional costs to operate safely are offset against other cost savings.  Some businesses have included a menu price increase (where it makes sense) as there is a delicate balance with the consumer.

  1. What is the best messaging to your customers around an employee testing positive for Coronavirus?
    1. Communicating established policies around prevention and action to be taken if an employee tests positive (46%)
    2. Communicating on social media for each incident of an employee testing positive (4%)
    3. No communication to customers (46%)
    4. Other (4%)

Restaurants have always been under scrutiny from the health department and are required to follow strict sanitation standards, so complying with the new mandates around COVID-19 follow suit; however, the public perception and media attention can be challenging to manage.  Overwhelmingly, most businesses are taking the path of communicating to customers their policies around prevention and action should an employee test positive.  Should an employee test positive, the communicated actions are being followed, which are in compliance with governmental regulations.

  1. What opportunistic strategies are you evaluating in this current pandemic client? (Select all that apply)
    1. Available real estate to open new stores (48%)
    2. Market appetite to sell stores (26%)
    3. Decreased valuations to assist with succession planning (9%)
    4. Other (17%)

In every crisis, there are always opportunities that present themselves.  Unfortunately, several retail and restaurant operations were not able to weather the storm, which is creating a supply of coveted real estate space.  While many concepts were in growth mode pre-COVID-19, those that were not are now jumping at the chance to lock down these real estate locations.  There is also the opportunity to buy and sell.  Those concepts that have shown to be resilient during this crisis are still achieving significant multiples, some even more so; whereas, those struggling may need to bring in additional investors to survive in the long run.  Other responses included (1) going through a brand evolution to prepare for the future, (2) gaining guests from full-service restaurants, (3) buying quality equipment at auction, and (4) ability to obtain favorable financing through low interest loans.  The silver lining does exist.

COVID-19 is an event that no operator would ever want to live through again, and still, we are not through it yet.  Restaurants have struggled tremendously.  However, there have been many lessons learned throughout this disruption that will forever change the way you do business.  The changes being made will make your business stronger in the long run.  There have been opportunities presented for those in a position to grow through expansion or acquisition, as well as those who are deciding to exit the industry through succession planning or a sale.  We trust the sharing of ideas through this survey and our webinar of industry veteran panelists is beneficial to your business’ livelihood and future strategy.

To discuss this material or your questions in more detail, please contact Dustin Minton or Kaz Unalan.

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Tags: Coronavirus COVID-19, Operations