What’s Next for Restaurants?

Ever since the World Health Organization declared the outbreak of COVID-19 a pandemic, it was clear the crisis would disproportionately affect the restaurant industry. Immediately after the designation was announced, cities across the country began enforcing strict social-distancing measures, in many cases ordering the closure of restaurant’s dining rooms. Weeks later, some restaurants have found ways to stay afloat during this indefinite period of unprecedented restrictions, and many others have closed. 

The biggest question for the industry now is what happens next?

Restaurant investment firm CapitalSpring has invested in more than 4,000 restaurants across multiple brands and segments. Jim Balis heads their Strategic Operations Group and is leading CapitalSpring's coronavirus mitigation strategies. According to Balis, though the immediate situation is challenging, there is still a promising future for the industry, particularly for restaurants that adapt quickly.

“The restaurants that sit around waiting for things to return to normal are not going to survive,” Balis explained. “But those who adjust to these new circumstances are going to be well-positioned to do great business when this crisis is behind us.”

Foremost among those adjustments is a move toward off-premise services, something much of the quick-service segment is already equipped to provide. Dine-in-only restaurants may need to dramatically rethink their business models to adjust to this new paradigm – it’s not going anywhere says Balis.

“Carryout and delivery are absolute prerequisites for even modest success now,” Balis said. Even if a dine-in only restaurant has the cash reserves to wait out the pandemic, they are not likely to re-open to a consumer environment that resembles what we’ve seen before.

“What we’re seeing right now is a revolution in the way consumers interact with restaurants, and that’s not going to snap back to normal — or to what we used to think of as normal — anytime soon, even after this crisis dies down.”

In addition to the shift toward off-premise service, Balis says quick-service brands have another reason to be optimistic: increasingly value-conscious consumers.

Unemployment is surging at a historically unprecedented rate, and “some consumers are trading down to lower-priced options,” Balis said. Not only are quick-service brands finding a lifeline in these shifting preferences, “we’re seeing better sales performance in some brands in this segment.”

Real estate is a key concern for restaurateurs, and Balis says the coronavirus crisis presents both hazards and opportunities in that regard.

Given the shift to off-premise services, new restaurants may not need to rely on the foot traffic that many restaurants used to prioritize. Instead, tomorrow’s restaurants may do better to set up smaller footprints or even mobile operations in close proximity to residential neighborhoods. Of course, shifting a real estate strategy can take time given existing long-term leases and the capital intensity of moving operations.

Another advantage for quick-service is much of this segment is franchised, which provides a little more durability during times of crisis. These brands have large departments/teams and outside services to support their franchisees.  “Independent operators are going to have to be scrappy to navigate current traffic declines,” Balis said. Regardless of the segment he recommends bringing your leadership teams together to exchange ideas and develop a shared strategy to stay afloat.

One change that applies to all restaurants, regardless of their backing or segment, is that customers are highly attuned to safety and sanitation, and in an era defined by mass communication, restaurants can’t afford to be seen as slipping.

“If someone visits your restaurant and sees an employee preparing food without gloves, all they have to do is snap a picture, and a few clicks later, that’s it for your business,” Balis warned. That heightened sensitivity is not likely to disappear even after the pandemic is contained.

CapitalSpring has set up a robust communications network to keep its brands up to date on news, guidance and resources. “We are communicating daily, in both English and Spanish, with our team members to make sure they are educated on the situation and well-equipped to face its challenges.”

Whatever comes next for the restaurant industry, Balis is confident that CapitalSpring’s portfolio of restaurants will be among those best positioned to succeed.

“It’s all about adaptability,” he said. “We’ve got some extremely valuable data, and we can make intelligent projections about where this pandemic is going, but ultimately, restaurants need to be nimble, and they need to be prepared to pivot at a moment’s notice. The restaurant industry isn’t going anywhere, it’s just a question of which restaurants have the flexibility to survive.”