Restaurant/Hospitality

Few industries were impacted as directly and quickly by the coronavirus as the hospitality and restaurant industries. Unlike the 2008-2009 “Great Recession,” which took about 18 months to reach a bottom, these industries found the cliff over the course of a few weeks in March. Travel restrictions, social distancing, stay at home orders, and an overall concern by the public about the spread of COVID‑19 created a perfect storm of closures, layoffs, and cash flow issues in these industries. Although the recent flow of small business funding from the CARES Act and the phased-in lifting of the government orders are first steps for these businesses to reopen, the process will undoubtedly be irregular and bumpy at times and require a combination of transparency, trust, and strategic thinking.

While it’s an overused term these days, there will really be a “new normal” for the hospitality and restaurant industries. Reduced occupancy rates, reconstituted floor layouts, and aggressive cleanliness procedures will all contribute to higher expenses and greater cash needs. Business owners in both the restaurant and hospitality industries (which sometimes overlap) should be cognizant of the following issues as part of an overall reopening plan:

  • Consumer sentiment - The COVID‑19 fallout is a double-whammy of economic pain and public health uncertainty. Consumer habits will have changed, and the first few months after reopening will be slow as consumers regain confidence that it is safe to eat, sleep, and travel once again. Large gatherings may still be prohibited in certain states, so a business must be prepared to adapt to any longer-term restrictions. It’s also conceivable that consumers will choose to come down market and utilize restaurants or hotels that are at a lower price point than pre-COVID‑19.
  • Budgeting - Most annual budgets now need a complete overhaul. Cash remains king. Leveraging government and disaster loans, working to maintain existing lending facilities, and cutting unnecessary expenses was a good first step will help businesses through the initial re‑opening stage. However, business owners will need to prepare and continually update cash flow forecasts to maintain a firm grasp on future cash needs. Supply chains will be disrupted and previously used vendors may no longer be available. Reopening costs will be higher and capital spending will be lower. Moreover, for those restaurants or hotels that are franchised, business owners must continue to work with the franchisors to establish sensible royalty and other franchise fee arrangements. Collaboration and cooperation among lenders, vendors, and franchisors will be as important as ever during this time.
  • Location -  Testing, government orders, and general location will impact the success of a reopening. Certain states and locales will be ahead of others. Smaller, rural markets will likely come back first, while the more densely populated urban areas will likely have far more restrictions in place for a while. Also, restaurants and hotels in or near large malls will likely be slower to come back than those in strip malls or one-off locations. Owners must continue to work with landlords to right-size rent obligations over the near term while the business reopens.
  • Employee retention - Those businesses lucky enough to have minimized layoffs are few and far between. Given the large potential pool of workers, many in the restaurant and hospitality industries may be competing with each other for the best employees or even competing with the lure of extended unemployment insurance. Others may simply not return due to fears of operating in a close-contact industry (i.e., servers or housekeepers). Training will be key as health procedures and service delivery will have changed post-COVID‑19. Some may need to implement soft openings to have enough time to train employees adequately in these new procedures.
  • Innovate - Winners and losers emerge in every crisis. Those who can adapt and innovate will survive and thrive. In the restaurant industry, mandated occupancy restrictions will force more curbside, online, and outdoor options than before. Menus will change due to re‑sourcing to a more localized supplier base. Hotels may mitigate a need to even utilize the front desk with patrons using smart phone apps for check in/out and as virtual keycards for their rooms. Certain customers may start basing their patronage decisions on who best implements hygiene and cleaning processes at their restaurant or hotels.

A successful re‑opening will depend on smart planning, maintaining access to capital, and conducting appropriate risk management. The McDonald Hopkins’ Business Re-Start Task Force is well-situated to assist restaurant or hotel business owners in achieving a positive result.

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