The Ultimate Challenge for Restaurants: Surviving COVID-19
*Updated March 18, 2020. This story was originally published by Franchise Times’ sister publication, the Restaurant Finance Monitor.
The challenges for restaurants from the COVID-19 virus are formidable. Already, many state and local governments have ordered restaurant interiors to either be closed or capacity constrained. Expect those requirements to be a national mandate soon. Fortunately, carryout, delivery and drive-thru operations are spared. Things are bleaker for sit-down restaurants that don’t have enough carryout or delivery business.
The focus of the column this month is survival and what you can do to stay in business and protect the long-term viability of your restaurant operation. Two things are paramount, and we’ll discuss them both in more detail, below: First, keep your employees informed and try to keep them working as much as possible. Second: Restaurants are notorious for running with negative working capital. As sales slow, cash must be protected at all costs. Curtail all non-food, non-labor cash outflow immediately.
Here are some ideas to ensure the viability of your business, at least until the all-clear signal is given.
1. Communicate, Communicate, Communicate. Now is not the time to crawl into a hole. Keep your employees informed and working as much as possible. They know the situation with the virus and the community need for social distancing, but what they don’t know is how it will impact them. Set up a communications and scheduling team just to deal with employees. Encourage the ones you can’t keep to sign up for unemployment as soon as possible. You will need your employees to eventually return to work. Employers who do not take care of their employees, as best they can, face a difficult recovery.
Also, make sure to keep the safety of your employees and customers front of mind. They must also know that you’re concerned for their safety. You will need a designated point person for communicating with customers, vendors and landlords. As for the bank, get a phone meeting ASAP to share your plan.
2. New Store Development and Remodeling. Stop all new development and image enhancement projects immediately. It makes no sense to build new restaurants or remodel others right now. Forget about your franchise development agreement. It doesn’t mean anything right now. You need to preserve cash for your operation and that means stopping the cash going out the door toward construction.
3. Royalties. If you are a franchisee, defer the payment of royalties and ad fees immediately. Let’s get one thing clear: You will eventually be required to pay these fees back. The asset-light franchisors, however, understand they need you to stay in business to support their stock value and not spook Wall Street any more than it’s already spooked.
4. Rent. You’ve paid March rent, but if your store is temporarily closed, call or send your landlord an email and let them know you can’t pay the April rent right now because of something completely out of your control. Tell them you need to get through this crisis first, and that you will eventually be back in touch with them to either pay them, or restructure the lease. Keep in mind that workouts happen all the time in real estate. As a precaution, remember to disable any auto-pay features on your bank account.
5. Off-Premises. This is where the game will be played in the next few months. Focus all of your efforts on delivery and takeout. Staff only those employees needed to run that aspect of the business.
6. Utilities. Municipal utility companies are not going to turn off your power and light during a crisis. Use them as the bank as long as they will let you.
7. Bank Credit Agreements. Start the discussion immediately with your lender. Ask the bank to suspend any principal payments for the next 90 days, with a right to extend for another 90, if circumstances dictate. Banks are in better shape than they were in the 2008 financial crisis and right now you need their help.
8. Taxes. There may be penalties for non-payment of sales and use, and real estate taxes. It’s not optimal, but for this crisis, the states and the counties, especially the ones that shut down your dining rooms, are not going to put you out of business.
9. Marketing and Advertising. Focus your spending on your customers. Curtail all unnecessary media, unless it is used to drive delivery, takeout and drive-thru orders. Radio advertising is worthless right now as no one will be in their cars driving to and from work. Television might work, especially with so many people stuck at home.
10. Store Rationalization. If you can keep the restaurants open, that will be your best bet. However, you may be forced to close restaurants located near sports venues, malls and airports. Make sure you have security around them. As certain people get bored with staying home, vandalism and looting could occur.
I’m not a medical doctor, but one can only hope the COVID-19 virus will start to dissipate by mid-to-late April. People will be anxious to get out of the house and start attending sporting events and visiting your restaurants again. There may be some disaster assistance available to restaurant owners via the Small Business Administration but it will probably come after the fact. Don’t count on the government doing anything for you.
The important point here is to use any means necessary to stay in business so you can serve guests once again when this pandemic is over.
John Hamburger is founder and president of Franchise Times Corp. In addition to publishing Franchise Times Magazine, the Restaurant Finance Monitor, Food On Demand and Foodservice News, John is a frequent speaker at restaurant and franchise industry events on finance and development topics. He is frequently quoted about financial matters concerning restaurant, franchise and hospitality businesses in national business publications. John previously served as a chief financial officer of a public restaurant chain and a CPA in a national accounting firm.