Overview
Restaurants and foodservice businesses were some of the first economic activities severely impacted by the COVID-19 pandemic. Dining in restaurants virtually stopped overnight in cities and states as social distancing guidelines took effect. While many businesses tried to ‘retool’ and adapt to the new realities, many others are continuing to suffer from this unprecedented fallout. Even worse is the uncertainty that has never been at such levels; the uncertainty of whether and when consumers will feel comfortable to start revisiting their local restaurants and how many restaurants will survive this crisis.
Our research team has been working to develop rapid response strategies for the industry, from the perspectives of both business owners/managers and consumers. Solutions will need to address both aspects of this equation.
The fallout from the business perspective is evident: severe loss in sales, a significant number of employees laid off, and several businesses already deciding to permanently close. Many more are at risk of not making it past this summer. The smaller, independently operated businesses, especially those owned by minorities or immigrants, or in rural locations, are at an even higher risk due to already existing disparities in their access to financial and non-financial resources, issues that have deeper and more complex pre-COVID-19 reasons.
On the consumer side, restaurants have served communities and cities as a source of recreation, entertainment, access to convenient meals, and even ensured food security for others. Restaurants and foodservice establishments had become (and we hope they will continue to be post pandemic) an integral part of the fabric of our society, for social, cultural, and emotional reasons. In this post, we highlight the multi-pronged approach our team is leveraging to help the restaurant and foodservice businesses counter the negative impacts of this crisis.
A business needs to survive financially
Due to the COVID-19 pandemic, uncertainty regarding future revenues is at a historical high for the restaurant industry. There was a loss of more than 3 million jobs and $25 billion sales in the restaurant industry in the first 22 days of March due to the pandemic. As the shutdown of the entire economy extended, the situation for the industry has worsened. For example, as of May 5th, 22 percent of restaurant operations were completely closed, with 34 percent of on-site operators (such as operators in schools, malls and stadiums) being closed. Meanwhile, 63 percent of restaurants have laid off some of their employees during the pandemic, with 29 percent of them having laid off more than 75 percent. What makes restaurant operations more challenging is an increase in some operating costs, such as rent and food costs. For instance, a Pennsylvania restaurant indicated that the price of meats has increased by 30 to 40 percent during the COVID-19 crisis.
The government has actively attempted to provide assistance to restaurant operators with, for example, the Paycheck Protection Program (PPP). PPP was designed to provide small businesses with an incentive to keep their workers on the payroll by offering a forgivable loan to pay not only payroll, but also rent, mortgage interest, or utilities. While PPP certainly helps, many restaurant operators have raised some concerns. One widely accepted issue is difficulty in interpreting all the requirements of PPP. For example, while the loan requires restaurant operators to spend at least 75 percent on payroll, it is often not clear how to accurately calculate the payroll because there could be different methods for calculating it. Yet, correctly interpreting the requirements is critical given that the penalty for violating them is that the loan is not forgivable and must be repaid within two years. Further, 75 percent of the loan must be spent on the payroll within the next eight weeks which is often nearly impossible for many or most restaurants.
With all these challenges, future circumstances are extremely uncertain for many restaurant operators and our team is working to provide them with some financial directions and guidance. More specifically, we will develop financial planning models to help restauranteurs navigate and prepare for their uncertain financial future better. We believe this will be important to ensure these businesses are more effectively able to plan their operations during and post COVID-19.
Approaches to managing a business will be key
While some restaurant operators closed their doors following the outbreak of COVID-19, others have pivoted from a focus on onsite dining to a takeout/delivery model, with many of these operators being forced to re-engineer production and service delivery systems in order to remain operational.
From a business practices perspective, restaurant operators can go the route of implementing efficiencies (e.g., streamlining their menu, furloughing employees), and/or engaging in innovation (e.g., diversifying product offerings to include the sale of groceries, offering online cooking lessons). As the latter examples imply, innovation, in the current context, does not encompass radical innovation. Rather, it encompasses a company’s engagement in new ways of doing things, and/or new products and services.
Our team will focus on three factors that may influence the degree to which a restaurant company relies on efficient versus innovative business practices during a crisis: culture, resource availability, and strategic flexibility. While resource availability can influence an organization’s ability to be flexible and adapt to change, organizational culture can facilitate this change to happen. And ultimately, the degree to which a company is flexible will impact their business practice choices. For example, in a company that has formal rules and policies, there is likely going to be less flexibility or adaptive capacity to respond to the current crisis than a company with an extended family/highly committed and participative culture. Such cultural differences could manifest in terms of the practices they employ, whether efficient or innovative. Eventually both efficient and innovative practices should lead to stronger company performance. Research suggests that innovative practices are superior to efficient practices in terms of their impact on performance. However, this may not hold during the current crisis.
By focusing on the drivers and outcomes of innovative and efficient business practices during this time of crisis, we hope to offer guidance to restaurant operators about how to organize resources and foster the right culture so that they can remain nimble and responsive to the market as the current pandemic plays out, and to inform any future market disruptions.
Consumers will need to be persuaded
All states and U.S. territories have started to ease the stay-at-home orders and allow non-essential businesses to reopen in multi-phase plans. As of June 5th, the Washington Post reported that 43 states have allowed restaurants to reopen for dine-in service of some kind, or intend to do so soon. Restaurants in each state are required to strictly follow specific reopening guidelines, including maintaining social distancing, capping dining room capacities between 25 to 50 percent, and requiring employees to wear facial masks and gloves.
While reopening for dine-in service will certainly help restaurants increase their sales volume, we cannot ignore that this is likely to be a painful and slow recovery for the restaurant industry. For example, in Texas where restaurants reopened their dining rooms on May 7th, more than 50 percent of restaurant operators have reported that their sales did not increase between the last two weeks in April and the first two weeks in May. One of the major challenges for restaurants is persuading consumers to visit their dining rooms again. The majority of consumers are hesitant to visit sit-down restaurants due to fears of contracting COVID-19. Two studies, one by Datassentials and another by Washington State University, have reported that upwards of 80 percent of consumers have not dined in a sit-down restaurant since restaurants were reopened in their community. Restaurants need not only to improve their safety measures to prevent viral spread, but also to leverage marketing communications to persuade consumers to consider dining out again.
For this study, our team will build on the elaboration likelihood model (ELM). The basic premise of the ELM is that persuasion may be induced through a central route based on the strength of arguments presented in a message or a peripheral route based on cues such as credibility of the message source. We will incorporate the ELM to examine consumers’ decision-making routes, and the effects of different types of information on consumers’ restaurant dining decisions. We will also identify effective communication strategies for alleviating consumers’ risk concerns, and to positively influencing their motivation to return to eating out. The results of our research will provide guidance to restaurant operators about how to leverage their website, social media, and online reviews to relieve consumer’s risk concerns, and ultimately rebuild sales volume.
Closing Thoughts
As noted earlier, restaurants and foodservice businesses are an integral part of our social and cultural life. No doubt post COVID-19 ‘normalcy’ will be different, and one we can hardly imagine at this point in time what that will look like. Meanwhile, whatever we can do to help another important part of our communities survive this crisis will be of value to us all.