Restaurants Brace for Delta Surge, and Survival Tactics Yet Again

Restaurants are beginning to battle headwinds from the Delta variant. While the industry extended its streak of positive sales growth to 21 weeks, according to Black Box Intelligence, sales and traffic trends softened for the fourth straight period (week ending August 8).

In addition, off-premises numbers bumped compared to the previous week. While that might sound like a nice spin, it mirrors COVID-19’s most disruptive trend line—dine-in sales sliding in favor of business taking place outside the four walls of restaurants. Proof, Black Box said, “that consumers are reacting to the rapid rise in U.S. COVID cases driven by the Delta variant.”

Just this week, the U.S. Department of Health and Human Services announced Americans who received the Pfizer or Moderna vaccines, regardless of age, would need booster shots eight months after getting their second jab. This process could begin nationwide as early as September 20, pending FDA approval. People who received the Johnson & Johnson vaccine will also likely require a booster.

On Tuesday, the Centers for Disease Control and Prevention reported the Delta variant currently accounts for more than 98.8 percent of American cases. August has been the third-worst month for COVID numbers in 2021, trailing only January and February.

In the week ending August 8, just fast casual improved sales versus the prior seven-day stretch, per Black Box. Fine dining, meanwhile, posted the biggest drop, followed by family dining. Again, evidence of dine-in anxiety picking up.

Sales performance declined for 29 states during the week, with four dropping into the red.

Unsurprisingly, this COVID surge surfaced new challenges for restaurants. And it’s been placed in a pressure cooker in New York City, New Orleans, San Francisco, and other markets asking operators to require proof of vaccination from customers.

According to a Snagajob survey conducted this week of 1,872 hourly workers, 33 percent said the Delta variant and recent uptick in COVID cases has made them more hesitant to return to or go to work. Forty-nine percent said how much they will interact with the public is a factor they consider when deciding to apply to a job or not. And 67 percent noted they’d work for an employer that required them to be vaccinated and 93 percent are willing to work where they are required to wear a mask.

Is asking for proof of vaccination from diners factored into that hesitation? There’s no question it was a significant concern months ago when it came to enforcing masks, with the National Restaurant Association’s ServeSafe platform even creating a Conflict Descalation training module to help restaurants handle angry retorts.

In NYC, where restaurants will need to comply by September 13, businesses will be fined $1,000 for a first offense, $2,000 for a second, and $5,000 for a third.

Customers need to show proof of vaccination in the form of a CDC-issued vaccine card, the “New York state Excelsior Pass,” or the NYC COVID Safe app. Guests can also just display a photo of their vaccination card. OpenTable has an option where people can confirm their vaccination status before booking a reservation as well.

Logistics aside, the challenge ahead is walking into very gray areas for operators. Will it be just like checking ID for a drink? It doesn’t seem likely, given how mask mandates unfolded in 2020. You might see “vaccine bouncers,” or staff dedicated just to easing and enforcing rules. There will probably be viral videos aplenty on social media.

Art Depole, a MOOYAH Burgers, Fries & Shakes franchisee who owns a store in Times Square, has noticed a downturn of late.

“While we only have a small amount of data to look at, we have already seen about a 40 percent decline in sales week over week,” he says. “Our lunch traffic is especially down as we are not seeing nearly as many dine-in guests or office workers in general in the city. We have also seen a considerable decline in tourist traffic and that was reflected last weekend, being one of our slowest weekends since March.”

Depole adds the current dynamic only exacerbated labor problems mounting well ahead of the Delta surge. Currently, about two-thirds of the staff is vaccinated, he says, and those who are not have told Depole they’ll most likely leave if forced to do so. A number of people actually came to the restaurant due to the fact their former employer required vaccinations.

But this isn’t about being pro- or anti-vaccine, he says. “While we always want to prioritize the health and safety of our guests, I think people need to understand the strain this will put on an industry that, I would argue, has been among the hardest hit during the pandemic,” Depole says. “Restaurants are in a tough spot being forced to police the issue for the city, and it seems unfair that certain industries are being singled out.”

“For example, 5,000 people can co-mingle in large retailers down the street from us with no masks and no questions asked about vaccines, and likely these retailers aren’t cleaning and sanitizing to the standards we hold to,” he adds. “We disinfect and sanitize in our restaurant every 15 minutes with a peroxide-based cleaner that kills COVID-19, and we take great pride in the fact that our restaurant has had zero cases of COVID among guests and staff. It’s difficult for us to turn away good customers who are not vaccinated while other businesses face no such requirements.”

How will Depole enforce NYC’s mandates? It’s a good question, he says. The store hasn’t received much guidance from the city, but it’s Depole’s understanding they’re expected to check vaccine status at the door and turn away unvaccinated customers who want to dine in.

“The issue for us is that to properly enforce the mandate, we will need to hire someone to stand at the door to check our guests' vaccine status,” he says. “On a typical Friday, we are open from 11 to 2 a.m., which means that we will have to pay $15 per hour for someone to stand at the door for 16 hours which will run us an extra $6,000–$7,000 per month in payroll. Right now, that is an expense we just can't absorb as we are already struggling to keep our heads above water.”

Alec Haesler, a director at Carl Marks Advisors, also spoke with QSR in a wide-ranging interview about the hurdles ahead, where restaurants go from here, and much more.

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As restaurant operators try to keep pace with this demand, they have been hit hard by operational challenges.

The decision to mandate vaccines among customers or not is on the minds of countless restaurants right now. Is this a dangerous line to walk? Is it an inevitable one? Are there possible benefits?

Since the onset of COVID, regulations have generally been enacted and enforced at the state and local level, and we don’t anticipate we will see a federal vaccine mandate for the restaurant, entertainment, and leisure industries. Rather, vaccine mandates will vary from region to region. Certain municipalities have been more proactive in mandating vaccines for indoor dining (New York, parts of California), while others have been more reactive, in response to the Delta variant.

Like any other COVID restriction, vaccine mandates will be a highly controversial decision, with a visceral reaction on both sides. However, the benefits likely outweigh the costs. While certain customers may react negatively, operational stability is critical to the economic recovery of the restaurant industry. This includes keeping staff safe and continuing to operate without further lockdowns or seating capacity restrictions.

The best way to do this is by taking the necessary steps and complying with federal, state, and local health ordinances.

If vaccinations do get mandated for indoor dining, like in NYC, what advice would you give restaurants trying to enforce them? As we all know, it was difficult enough to get some customers to wear masks.

Restaurant operators have been forced to walk a difficult tightrope over the last 18 months. COVID regulations have been complex and somewhat poorly communicated, the environment has become extremely politicized, and often front-line restaurant workers have borne the brunt of that anger.

Operators have adapted to a myriad of restrictions, including indoor capacity restrictions, social distancing, and mask mandates. They should lean on those past experiences to create an accommodating experience for all. That could include using newly created outdoor dining and offering to-go options for unvaccinated or noncompliant customers. Some may react negatively, but restaurant operators need to balance creating a welcoming and accommodating environment while complying with mandates.

More generally, what do operators and management teams need to be thinking about now as we potentially gear up for more shutdowns?

After the last 18 months, the country can’t afford another period of stringent lockdowns. The economy needs time to stabilize, and Americans are experiencing lockdown fatigue. Politicians and health officials will likely do everything they can, short of shutdowns, to stem the new wave of COVID. This includes vaccine and mask mandates.

Operators and management teams need to be prepared. We at Carl Marks have advised clients as follows:

Every management team should conduct a post-mortem assessment of the last 18 months, looking at what they know now that they wish they knew previously, what they would do the same, and what they would do differently.

This should translate to a documented “Action Plan” for future lockdown (and subsequent reemergence) scenarios including steps they can take in advance, steps they should take immediately after (a “100-day plan”), and how they will we react to a prolonged lockdown (sustainability/survivability/reemergence).

Key considerations to answer in building this action plan are:

1. What level of customer demand (foot traffic for in-person, to-go, delivery) should we expect? 2020 was unprecedented, and forecasting was next to impossible. This time around, there is at least empirical evidence to lean on (foot traffic, average check size, etc.)

2. What level of unit-level staffing can be supported? This depends on the anticipated length of a lockdown. Hiring and onboarding post-emergence has been a significant challenge.

3. How do you manage vendors and landlords? What about other creditors? Vendors and landlords have taken a beating already. Will they accept further concessions?

4. Do we have the liquidity necessary to survive and reemerge? What steps do we need to take along the way to ensure that answer is “yes?"

It will be critical to build a business plan that embraces creativity, encourages a willingness to pivot strategy when necessary, and has the necessary capital to do so.

One of the biggest challenges of late has come behind the curtain, with supply chains, inflation, and, of course, labor. How can restaurants manage vendor/supplier relations now that we can potentially anticipate challenges from Delta waves? How much of the old pandemic playbook, from smaller orders to pared-down menus, can operators lean into?

The last few months have seen a significant recovery in consumer demand. As restaurant operators try to keep pace with this demand, they have been hit hard by operational challenges, and run the risk of declining customer satisfaction metrics, and potentially longer-term brand impairment.

In a sense, a short-term dip in consumer demand might help the current operational environment. It would allow vendors time to ramp back up while restaurant operators get some breathing room to hire, onboard and train new staffing levels. This would only be the case if a drop in demand were short-lived. A persistent downturn would essentially push things back to where we were in the second half of 2020 and restart the process anew.

In the event of future lockdowns or a prolonged COVID wave, the old playbook should still apply. A simpler, more flexible menu cuts down on staffing and food waste. To-go, delivery, and digital-only menus will continue to be important alternative revenue streams, each of which will require further investment.

Taco Bell

Taco Bell's Defy concept is a reflection of changing times: multiple drive-thru lanes and a focus on digital ordering.

The playbook needs to be applied to creditors as well. This includes reengaging creditors, as quickly as possible, to come up with a long-term plan that benefits all stakeholders. Most important is the ability to remain flexible, testing new alternatives, and responding to positive (and negative) customer feedback.

The uncertainty of the last 18 months has also put the focus on reliability and trust between vendors and restaurant operators, and we have seen a “we’re in this together” mentality emerge. As a result, personal/co-dependent relationships have been strengthened and are a major factor to consider alongside vendor economics. A CFO of a large full-service chain recently commented:

“Our flatbread supplier recently notified us that they would no longer be producing our flatbread without any forewarning or notice. This left us having to find a substitute product as quickly as possible and having to go without product in some markets for several weeks. This supplier had other flatbreads that we could consider switching to, but instead we chose to partner with a new supplier that we felt we could trust to be a better partner. We’re all facing a variety of challenges and going above and beyond in this environment goes a long way with our partners.”

Talk about cash flow and operational plans—how restaurants can survive if lockdowns arise again?

We often tell our clients that in any situation where a business if facing distress cash is king. Having the capital available to not just survive a downturn, but to invest in reemergence, is what will separate the successful operators from the rest.

During the initial wave of COVID, there was no historical precedent to rely upon. The situation was dire and the strategy was to preserve as much liquidity as possible. Near-term projections were in a sense “unforecastable.”

This time around, operators have some empirical evidence to lean on: what can you expect from customers, vendors, etc. Attaining operating balance to maintain customer satisfaction while generating positive cash flow (or, at a minimum, being cash flow neutral) is the end goal. Of course, there are added wrinkles this time around:

What can be done with rent expenses, vendor concessions, and/or funded debt obligations that were deferred into 2021? What can restaurant operators get this time around? What kind of government support might be available (CARES Act III, etc.)?

So far, much of the Delta response has been anecdotal in terms of customers expressing concern about dining out again. Yet sales continue to soar. If restaurants start putting restrictions back in, however, do you think we could be headed for another downturn?

Right now, concerns about dining out are being offset by lockdown fatigue. Without further restrictions, you will see ebbs and flows in customer demand—depending on regional dynamics and how bad the current wave gets.

The reinstatement of restrictions would push the industry back into some form of downturn. The severity of that downturn will depend on the severity (mask mandates vs lockdowns, etc.) and longevity of those restrictions.

The next several weeks will be interesting to watch, as vaccine mandates and other forms of restrictions take effect in municipalities across the nation (vaccine mandates in New Orleans began on August 16 and in New York City in several weeks). Monitoring customer foot traffic and other key performance indicators will give us a sense of where things might be headed.

If, as some predict, COVID pandemics may be with us for years to come, how should restaurants retool their business models/plan for what is to come?

The most important factor is to remain flexible. There is a great deal of uncertainty about the operating environment for the foreseeable future. It will be critical to build a business plan that embraces creativity, encourages a willingness to pivot strategy when necessary, and has the necessary capital to do so.

This can range from investment in to-go, digital, delivery, and ghost kitchens, to rethinking geographic positioning (proximity to social centers, business centers, etc.) or unit layout (less in-room dining, more space for to-go options, increased outdoor space, etc.).

Operators have done a great job innovating over the last 18 months, brainstorming and implementing strategies in record time. Now is the time to take the lessons that have been learned and leverage them to create something sustainable in what remains an uncertain world.