Why the Pandemic Could Create Investment Opportunities

    Two industry veterans say challenging times will bring favorable locations, accommodating landlords.

    Web Exclusives | April 14, 2020 | Ben Coley
    The food line at Five Guys Burger & Fries.
    Unsplash/Marcel Heil

    Five Guys and Popeyes franchisee Rick Fisher sees a lot of real estate similarities to the Great Recession.

    Five Guys and Popeyes franchisee Rick Fisher and Fransmart CEO Dan Rowe believe the restaurant industry will experience major changes in the post-pandemic world.

    Within some of those changes lies opportunity.

    Rowe says that Fransmart, a company that helps franchises grow, has been getting a surprising number of leads, and has closed on a couple of deals in recent weeks. People are investing during the pandemic, Rowe notes, because the restaurant industry will look much different in a few months than it did 60 days ago.

    “The things that have challenged our industry for the last five to seven years has been the sense that there’s too many other restaurants,” Rowe says. “And so, restaurant sales were soft for the last five to seven years. It’s been tougher to get employees. The unemployment was low. And it’s also expensive. So many people want locations that all the prices keep going up, up, up, and the landlords aren’t making any deals. … All of these restaurants are about to have a big shift in the supply and demand quotient back in their favor for access to really good locations, really good people, and really good deals.”

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    “If you know what you’re doing, and you have access to capital, if you were going to build franchises anyway, this environment makes them twice as attractive,” he adds.

    Fisher, who grew his franchising business during the Great Recession more than a decade ago, sees many similarities in the current climate.

    He envisions environments where spaces will open up, landlords will become more reasonable, and opportunities will be prevalent. He says in some cases, there may be a weaker brand that didn’t make it, and his team can move in and easily convert the real estate. Other times, a property may become available because of circumstances on the developer side of things.

    “We saw a lot of that back in ’08, and we took advantage of it,” Fisher says. “We accelerated our growth. We leaned into it, and we were in a position to do that. … Our sales were down, but they didn’t get crushed. And we had a pretty low debt to equity ratio. We were pretty well-positioned from a capital structure, which again is similar to us today. We’re leaning in, and we’re looking at new opportunities now for the same reasons. I think landlords and developers are going to be more open to things they wouldn’t otherwise do. Brands are more cooperative and taking down some of their normal strict and stringent rules on sites.”

    “And I think the conditions for employment are favorable,” he continues. “A lot of the arrows that normally point neutral or down when you get into an oversubscribed environment, which is what we had about 60 days ago, start to point very much in favor. Typically, what happens is, the weaker players unfortunately can’t take advantage and that’s where we exploit that scene.”

    In other words, Fisher has seen this movie play out before. He acknowledges that the situation is different because the pandemic has caused a behavioral change that could last much longer, but looking back on it, he thinks his team will feel good about the risks it took.

    Promising locations and favorable lease deals aren’t the only things Fisher and Rowe expect for the industry.

    For example, the industry veterans agree consumers will demand safety in restaurants, and brands will respond by putting sanitation at the forefront of their marketing efforts. Fisher says the move toward cashless transactions will accelerate, and that restaurants may soon be required to carry COVID-19 certifications to prove their employees are being tested and protocols are being enforced. At his stores, the employees are tested with infrared thermometers before starting a shift.

    “Because if I’m a customer and I walk into a restaurant, and there’s all these folks in close quarters,” says Fisher, who’s heard rumblings of a possible COVID-19 certification. “They’re not following the 6-foot rule. If they’re contagious, that’s a time bomb.”

    Rowe notes there will always be a demand to eat, so people will continue to flock to restaurants. However, in the post-pandemic world, there will be much fewer players dividing up that demand—much unlike the saturation and softer sales of the past several years.

    “We’re growing a diner concept and this diner concept is doing three times the off-premises sales that we did in the past,” Rowe says. “And he says when we go back to normal, we think we’re going to have the normal sales, plus the extra off-premises revenue that used to just sort of be a trickle.”

    At Five Guys and Popeyes, Fisher says, he’s avoided extensive layoffs and implemented typical COVID-19 protocols such as extensive sanitation and contactless engagement with customers. There’s been a 20 to 25 percent decline in sales year-over-year, but there has been improvement each week because customers are beginning to adapt to the new off-premises only model.

    As for the advice he’d give to franchisees starting with an emerging brand during the pandemic, Fisher says, they must first believe in the brand and the people. He adds operators should think as an entrepreneur and see what other investment opportunities are available.

    He advises franchisees to look at matters carefully today and compare it to what the business climate will look like in two years.

    “Two years from now when this is all past us, it’s going to cost you more, it’s going to take you a longer time, and you may not even be able to get in the game whereas today I think there’s a door that’s kicked wide open for people with a little bit more risk tolerance profile,” Fisher says. “But in exchange I think you’ll get a much more healthy return for the risk you’re taking today.”