The coronavirus is sending Americans back home for dinner, creating a crisis for a restaurant industry that was already slowing down.
The viral outbreak is wreaking havoc as diners isolate themselves at home and states restrict operations to takeout and delivery only. Large swaths of the industry are facing weeks, or perhaps months, with reduced or nonexistent revenue.
It is a grim prospect for restaurants that were already struggling with brutal competition for a stagnant pool of customers. To make matters worse, some chains have opted to expand aggressively in recent years—which has oversaturated the market and helped to fuel an increase in restaurant debt levels, worsening the risk factor for many companies.
Add rising wages to the mix—which are likely to continue climbing due to the sudden, urgent need for expanded sick leave and benefits—and the industry is poised for a shakeout.
“You’re going to see a lot of bankruptcies,” said Michael Halen, Bloomberg Intelligence analyst, adding that smaller chains that managed to hang on because of cheap debt are the most at risk. “You’re going to see more chains go under.”
The looming bankruptcies are a major problem for landlords that have relied on restaurants as stable tenants as other parts of the retail landscape have been decimated by e-commerce. In recent years, fast-food chains have taken up more and more space at malls and shopping centers, as apparel companies and department stores struggle. But with the coronavirus now shutting down both restaurants and retailers, landlords likely will have to choose between cutting rents or losing tenants.
“Its definitely a concern,” said Vince Tibone, an analyst at Green Street Advisors. “The most likely outcome is landlords will have to concede on lower rent for a period of time.”
The growth in fast-food restaurants had already slowed to the lowest rate in at least 20 years in 2019, as companies started to curb the rapid growth of the previous years. Capacity still outstrips demand, though, according to Noah Shaffer, senior director at real estate services firm Confidant Asset Management.
“When you just look at what consumers can spend in a market and how many restaurants are already there serving it, you start seeing there is an oversupply,” Shaffer said. “And that happens in quite a few markets.”
For years, the biggest fast-food companies, such as Subway Restaurants and Dunkin’ Brands Group, expanded aggressively across the country—peppering cities and suburbs with locations on what seem like every corner.
Much of the expansion was financed with cheap debt, as companies took advantage of low interest rates. Eateries in the Russell 2000 Restaurants Index more than doubled their debt load as a share of earnings during the past five years, reaching a record high last year after an accounting rule change required them to record more leases on their balance sheets. Even before the accounting change, the ratio had trended upward.
“If they are pretty levered up already, they don’t have ability to tap into additional capital to sustain,” Shaffer said. “The risk and concern for some landlords is starting already.”
Restaurant equity, meanwhile, has taken a brutal blow in recent weeks. The Russell 2000 has plunged roughly 60% this month, with companies such as Jack in the Box, Brinker International and Denny’s falling more than 70% so far. On the S&P 500 Index, Starbucks, McDonald’s and Yum! Brands have all declined 30% or more in the same period.
In a sign of the rising levels of distress, the National Restaurant Association, an industry chamber, sent a letter to President Donald Trump on Wednesday calling for relief including tax credits and increased access to funding. The group anticipates a decline in sales by $225 billion in next three months, leading to 5 million to 7 million job losses. For context, it says it currently employs 15.6 million Americans and is the nation’s second largest employer.
It’s clear the pain is already starting. Union Square Hospitality announced it laid off 2,000 workers after closing its restaurants, which include LoBall and Gramercy Tavern.
Companies are also moving to immediately curb expansion. Darden Restaurants—the owner of the Capital Grille, Olive Garden and LongHorn Steakhouse—told investors in a conference call Thursday that it’s halting all new restaurant construction. The company also pulled its forecast for the year and suspended its dividend.
At the same time, the debt issue is likely to get much worse quickly. Darden, Denny’s and Ruth’s Hospitality Group recently announced they’re accessing or increasing credit lines, as did Starbucks.
“There are a lot of chains that are in trouble,” Halen said. “A lot of these restaurant chains and restaurant groups have a ton of debt, and they are not equipped to deal with a situation where basically sales are getting shut down overnight.”
Source: Thanks https://www.crainsnewyork.com/food-beverage/eating-out-might-never-be-same