The COVID-19 journey for restaurants was often a tale of the haves and have-nots. Well-capitalized brands guarded capital, stock-piled assets, and got aggressive when the day to do so arrived. Many independents and small shops didn’t have the luxury. Thin cash reserves forced them to confront COVID as a Groundhog Day episode of Survivor. And it stretched for months.
There were 763,931 restaurants pre-coronavirus, according to Datassential’s Firefly platform. By summer, 90,296 closed permanently. Alongside 12,596 openings, the tally was 698,176 units as recovery began to flip into gear, or a net loss of 65,755 restaurants.
Nearly 9 percent of the total field gone in about 16 months.
This rationalization left behind a different world. Of the closures, 7.4 percent were national chains, 13.3 percent regional, and 8.5 percent independent. Fine-dining restaurants accounted for 10.9 percent of the cut, while casual dining represented 9.2 percent, and midscale 9.1 percent. Food trucks absorbed the biggest blow, with 19.5 percent of the pool closing during COVID. Quick-service and fast-casual, meanwhile, trailed the pack at 7.9 and 7.2 percent, respectively.
As you might expect, restaurant franchising felt the pandemic crush like any other sector. According to FranConnect, a management solutions company, lead generation was significantly depressed across America in 2020. Enterprise brands saw leads fall 36 percent. More notable, though, deals per brand tumbled off a cliff for restaurants, with quick-serves plunging 63 percent and sit-down chains nearly 80 percent.
The International Franchise Association, based on FRANdata statistics, said quick-service franchise venues retracted 6.7 percent in 2020. But it projects the field to grow 4.1 percent in 2021.
This is optimism experts around the franchising community share. Firehouse Subs CEO Don Fox believes a post-COVID arena will be “increasingly favorable for franchising in general.”
“I do think the landscape will be a little bit different in terms of what brands might be able to tap into,” Fox says. “Because, I think, as a result of the pandemic, for quite some time people’s nature is going to be to look at a particular brand they might invest in and look very heavily at the performance of the brand during the pandemic, with the thought that this could happen again. It’s going to factor very much into people’s thinking.”
To understate it, the notion of a global health crisis was a non-issue before COVID, in terms of investment prospects. Few considered such a thing even possible in today’s age, let alone at a scale that could freeze in-person dining north of a calendar year.
Fox says Firehouse, which exited 2020 with 1,102 franchised stores (along with 38 corporate), had a solid pipeline headed into the year. But reflective of FranConnect’s data, progress crawled at the height of COVID. People, understandably, were reluctant to part with savings and even more hesitant to back one of the hardest-hit sectors in the country.
Yet that’s exactly where this conversation is changing.
Interest in Firehouse from prospective and current franchises has fired up in recent months. “We talk proactively about what our experience has been because we have a great story,” Fox says. “Unprecedented level of success. Sales every week have set new records.”
The first Monday of the “official pandemic,” March 16, 2020, Firehouse stopped collecting royalties. A day later, it did the same for ad fees. It would be months before Firehouse asked operators for either. And even then, it came as deferred payments. Firehouse wanted to keep dollars in the wallets of franchisees until it had an idea where COVID was tracking.
However, although Firehouse didn’t realize it then, the chain completed its recovery—sales returning to prior-year levels—after just 10 weeks. “There’s no way I could have predicted that, especially through the first four,” Fox says. “At the end of Week 4, we were still 45 percent negative.”
Come summer, it was clear to Fox this wasn’t a short-term win. So the brand forgave all deferred royalties. This was a unique opportunity, Fox says, to gain “incredible goodwill” with Firehouse’s franchise community. “That is, from my perspective, opportunities like that will rarely every come around for you. It’s like a gift that’s handed to you divinely. And you can either leverage it or turn your back on it.”
Presently, Firehouse’s two-year same-store sales are comping, on any given week, 25 percent positive against 2019 levels. Fox credits it to broader realities, like stimulus payments and pent-up demand. But also to the brand’s digital expansion and the fact it’s at 2–2.5X in terms of dollars flowing through those channels. Like many restaurants, COVID gave Firehouse a chance to introduce consumers to off-premises; discovery from guests who didn’t prefer Firehouse for that occasion before. Or simply didn’t think of the brand as a takeout/delivery option.
In turn, you’re talking about a much different investment for franchisees today than pre-virus. The restaurant industry has gone from a question mark to a ship rocketing up a recovery wave.
Per Yelp, more than 3.7 million diners were seated via its platform in May 2021—an all-time high.
Food services and drinking places produced sales of $71.3 billion in May. The previous May? It was just $42.3 billion, according to Census data.
Dan Rowe, founder and CEO of Fransmart, a development company that helped scale Five Guys and QDOBA in the past, and works currently with a handful of concepts, including The Halal Guys, Curry Up Now, and Taffer’s Tavern, says closures brought on by COVID, while unfortunate, have altered the franchising outlook. And in an alluring way for those ready and willing to dive in.
“Two years ago, it was hard to be a franchisee because it was just tough to find locations,” Rowe says. “It just felt like there were too many restaurants open. Too many businesses open. And COVID, as sad as it was, basically a third to 40 percent of restaurants that were open are closed or severely limping. And that goes across the spectrum of retail and service, and everything else.”