Where Does the Restaurant Industry Go from Here?

    Are more bankruptcies coming? What happens to operators who can't pay rent? Plenty of questions remain.

    McDonald's sign
    Flickr/Mike Mozart
    McDonald's, and many large-scale quick-serves, have weathered the pandemic storm better than most thanks to digital and drive-thru.

    While restaurant bankruptcies have been part of the COVID-19 story, it might not represent the massive chapter some predicted last March. At the least, there’s been a lull of late as restaurants try to navigate what, hopefully, might be the final stretch before the pent-up reward. However, it remains likely some chains and smaller operators will need to restructure to handle debt accrued over the past year-plus of this pandemic disaster. So we almost surely haven’t seen the last of Chapter 11s and M&A activity.

    Back in November, consulting firm AlixPartners released a study that said the limited-service restaurant segment nearly quadrupled debt between 2009 and the end of 2019. The full-service sector saw a less aggressive increase of nearly 30 percent. During the early days of COVID, brands engaged in negotiations with lenders. The goal being to draw down on revolvers to maximize liquidity runways and avoid covenant violations. This increased debt between 2019 and the last 12 months 2020 by 8.1 percent for limited-service units and 15.7 percent for full-serves. The former now sits at more than four times as much debt, while full service is at nearly 50 percent more than at the start of the Great Recession.  

    To put it simply, even as the light at the end of the COVID tunnel approaches, there is still plenty to sort out.

    According to the NYC Hospitality Alliance, 92 percent of Big Apple operators (from a survey of 400 or so) couldn’t afford to pay rent in December. These setbacks are going to come due.

    The good news is help is coming for many, with Congress passing President Joe Biden’s $1.9 trillion American Rescue Plan, which includes $28.6 billion in direct funding for independents and small chains. Yet is that the end-all of this conversation?

    Dave Bagley, a managing director with New York-based investment bank and advisory firm Carl Marks Advisors, leads the company’s restaurant group. He’s seen all of these realities unfurl from the trenches.

    What can owners do from an operations perspective if they can’t make rent? When will landlords and lenders stop kicking the can down the road, and how will it impact restaurants? Can the sector dig itself out of all this debt? And will there be a serious uptick in distressed M&A?

    Bagley answered these questions and much more in a wide-ranging chat with QSR.

    Let’s start with some big-picture stuff. What was your response to the federal aid package? Does it go far enough?

    There were several things that were helpful to restaurants within how the federal aid package was structured. Instead of putting millions on unemployment, the aid package allowed companies to remain attached to their employees. As with any federal aid/stimulus, there were companies that used the money wisely and there were others that perhaps were not as straightforward with the use of the funds. Many restaurant operators consider employees more like family or a team, so the fact that people remained employees was critical. So many hard-working people that would have resisted taking direct federal aid were able to retain their dignity as employees through the crisis.

    The other important element of the package was the ability for the funds to be used for rent. Landlords gave companies a lot of concessions, forbearances, and deferrals of rent at the beginning of the crisis. However, no one had any idea that the lockdowns would remain in place as long as they did. The ability to get money to the landlords that stood by struggling locations was critical.

    While certain people have decried the fact that bigger companies took aid, they needed to as well. Each of them employs a lot more people than single location operators, and because the money was going through the banks, money going to larger companies kept a lot more people on payrolls more efficiently than metering out small $5,000–$10,000 loans. Now many of the larger companies may have had other resources to tap into, but again, no one had any idea how long things were going to last.

    As far as the total stimulus/aid amount, the government put a lot of money into the system and made it available for a lot of companies—the amount was probably appropriate. They needed to act quickly and forcefully. Funding the money through the banks was the right choice to get money to companies quickly and efficiently. It also served to keep bank employment in place. Ultimately, differences in state-by-state lockdowns, disparate impact of lockdowns on segments of the industry and a lack of focus on smaller companies probably inhibited aid getting to those that needed it the most. Many companies were saved, but many others were not because of the inefficiencies in the plan.


    Wendy's drive-thru surged to 90 percent of business early on during COVID-19.

    What have you heard from some restaurants regarding the package? What are some of the early questions/concerns/biggest hopes?

    Restaurants that were able to access the funds were thankful. Some of our clients with businesses that fared well during the lockdowns are really thankful and their balance sheets are doing quite well.

    Overall, the program helped those companies the most where ownership was organized strategically and financially and who were able to act quickly and with purpose.

    The best component of the plan was the ability to keep employees in place.

    Many of the people we talk to who took loans have already or are in the process of getting the loans forgiven. We’re only working with a couple that took the money and now face some potential issues.

    What’s the next step?

    This is a high-level outline for the reopening process our clients face:


    Many restaurants have survived because people changed their buying habits and supported businesses through the lockdowns.

    Restaurants need to figure out how to thank customers for their continued support, while providing an avenue to bring back those that could not.

    Grand re-openings provide a chance to create attention and show gratitude for customers and to welcome employees back as well.

    Customers have gotten used to ordering online or over the phone, and companies have been able to raise the bar on ordering systems and ease of use for customers. They should make sure they have similar experiences back in their restaurants and are not bogged down with poor servers, massive menus that are difficult to evaluate, and slow payment.

    At home customers can reach into the fridge for a beverage. They should not wait too long for a similar service at a restaurant.


    Hopefully companies have been able to retain their key staff and are ready to hire again.

    Hiring and training are critical parts of a restaurant’s brand and there are no shortcuts.

    Restaurants need staff but more importantly they need good staff that are ready to meet the customers’ expectations and become part of the team.

    There is no real need to rehire prior employees that were just fair (or less than)—this can be an opportunity to upgrade and improve the quality of employees.

    Compensation expectations need to be discussed; many restaurant employees made ends meet with the inclusion of tips. It is unclear what tips look like in the short term as we make our way back to “normal.”


    Keep a limit on menus—many restaurants have limited their menus and all should think hard about wantonly adding back everything they used to have on the menu previously. They should do what they are good at and focus efforts on being great. For the near term, customers will have sympathy for limited offerings and companies should embrace it.

    Cleanliness, customer and employee safety were always critical … Now it actually is. Restaurants should be seen doing the right things, like taking extra cleaning steps and visibly doing anything to make people comfortable to be out. Customers are always right, so managers and owners will need to train and support employees on how to deal with patrons that need a little help following the rules. They should be courteous and respectful but should not pontificate on safety or be obnoxious to the point of being self-righteous. As always treat others as you would like to be treated.

    Restaurants should retain the profitable portions of new delivery channels. They should push take out and catering but continue to be leery of delivery companies. Domino’s CEO Richard Allison has made it a point that they have never made much money on delivery, it’s part of the service. Door Dash, GrubHub, Uber Eats and others will need to show a profit at some point and that will become more difficult as people go back to eating out.


    In the restaurant industry, we tend to look at a company’s brand more as how they deliver on the customer’s experience. The customer experience has several components, the most important of which are facilities, service and products.

    Facilities over the last year has moved from seats, booths, ambiance and if the bathrooms are nice, to delivery and catering. Companies need to assess their facilities with a critical eye as customers have gotten used to their nice kitchens, nice tables and clean bathrooms--or at least have been able to overlook any shortcomings in their homes. A restaurant’s facility will be immediately compared to where the customer had their product the last time, so don’t make them wish they were eating at home.

    Service is a key component of why a customer comes to a specific restaurant. Elements of good service include convenience, speed, selection, variety, friendliness, and quick help. Restaurants should make sure service meshes with the customer’s expectations and price point.

    Products should be limited as restaurants ramp back up. Inventory costs need to be low, but also usage will be an issue until things are normalized. Companies can die due to quick growth by running out of capital as often as they die from lack of business. Price points must realign with expectations (old or renewed).

    Restaurants should ask: What does the competitive landscape look like now? Who is still in business and who has moved on?

    On rents and landlords, it is an exceptionally long topic. We are looking to be aggressive with shortening terms but then adding options and renewals on the back end to mitigate exposure. Ultimately, it is a balancing act between investment into a location and exposure to lease liability. As much as it seems like a take/take relationship, now is the time to look at giving on some items to get on others. Lots of retail space is available so now might be a good time to look at options. But one should be aware that many people have the same thought right now.

    Shake Shack

    Brands like Shake Shack and others have dialed up mobile in recent months.

    Even with federal relief in the picture, what do you think it’s going to take for restaurants to really start making a recovery?

    State by state, county by county, restrictions need to be relaxed for restaurants to really start making a recovery.

    Older generations want and desire community and will want to be out and about again. They just need to feel safe; either by being vaccinated or by seeing more traffic out and about. That will drive a lot of business across many segments that have suffered greatly during the locations. Specifically, the more family dining, sit down focused, bar component types of concepts.

    Younger generations and urban area workers need their employers to open offices and set expectations of working at work again. That will reinvigorate breakfast, lunch and snack-focused businesses.

    Entertainment and sports venue establishments need the leagues to pressure local governments to lift restrictions so people and employees can get back to work at those locations.

    Getting into some of the more nuanced conversations, what can operators, still struggling, do from an operations perspective when they’re unable to make rent? This is likely going to be an issue that persists well into 2021, if not beyond.

    At some point landlords have their own business issues to deal with. Many of them have loans and obligations of their own and will not be able to continually offer concessions. Longer-term, we believe the shutdowns and mandates may end up chilling the retail sale leaseback market from the point of view of investors not willing to pay as much for properties because they may see the need to hold more cash reserves or equity in the investment than they have traditionally.

    Luckily, there is and will be a glut of retail space available which should allow operators to have some level of leverage over landlords.

    However, that leverage will be limited on a location-by-location basis. Solid long-term locations will have competition looking to take advantage of any misstep by the current tenants. We have several clients looking at potential acquisitions or development locations based on that thesis currently.

    When do you think landlords and lenders will stop kicking the can down the road, and what will the impact be on restaurants?

    We are now looking at one full year since lenders started kicking the can down the road. Normally, they have six months as their grace period without additional information, paydown or some sort of resolution plan.

    If you look at the larger banks, they put massive loan reserves in place during 2020, which impacted their earnings. Much of those reserves became unnecessary, as for the most part large segments of the economy moved forward. Many of those banks now can start to look at recovering those reserves (which will improve their earnings) and perhaps will keep some in place to handle retail loan issues. If they do that then pressure on landlords will continue to be moderate.

    When the banks push landlords, or the landlord’s capital structure limits their flexibility, then restaurant owners will be forced to deal more intently with their rent issues.

    We anticipate that late Q2 and into Q3 there will be a lot of pressure on restaurants.

    Something that doesn’t get talked about enough is the debt being built out of all of this. Even in a recovery period, that burden will be there. How can the industry dig itself out?

    That is a great insight.

    Let’s start with the amounts owed to vendors. How many weeks out are the food vendors? No one paid them probably at least April and May last year. So instead of the normal 14 days or so terms outstanding, owners are now looking at 60–90 days. We typically work out plans to pay dollar for dollar so that at least business can get the goods they need to continue business and the accounts payable amounts do not grow. Many will have to work out long-term payment plans to handle the outstanding amounts.

    Do you see this translating to increased M&A? That’s already been the case in many bankruptcies, with chains getting purchased of Chapter 11. Is that a sign of things to come?

    Many companies will end up having to go through a bankruptcy to clear the debts. Others will sell and owners will just net less than they hoped for.

    We see a lot of transactions forthcoming. Once things open up and investors can see a path to normalized operations, then valuations will be easier to agree upon and transaction volumes will increase.

    All the trends of consumers preferring to eat out versus cook at home that were prevalent prior to the pandemic we believe will reappear and continue in the future. We believe the industry will continue to be a favorite of investors and operators.

    What do you think about all the SPACs forming?

    Any investment vehicle that Wall Street can dream up to bring capital to the industry is good. They will provide opportunities for growth and development.

    We would see the issues of a SPAC investment for the industry as similar to traditional fears about PE investors. Their timeline may be shorter than operators, and, at some point, timing of the investment and its anticipated or required returns may or may not impact decisions made by ownership.

    Bar Louie, which worked with Carl Marks on its turnaround and emergence from bankruptcy, was a great example of a restaurant chain that went leaner and more efficient and is now prepared to thrive in this post-pandemic world. What are some key attributes you believe will define the winners from the losers down the road?

    I was interim CFO for Bar Louie about ten years ago before their sale to Sun Capital. It was and is a good concept and another great example of how a business can be started with nothing and grow. The great American story.

    Several of the bankruptcies that occurred as the pandemic started were just concepts that had been on the edge of disaster anyway. Declining sales, poor locations, bad menus, nonexistent or bad marketing and poor brand awareness or perception. We should not have been surprised that many of them headed down that path.

    Many companies have pursued growth and development based on availability of retail space. Pretty much every time we work with a company there are a number of locations that are poor performers but have a “story.” Many times, those stories involve road construction, poor management (that was just replaced), increased competition or other reasons that a turnaround is around the corner.

    Bar Louie’s team looked at their locations and were highly selective. They pruned many of those almost-there locations in favor of focusing their financial and management resources on the locations that resonated with consumers and were positive reflections of the brand. Those actions provided a baseline for a reinvigorated company that should recover quickly when lockdowns are eased and be well positioned for profitability and perhaps discriminating growth in the future.

    Financial flexibility to protect the company in a downturn and prevent short term hardships from impacting sound long term planning is the one key for companies to survive.

    Long term, consumers are smart, discerning and will end up gravitating to quality and value and the brands that meet their consumers needs are the ones that will last.