It’s all over the news – 2020 has had a devastating impact on an already challenging industry. The National Restaurant Association reports that restaurant and foodservice sales were down $240 billion. This means the whole industry had a growth setback of six years, bringing sales to 2014 levels and resulting in over 110 thousand establishments closing their doors either temporarily or for good.
Over 2.5 million jobs were lost in 2020 in the foodservice & restaurant industry alone. Yet, as the pandemic continues into 2021, many investors have started to consider whether this is a good time to open a restaurant, as lockdowns, mandates, and restrictions are slowly starting to be lifted across the country.
How Were Fine Dining Restaurants Impacted in Comparison to Fast Food Establishments?
Of all restaurant operators, those who run fine dining establishments have taken the biggest hit during the pandemic. Research by QSR Magazine reveals that over 72% of fine dining restaurants have had to let go of at least 3⁄4 of their staff, after having an 82% decline in their sales following the beginning of the COVID-19 outbreak. In comparison, well-known fast-food brands have seen a 90% increase in drive-thru sales. The challenge for fine dining restaurants and similar establishments is pivoting to a carry-out model when most of their menu is meant for dine-in meals and their clientele does not typically think of their establishments as a place where they can purchase carry-out food. Brands that rely more heavily on dine-in business have had a hard time switching to a curbside or to-go business model. Unfortunately, many veteran restaurant operators found themselves unable to adapt to the new normal and have closed their doors for good.
Why Is Now a Good Time to Invest in Restaurants?
While hundreds of thousands of restaurants folded under the pressure of the current bear market, investors across the country are turning their attention to the potential opportunity to fill up the market gaps left behind by all the establishments that closed their doors. Because the restaurant industry is highly competitive by nature, investors would typically pay premium lease
rates for spaces in highly-populated areas. With many of those highly sought-after spaces going vacant, landlords are more likely to offer better lease rates to reflect the new reality.
The nationwide closings also meant that many second-generation restaurant spaces have now become available for investors looking for a turn-key opportunity to get into the industry without paying for the larger upfront cost of starting a restaurant from scratch. Second-generation restaurants often come equipped with furniture, fixtures, and equipment. Besides, the pandemic shutdowns caused many restaurant owners to cut their losses and be eager to sign over their lease of prime locations with no key money. Markets such as the Midwest and California may offer the biggest opportunities for investors looking to lease second-generation restaurants at a discount.
What Are the Risks and Rewards of Investing in the Restaurant Industry?
Perhaps the biggest factor that may decide which restaurants make it through the crisis and which ones don’t is capital. Small neighborhood restaurants and bars with limited access to emergency capital have been the biggest casualty in this industry. Besides lack of capital, other common risks associated with running a restaurant may include:
- Inadequate cash flow to maintain day-to-day operations such as payroll, rent, and supplies;
- Inadequate or insufficient marketing strategy resulting in less foot traffic and sales;
- Inadequate brand and reputation management leading to inaccurate negative reviews that may scare away new customers;
- Failure to maintain proper certifications, licensing, and safe food storage practices;
- Lawsuits due to accidents, injuries, or foodborne illnesses resulting in significant financial hardships and harmed reputations
If a prospective restaurant owner has a strong business plan in place as well as a plan for securing proper capital in advance, they may be better equipped to navigate challenges that will inevitably come along the way. Running a restaurant can also be rewarding, and the current bear market makes it affordable for someone wanting to come into the industry without spending a lot on startup costs. There’s no doubt that starting a restaurant is hard, but when done right, a restaurant can be an excellent source of income, enabling greater freedom for anyone who owns it.
What Does the Future Look Like for Restaurant Owners?
Even though it’s hard to feel optimistic about the future as we still deal with the challenges of the pandemic, the future of restaurants that are flexible enough to quickly adapt their business model to the uncertainty of the market appears to be promising. Not only is this a favorable time to acquire real estate or enter into a discounted lease arrangement to snatch prime locations, but it is also the time to think outside the box and make use of technology to increase off-premise dining options.