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Analysis

The Post-COVID Restaurant

In the UK we have just been told it would be another 6 weeks (at best) before restaurants will be permitted to have dine-in guests (July 2020). It’s been 6 weeks since the COVID ‘lockdown’ started and since then we have only been permitted to serve takeaway or delivery meals.

Some restaurants closed temporarily. Some continued offering take away. Some pivoted to offer a take out option. Some have recently re-opened for takeaway and delivery (as we have since 1st May) and others have forged new paths to maintain their business offer such as converting their restaurant space to retail space offering fresh produce (we have just launched an online wine shop for example). Some restaurants are still closed. Some will never open again and some have already entered administration (liquidation). There have been redundancies (lay-offs) and I expect there will be more to come.

However, this is all reactionary and we need to look longer-term about what happens after restrictions begin to be lifted, and how the slow return to normal (or even if we will ever have the same normal) will impact business in the short, medium and long term.

In the Eye of the Storm

As of now, we are in the eye of the storm. The storm front hit when we were instructed to lockdown. We have had time to adjust and adapt and are now looking at what will happen once the storm has passed and what that landscape will look like. We’re at the mid-point in that cycle right now.

Takeaway and delivery sales have jumped for those who are doing this. This is because there is no dine-in option and people are fed up cooking at home (as well as the regulars who love your food). But, the increase does not deliver the same revenue as the hybrid of dine-in and take-out did before COVID (on a like-for-like basis). And we have to consider that as more establishments come out of hibernation while dine-in is suspended, there will be more competition for these orders as customers have more choices.

A recent YouGov poll showed that consumer confidence about returning to public spaces such as restaurants was only at 37% currently. How this changes over the next 6 weeks will depend on a number of factors: one is fear, one is frustration, one is how the government assures us and provides clarity on the direction we are going. It’s not going to be easy and, based on experience so far, I don’t think this will dramatically shift. Furthermore, we will be subject to social distancing and restricted numbers inside the building at any one time. The end result? Lower revenues for dine-in guests compared to pre-COVID.

Now is the perfect time to take stock on where your restaurant is. You need to look at business resilience for the long term based on an assumed lower revenue for a period of potentially years. You need to look at how you could add revenue streams you have not explored to increase this. You need to look at how you pay your bills and, specifically any debt financing you may have.

Hypothetical Post-COVID Restaurants

The WHO says that spacing indoors needs to be at least 1 meter, though we will be dependent on the government to mandate this or set another limit. Some countries have introduced barriers between tables as a permissible option, but this remains to be seen if this is OK in the UK. We have been receiving adverts for all sorts of new screens and barriers to protect serve-over counters and it’s going to be a very strange world if we start living behind curtains.

This shift in the landscape is going to be a challenge in the fast-casual sector who rely on volumes and small margins. However, for the fine-dining end of the market this is not too far away from business as usual. Fine dining restaurants generally have more space between tables and have a very different feel, and are also more expensive. This is a consequence of fewer covers per square meter, generally higher-paid professional employees, and also a higher number of them to ensure great service is offered to the guests.

In the new world of dining in the UK, there is an opportunity to become more professional as our European neighbours have been for some time. But, your guests will need to be comfortable with the higher price point unless you have a way to deliver additional revenue streams, and you may need to upskill to understand this segment of the market. This will also lead to fewer restaurants on the high street which will have a knock-on impact on the sector and the people who currently work in it.

A post-COVID restaurant may well look like one of these.

Fine Dining is the New Normal

  • Fewer diners and more space
  • A more relaxed feel to the dining experience
  • More staff per guest overall
  • Higher price points
  • A targeted takeaway offering
  • Secondary complementary revenue streams

Diversification Ensures Resilience

Although Fine Dining establishments may well adopt diversification in revenue streams for better resilience, restaurants which are not fine dining will have to embrace as many revenue channels as feasible.

With a strong takeaway and delivery offering alongside the dine-in offering, the restaurant has the opportunity to minimise a rise in prices, though we have to be conscious that input costs (COGS) have already gone up and will continue to do so across the board in the medium term. With secondary channels (such as wine stores, etc) the new restaurant can be more than just a place to go and eat. Diversification is essential.

Food Factories

The alternative will be a food factory with a limited offering, clearly packaged and able to deliver quality at volume. Some have pivoted to deliver this now in response to the crisis. It remains to be seen how or if they change in a post-COVID world.

Survivors will set aside their ego and look at it objectively: they have a dining space and a kitchen, so how can it be used in the current environment to generate revenue and make a profit?

Financial Restructuring Opportunity

If you have borrowed money to finance your business, whether that is loans or equipment leasing, or anything in between, now is a good time to look to restructure your financing and potentially leverage the CBILS offering to reduce your liabilities over the longer term. You will need a solid financial plan to back this up, but it should demonstrate to your CBILS financier that you are looking to build in financial resilience going forward.

Go out and get your settlement figures for any financial package you already have and plan out how a CBILS loan may look as a replacement for some or all of the existing plans. Be prudent and you may be able to reduce your future commitments, your personal liabilities, and ensure business survival over the next 2 years until we achieve a new normal, whatever that is.

Leveraging Gift Vouchers

These are tricky in a crisis.

In normal trading, you have a rolling process where people pay you money in advance of receiving the product at a later stage. In reality, the money you take this week pays for the bills you received last month depending on how your cash flow and payment cycles work). So, you will be funding the delivery of the voucher out of receipts you take a month afterwards.

In the current crisis, the wholesale offer of vouchers (especially at a discount) might bring a cash windfall to cover some immediate costs such as payroll or suppliers, but it means you will have a wave of guests cashing in their special offer vouchers in the near future from stock you will subsequently need to pay for from revenue you will not receive (remember, you already spent the revenue from the vouchers). The wholesale voucher offer equates to a short-term business loan your customers provide you and then call in.

The selling of vouchers is always a good secondary revenue stream, but you need to carefully plan any injection of cash into the business and how it will be repaid. As a primary source of revenue, I would argue against it.

Key Factors for the Future

A strong restaurant in the future will have four key factors:

  • Capital Reserves & Cash Flow
  • Measured Growth Strategy
  • Ability to Pivot
  • The Zebra Effect

Further Reading

Nick Kokonas on Resurrecting Restaurants, Skin in the Game, and Investing on the Tim Ferriss show.

The Future of Restaurants Part 1 (Big Hospitality)

Thanks for reading this article about the restaurant business. I hope you liked it! If there is anything you'd like me to discuss or write about just let me know in the comments or via the contact form.

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