Smaller restaurant chains and independents are being more negatively affected by the fallout from the COVID-19 pandemic than larger chains, according to experts.
A Bank of America study led by analysts Gregory Francfort and JonMichael Shekian found that the trailing seven-day average spends at smaller restaurant chains and independents as of July 1st, 2020 fell by up to 25% compared to just 4% for larger chains. This was determined by looking at aggregated transaction data from the bank’s debit and credit cardholders to analyze consumers’ restaurant spending habits.
The gap in spending was even wider in mid-April, peaking at the low-30% mark.
According to Francfort and Shekian, the closure of restaurant dining rooms and the greater emphasis on social distancing has hit smaller chains harder than large chains, which tend to have drive-thru lanes and favorable deals with third-party delivery service providers.
The analysts expect more casual and fast-casual restaurants to close compared to fast-food chains. This is similar to the findings in a report commissioned by the Independent Restaurant Coalition, which noted that up to 85% of independent restaurants could close by the end of 2020.
With many parts of the US still seeing an uptick in coronavirus cases, things could get even worse over the coming months. However, even before the pandemic, small and mid-sized restaurants were struggling to compete with larger, well-established brands like McDonald’s, Little Caesars, and Olive Garden. This is in part due to these behemoths having an abundance of what smaller businesses usually don’t: cash.
The larger players are in a better financial condition to survive long periods of reduced sales, and they have access to lines of credit to help them get through tough times. They also have more funds for solid marketing strategies and for investing in things like artificial intelligence and automation.
Other brands, like The Cheesecake Factory and Chili’s, have been able to spend millions of dollars in the past several years to further improve their takeout businesses. Although takeout doesn’t do much to help restaurants recover lost sales, it certainly does help them burn through less cash, which can extend their lives.
Unlike large-scale companies, many small and mid-sized brands are typically owned by private-equity groups that use aggressive strategies like debt and sale-leasebacks, leaving them with little room to make mistakes.
Smaller businesses also have more difficult relationships with delivery apps, which hinders their growth. By contrast, larger brands have more muscle to negotiate mutually-beneficial deals with third-party delivery service providers like Uber Eats and DoorDash.
Independent restaurants are in an even tougher position than small and mid-sized chains. They are often unable to make the costs of these partnerships work. Small businesses often complain about being charged high commissions and activation fees, which makes it difficult for them to earn a profit through delivery services.
Tensions between smaller restaurants and delivery companies have gotten so bad during the pandemic that some business owners have already asked local governments to intervene. Others, meanwhile, have chosen to opt-out of these partnerships completely.
Although big chains have a larger safety net, this doesn’t necessarily mean they have nothing to worry about. Struggling franchisees can be a concern for some brands, while those who have used aggressive financing strategies in the past may find themselves hanging on for dear life.
Still, all things considered, don’t be surprised to see the big chains come out on top when the dust of the pandemic finally settles.