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Q. What impacts did you see in the industry due to COVID-19?
From shut-downs to new social distance rules to employee safety concerns, there was almost no aspect of the Quick Service Restaurant (QSR) and Fast Casual industry segments left untouched. Sales dropped precipitously in March and April when people were afraid to go out. After May 1, they began moving up and currently comps are positive month over month for QSR, specifically chicken and pizza. Burger chains are holding steady but not seeing the same increases. For QSR, food costs are down and margins are up because there is no need for discounting when you’re the only game in town. The Fast Casual segment continues to see their margins erode with continued discounting.
This is partly because QSR has built-in advantages for this environment: They are mainly stand-alone locations with established drive-throughs and the dining room is not the focus. People felt safe getting their food in the drive-through and it was relatively easy to integrate curbside pickup if they already had an app. Fast Casual chains, however, are frequently located in strip mall locations, which are hurting, don’t have drive-throughs, and many have not been able to integrate curbside efficiently.
Q. What are the key operational pressures QSR and Fast Casual are facing now?
In a word, Labor. It’s almost impossible to get workers right now. Operators have instituted ways to save on labor, such as kiosks and apps to eliminate order takers. Also, there is decreased need for dining room workers since dining rooms are closed or only partially utilized. Another factor is increased unemployment benefits, that have hurt franchisees’ ability to keep employees. Workers were afraid to come to work and interact with the public, and being able to stay home and collect unemployment and government benefits was a more attractive option, especially when the government benefits are as much or more than an employee’s salary.
A secondary pressure we’re seeing is the uncertainty of customers’ future income. We don’t know whether customers will continue to buy if they are not employed and stimulus money runs out. When the economy is in trouble, tablecloth restaurants are first to get cut from the family budget; then fast casual. Now, as the pandemic stretches past the one year mark, budget worries have moved down to the QSRs, which are usually the last to be cut.
Q. What’s changing regarding food delivery model? How have Uber Eats, Door Dash and others made an impact?
In March, food delivery took off. People were afraid to leave their houses so delivery services such as Uber Eats and Door Dash ramped up. No one has been able to make this work from a profit standpoint. Franchisees have a love/hate relationship with delivery services – they increase business, but at a loss or breakeven.
In April, QSR operators realized they already had a solution and began to push drive-through. Before COVID-19, the drive-through already accounted for approximately 70% of QSRs’ total volume. There was less emphasis on the dining room than years ago. With COVID-19 driving increased drive-through traffic, service times increased dramatically and customers would give up. Operators increased drive-through efficiency by retraining under-utilized counter and cleaning employees. Operators doubled up window cashiers and increased food prep to increase efficiency and move more customers through the line faster. Average wait time decreased dramatically and abandonment rates declined. By the end of 2020, drive-through and curbside pickup reduced reliance on delivery services like Door Dash.
Q. Tell us about the Ghost Kitchen model?
Ghost Kitchen goes hand in hand with delivery. It’s a concept where you have multiple kitchens – say Pizza Hut, Burger King, Popeyes, Taco Bell, Portillos, Qdoba, Chipotle, etc. – all in one warehouse or shopping center location that does nothing but fill delivery orders. So, if a family wants to order from different restaurants, delivery drivers can go to one central pickup for all of it rather than having to use multiple deliveries from different locations. I think the Ghost Kitchen model can work as the logistical kinks get worked out, especially for fast casual chains. Large real estate operators are working on it now, repurposing space they can’t use, such as shopping malls that have gone dark.
Q. How have franchises had to be nimble with employment?
They’ve had to be creative with reassignments, as I mentioned earlier. Restrooms and dining room use is reduced or closed but pickup lanes and curbside are super busy. So, employees have been redeployed to support pickup lanes and curbside.
Q. What do you see for FFF in the future in a flat economy?
The major national QSR chains will be the winners. It’s partly due to availability of real estate. With many small players and casual dining going out of business or closing locations, QSRs can pick up property they wouldn’t have had a chance at pre-pandemic. Another factor is the availability of capital. Banks are having a hard time deploying money because so many businesses are suffering and banks need certainty and clarity. For all the reasons we’ve been talking about, QSRs are a good place to deploy capital, they’re doing well. The more successful you are, the more appealing you are to banks. So big chain operators have access to cheap capital right now.
Unfortunately, Casual Dining will be the losers if they cannot easily change their business models with curbside, drive-through and delivery. White tablecloth restaurants are dead in the water – with estimates of more than 50 percent being out of business before this is over. It’s not solely due to COVID-19, the pandemic just pushed marginal restaurants over the edge. Lastly, people are getting used to new routines with drive-through and curbside pickup. The longer this goes on, those habits will not go away. There will be less demand for dining-in overall.
Bio for Andrew W. Lapin
Andrew W. Lapin, attorney and Shareholder for Robbins, Salomon & Patt, Ltd. has over 35 years of experience practicing in the areas of real estate, business franchise, business transactions, banking & finance, and labor & employment. His client representation includes entrepreneurial business owners, franchise owner/operators, real estate investors, developers and syndicators. Lapin also represents banks and other financial institutions in lending and loan workouts and restructurings; as well as in syndicated, single bank, secured, unsecured, structured finance, real estate, commercial and industrial, private bank and asset-based lending transactions.