Risks and Opportunities in the Restaurant Industry Today

In the nearly six months since the COVID-19 pandemic upended everyday life, the United States has made little meaningful progress towards its containment. As of late July, The New York Times reported that some 21 states were in the “red zone”, with more than 100 new infections per 100.000 people. At the time of writing, COVID-19 has infected more than six million Americans and claimed the lives of nearly 190,000.

Like society at large, restaurants remain mired in an unending nightmare. Fiercely competitive, highly leveraged, and, in recent years, oversaturated, the restaurant industry is a fraught environment in the best of times. Since March, the industry has been caught in the eye of a perfect storm: barely able to operate, even with reduced capacity, the prospect of just about any social gathering steeped in anxiety, against a backdrop of dwindling savings and disposable income for many consumers – and there’s seemingly no end in sight.

The gory details abound: A 34% drop in revenue in the second quarter of 2020. Losses of $145 billion to date, and much as a quarter of a trillion dollars estimated by year-end. Yelp’s Q2 Economic Average Report, stating that over 60% of closures on its platform during the pandemic will be permanent. A recent study from Allen & Associates projects that as many as 231,000 (35%) of the nation’s roughly 660,000 eateries could close this year. More than half (56%) of respondents to a National Restaurant Association survey said that they’re already aware of a local restaurant that has permanently closed, with an overwhelming majority (89%) expressing concern that such businesses in their communities will not survive in the aftermath of COVID.

It’s here that we must, again, highlight some persistent themes. First, there’s the ongoing bloodbath in the casual dining space, where several prominent names – large Pizza Hut/Wendy’s franchisee NPC International, Chuck E. Cheese, FoodFirst Global, Le Pain Quotidien (US), CraftWorks Holdings, Sonic franchisee SD Holdings and California Pizza Kitchen, among others – have already sought bankruptcy protection, with others – Red Lobster and BJ’s Restaurants among them – weighing their options.

And then there’s the elephant in the room with whom we’ve become all too familiar: the impending devastation of the independent restaurant. In the absence of large capital reserves, and with borrowing costs (where a willing lender can be found) rising, independent restaurants face what must feel like a stacked deck. Armed with only takeaway, delivery, outdoor, and – in some cases, and for now  limited-capacity indoor dining, independent establishments remain in a tooth-and-nail fight for their lives. More than five months in – two of which called for the closure of all bars and restaurants – the segment’s only tangible lifeline (more appropriately, the only lifeline to those fortunate enough to qualify) was eight weeks of Paycheck Protection Program (PPP) loans, beginning in April.

We recently noted that, as of May, some 75% of independent restaurants had taken on at least $50,00 of new debt, with over 12% taking on at least $500,000, and more than a third (34%) doubtful as to whether they’ll survive through October. We’ve also explored a July survey, conducted by The Hospitality Alliance, of approximately 500 restaurants, bars, and clubs in New York City, which painted a grim picture of the state of the independent eatery. Glimpsing the numbers from the following month is no less alarming.

Fewer respondents (17.1%, v. 19.8%) expected to pay July 2020 rent in full, with 37.4% (v. 36%) expecting to pay none at all. Of the 36.6% who expected to pay “some” July rent, just 17% anticipated paying more than 50%. Meanwhile, just 28.6% (compared with 26.5%) of respondents said that their landlords had waived any rent, and less than two in five reported any COVID-related deferrals. One in ten said they’d renegotiated their leases, with just 27.7% claiming that these negotiations were held “in good faith.” There’s sadly little to contradict the Independent Restaurant Coalition’s oft-cited estimate that, in the absence of direct aid, an astounding 85% of independent restaurants – directly and indirectly, responsible for roughly 16 million jobs – could be permanently lost by year-end.

That direct aid was expected to arrive via the RESTAURANTS Act, legislation with bipartisan support in both chambers of Congress, and the backing of several high-profile corporations, introduced in mid-June. If passed, the bill would establish a $120 billion fund to provide short-term capital to small restaurant companies (defined as “neither publicly-traded nor part of a chain of 20+ locations”). The act was initially expected to pass in August, as part of a second stimulus package from the government. However, the ongoing failure of legislators and the president to reach an agreement has left the deal in limbo. Hope remains that the act will ultimately pass and provide a much-needed lifeline, but every day without some sort of respite pushes smaller restaurants closer to a frightening precipice.

The scene is far less gloomy at the other end of the spectrum, however, where a number of well-capitalized fast-food giants have seized upon the opportunities presented by the broader industry’s struggles. According to Business Insider, brands like McDonald’s, Domino’s, Dunkin’, and Chipotle are using this moment to upgrade and expand their real estate portfolios, not only snapping up storefronts that have been vacated, but even reaching out to struggling restaurants that are still open, offering to buy out leases.

Similarly, the crisis has spawned enticing opportunities for financial sponsors. These financial buyers have offered up strategic expertise and, most vitally, capital, to small and medium-sized businesses struggling to simply meet their rent, payroll, and debt service obligations. In this particular buyer’s market, sponsors are leveraging debt forgiveness and/or the injection of relatively small amounts of capital into absolute control, on the most favorable of terms. These firms often wind up with the power to implement sweeping changes to management or the business model or to simply force a portfolio company into bankruptcy, clearing the way for the acquisition of yet more equity and assets, at yet more advantageous terms.

Finally, market conditions have given rise to yet another class of buyer: the special purpose acquisition companies, or SPAC. Simply put, a SPAC is a non-operating corporate entity, created to raise money via an initial public offering (IPO), for the sole purpose of acquiring an existing company. Once such a deal has been completed, the entities are merged, with the resulting company continuing to trade publicly, under the acquired company’s name.

The newest addition to this group is FAST Acquisition Corp., which began trading on the New York Stock Exchange (under the symbol “FST”) on August 21, after a $200 million IPO. Headed by co-CEOs – Ruby Tuesday founder Sandy Beall and &Pizza board member Doug Jacob – with &Pizza and Qdoba Mexican Grill Chairman Kevin Reddy serving as Chairman, and former CEO of José Andrés’ ThinkFoodGroup (and Performance Food Group board member) Kimberly Grant heading up strategy, FAST is seeking an “iconic” fast food or fast-casual brand with strong drive-through/takeaway business and the potential for international expansion, currently generating between $40 million to $150 million in annual earnings before interest, taxes, depreciation and amortization (EBITDA), with an enterprise value of at least $600 million.

Typically, the value of a SPAC lays in the industry experience of a savvy management team, exploiting opportunities in a market in which quality assets can be had at a discount. On the plus side, the current environment, combined with the pedigree of FAST’s management team certainly fits the bill. On the other hand, however, the company’s own, restrictive criteria ($600 million represents roughly a top-50 brand) greatly reduces the universe of assets on which FAST can focus. Beyond that, a recent SPAC proliferation – 73 have launched through eight months of 2020, raising an average of $392 million, up from 59 in all of 2019, with average raise of $230 million – suggests that SPACs will not have the luxury of cherry-picking assets, unabated.

All of this has, justifiably, raised concerns that American dining is on the verge of surrendering the adventurousness and sense of community that abounded over the past decade. Unchecked, the industry’s destiny appears to be one of homogeneity, dominated by mega-chains, devoid of the creativity, vibrancy, and cultural diversity provided by independent restaurants.

It’s so, so easy (and, frankly, not wrong) to lay blame at the doorsteps of federal and local governments for their failure to support small and medium-sized businesses in general, particularly those, like restaurants, that are disproportionately impacted by COVID. It’s worth noting, however, that a sustained recovery, irrespective of industry, must consist of more than financial lifelines and bailouts. Whatever the details of the next round of economic stimulus, to expect something equal in scale to the initial round – let alone larger – would be exceedingly optimistic. Also, at some point margins will need to come from something other than cost-cutting, and inflows from customers actually paying for one’s wares.

As they navigate closures, capacity limitations, and customers who are likely to be wary of public dining for some time and possibly facing financial repercussions of their own, restaurants will require more than quick fixes to sustainably regain their footing. Business models will need adapting, at the very least to include a stronger emphasis on off-site (delivery and takeaway) dining, even at the very high end, if not largely reconfigured, as with expansion to include a “ghost kitchen” a healthy recovery in the industry will call for genuine partners, with a similar commitment to the long-term health of the business.

If your restaurant group needs long- and short-term financing (assessing capital structures, debt restructuring, lease renegotiations) aimed at easing financial burdens while a business de-levers, to optimizing operations, to exploring strategic options (from acquisitions and partnerships to a sale of the company), EMERGING’s team of experienced, food-and-beverage-savvy executives and financial advisory and strategic consulting professionals are uniquely suited to help restaurant owners not only survive today but to lay the foundation for sustained, long-term success. Contact us at

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