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What’s on the Menu for the Restaurant Industry?

Sep 11, 2020

In August 2020, EisnerAmper Director Michael Morris moderated “The State of the Restaurant Industry” webcast featuring Cushman & Wakefield panelists Garrick Brown, Vice President of Retail Research, along with Executive Managing Directors Phil Colicchio and Trip Schneck. Brown addressed the current state of the restaurant industry and how the pandemic is impacting the industry, opportunities going forward, and financial assumptions and expectations of what it means to have a successful restaurant business.

Current State

More than 90% of restaurants in the U.S. are independent, small businesses, family-owned or franchised. The restaurant industry was fifth in terms of PPP loans, representing approximately 8% of PPP lending, with 344,000 loans comprising $41 million. Data shows that the number of COVID-19 cases per state did not correlate with the number of loans provided to that state. In California, Texas, New York, Florida and Illinois, less than 16% of the total small businesses received PPP funding.

Except for restaurants, many food-related businesses, including grocery stores and non-grocery food stores, have somewhat recovered. Additionally, scaling back the $600 weekly of the Unemployment Insurance Benefit will result in less disposable income for people to spend on restaurants.

Restaurants have been closing this year, and the numbers will continue to increase in the second half of 2020.  Yelp data indicates 26,160 total restaurant closures thus far, with a significant uptick in closures in August 2020. Furthermore, 60% of total closures are permanent, which equates to approximately 16,000 restaurants.

Impact by Sector

Cushman predicts fine dining and fast casual restaurants are at the greatest risk of failure, with an estimated 50% failure rate, followed by mid-range and casual dining with an estimated 25% failure rate. Cushman sees fast food as best positioned to succeed among the major restaurant categories. However, it predicts a 20% failure rate for fast food, reflecting the overall gloomy outlook for the industry.  

Sectors with some risk include the fast food and quick service restaurants, which are experiencing some risk, while the sectors with the least risk include food halls and ghost kitchens.

Fine Dining

As the most labor-intensive type of restaurant, fine dining profitability is more difficult to achieve. High fixed rent and increased minimum wages are also contributing factors. The taste of millennials is also shifting away from fine dining. Fine dining should bounce back, however, the middle sectors are likely to get squeezed.

There are always some outliers that survive by being unique and quick to adapt to change. One of the top five restaurants in the U.S., Chicago’s Alinea, increased its numbers during the pandemic by turning its dining rooms into a production studio and introducing curbside and family meals.

Food Halls

Approximately 220 food halls exist in the U.S. today; between 300 and 350 food halls are expected by the end of 2021. During the pandemic, 75% of food halls have remained open, and only three food halls have closed permanently. The ones that closed relied heavily on mass transit or office draw. Cushman and Wakefield are bullish on food halls because of the financial model where the vendor (chef) pays a percentage of sales that covers all expenses and requires very little investment. In the food hall model there is shared risk and reward (shared risk percentage rent) and landlord and vendor interests align. During the pandemic, they are not dealing with rent abatement. Another reason for being bullish is that food halls are highly adaptable spaces and lend themselves to social distancing. In a traditional food hall, the vendor occupies 30% of the space and the other 70% of space is communal, which makes it easy for them to switch to delivery and curbside pickup. Food halls are attractive to vendors as they are relatively inexpensive to open. Also, the consumer benefits from a variety of cuisine. During the pandemic, a landlord also has the ability for a food hall to pivot to a ghost kitchen model.

In a food hall concept, landlords like to use a licensing versus a leasing model. A few developer pitfalls include (1) a rush to bring in creditworthy tenants signal that you are in a food court not food hall; (2) restauranteurs do all concepts like a single operator food hall model with one operating all the concepts, including a variety of vendors; and (3) risky deal structures with signing lease agreements (e.g., preference to use licensing agreements instead of leasing to allow flexibility for turning over underperforming vendors, and 12-18 month terms instead of leases with longer term deals).  

Ghost Kitchen

A ghost kitchen is a brick-and-mortar space that functions essentially like a co-working space for restaurants without a storefront, such as caterers or food trucks. Food halls offer to do programming, social media, marketing, joint events and menu engineering; the vendor pays between 20-30% of their revenue for such. In a ghost kitchen, it is lower percentage, and you are really paying for the operator connection to the third-party delivery, optimization, and negotiated pricing (providing space and technology package). The expense of the third-party delivery system may be high. During the pandemic, every restaurant was essentially a ghost kitchen, creating delivery dining and outdoor dining.  

Future Restaurant Footprints

Going forward, many restaurants are faced with (1) downsizing due to lack of demand for dine-in; (2) expanding due to needed space in dining areas to spread out customers; or (3) increasing delivery and take-out to avoid dine-in requirements. Expect drastic changes to the restaurant model:

  • The footprint of a restaurant will shrink.
  • Restaurant leasing models, licensing arrangements or management agreements will be more equitable between the landlord and the restaurant owner to make the numbers work.
  • Delivery companies are becoming more important to the restaurant industry and more regulated as to which percentage of the check they can charge the restaurant in order to deliver the food.
  • Restaurants will develop their own delivery systems because delivery companies are too expensive.
  • Dining rooms will be smaller and bar areas will be larger due to the higher profit percentage on liquor versus food sales.
  • When you provide space for chefs to produce, you cut overhead.


The restaurant industry did not crash because of lack of interest or lack of support, it was simply because of the virus. There will be a lot of unemployed chefs who will open their own restaurants. The pandemic’s impact will provide an opportunity for experienced operators and beneficial real estate pricing, which is currently very flexible and attractive for new business opportunities. Investors in restaurants and special purpose acquisition companies (“SPACs”) formed recently and registered with SEC to raise $200 million to acquire restaurant groups. The Fast Acquisition Corp. is a SPAC formed by Sandy Beall, the founder of Ruby Tuesday, for the specific purpose of acquiring restaurants groups.

The restaurant sector is a backbone industry in the U.S. And while it was hit extremely hard by the coronavirus, there is every reason to believe it will once again continue its growth trajectory.

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