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'The game very much is survival' for US restaurants during coronavirus – experts

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'The game very much is survival' for US restaurants during coronavirus – experts

U.S. diners are used to getting their fill at restaurants across the country. But the ongoing coronavirus outbreak is forcing restaurants across the industry to rethink their sales and workforce strategies as public officials warn consumers about the hazards of leaving their homes.

Full-service restaurants designed for people to dine in could fare worse than quick-service operations that focus more on drive-thru sales. But in an industry largely built on customer interaction, even the best-run restaurants will suffer sales losses amid social distancing and restricted operations, experts said.

"The game very much is survival," Erik Herrmann, partner and head of the restaurant investment group at CapitalSpring, a private investment firm, said in an interview. "We're seeing a vast sales loss across the industry."

The National Restaurant Association estimated that the industry could lose $225 billion in sales and between 5 and 7 million jobs, a prospect forcing restaurants to rethink their approach to labor issues like paid sick leave. The declines are being driven by restrictions on business operations in U.S. states such as New York and California and in countries like India, the U.K., Italy and Spain. McDonald's Corp., Starbucks Corp. and Yum! Brands Inc. have warned that the outbreak would negatively impact their finances as they restrict their operations and close dining rooms.

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"Markets around the world are closely monitoring local government and health authority guidance, and decisions on restaurant operations are made at the market level based on the unique situations in those communities," Lauren Altmin, a McDonald's spokesperson, said in a March 23 email when asked if the company planned to close its U.S. locations. The chain just a day earlier announced it would close its restaurants in the U.K. and Ireland.

Smaller operations like Darden Restaurants Inc., Bloomin' Brands Inc. and The Cheesecake Factory Inc. withdrew their outlooks for 2020 and experts assume many small independent restaurants will close as in-person dining at U.S. restaurants has all but ended.

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Still, some restaurant operations are projecting confidence. Delivery-heavy companies like Domino's Pizza Inc. and Papa John's International Inc. have announced hiring sprees. Yum! Brands' Pizza Hut said March 23 that it had more than 30,000 positions open. Experts speculate that more people staying indoors to avoid getting sick could drive more delivery orders.

"We are hiring big time," Papa John President CEO Rob Lynch said told CNBC on March 19. "Our restaurants are ready to recruit and train and staff to meet the expected, oncoming demand that we're looking at as a result of some of the other food options being closed down."

Experts said the biggest brands will survive the crisis in part because of the ongoing growth of the restaurant industry. Out of about $1.5 trillion spent on U.S. food consumption in 2018, 51% was spent on food away from home and 49% was spent on food at home, according to a March 23 UBS report.

Reality bites

In the next 12 months, operating profit for the restaurant industry could fall from 10% to more than 20%, depending on how long the closures and restrictions last, William Fahy, Moody's lead analyst for the restaurant industry, said in a March 23 note.

"While the industry will take a beating across the board, the casual dining segment, where the substantial majority of sales occur within the restaurant, will take the biggest hit because of closures or partial closures," Fahy said. "As a result, casual dining will have to rely on take-out, curbside pickup and delivery as their core revenue drivers."

Companies that have been financially and strategically mismanaged have more potential downside that could lead to some bankruptcies, Jason Ware, a partner and chief investment officer at Albion Financial Group, a wealth manager, said in an interview. This could include restaurants that are undercapitalized, have too much debt or expanded unwisely, Ware said.

With so many countries and cities pressuring people to stay home, customer traffic to restaurants is in free fall, according to data from the reservation platform OpenTable. In the U.S., state-level rules calling for limited in-person dining operations all but wiped out seated dining in the U.S. by mid-March.

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Fruits of labor

The widespread pullback in operations and sales in response to coronavirus pandemic has led some restaurant companies to expand the benefits they offer employees.

The moves could add to companies' operating costs at a time when revenue is falling, though companies are also reducing hours, cutting salaries and furloughing employees to save money, experts say.

Beyond being part of a company's response in a time of crisis, expanding benefits can also be important given how competitive the labor market has been as retailers fight for workers, Alex Arnold, a consumer analyst at Odeon Capital, said in an interview.

"If you've got a balance sheet to do it, you're actually investing in your workforce," Arnold said.

Starbucks declined to comment on how its expansion of benefits is impacting its operating costs or whether the changes are part of staying competitive in the labor market. McDonald's did not respond to questions about the impact of changes to its workforce benefits.

The restaurant industry's significant number of hourly workers means it faces outsized risks from a health crisis, meaningful cost of turnover in a tight labor market and competition from retail companies expanding sick leave policies, Laura Silberman, a Credit Suisse analyst, said in a March 13 note. Restaurants are expanding policies in advance of government mandates, though in franchised systems labor policies are set by franchisees, Silberman said.

"We anticipate [franchisees] will implement similar policies," Silberman said. "Franchisors could look to offer temporary royalty relief if necessary to minimize financial hardship and potential closures."

After pressure from employees, a union of restaurant workers and the advocacy group Fight for $15, McDonald's is offering workers at corporate-owned locations two weeks of pay in the event of a quarantine, Bloomberg News reported March 10.

Starbucks made a similar move when it temporarily expanded its catastrophe pay to two weeks for employees diagnosed with COVID-19, the disease caused by the coronavirus. The pay also applies to employees who believe they were exposed to it or suspect they were, Rossann Williams, Starbucks president of U.S. retail, said March 18.

"We've even extended that to partners that feel ill and not sure if they have the virus," Williams said. "We've encouraged them to stay home for up to three consecutive days just to make sure they have an opportunity to get tested, if, in fact, that was something that they wanted to do."

An online petition with more than 37,100 signatures called on Starbucks to do "the moral thing" by suspending operations at all of its locations while still paying employees their regular wages. Starbucks promised March 22 to pay U.S. employees whether they come to work or not until April 19.

An acquired taste

U.S. consumers' spending at bars and restaurants has been rising for years, causing some experts to doubt whether the current crisis will throw the industry off course in the long run.

"Restaurants are part of the food infrastructure of this country," Herrmann said, adding that stir-crazy consumers could eventually flock back to restaurants and bars to celebrate the end of the pandemic once it is over.

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Consumer spending on dining out has grown in recent years. Restaurant customers spent $65.81 billion in February, surpassing the $65.43 billion spent at food and beverage stores in the same month, according to advance estimates of seasonally adjusted figures from the U.S. Census Bureau.

Yet, there could be a transition period when the pandemic is under control but consumers still feel wary about the kinds of crowds found at restaurants, Ware said. Still, for all the immediate damage the new coronavirus will do, erasing the popularity of brands like McDonald's and Starbucks is unlikely in the long term, he added.

"Memories fade and instilled behaviors come back," Ware said.