Casual Dining Chains Among Hardest Hit in Wake of Pandemic

Fast food chains are better positioned to weather the falloff

The Logan's Roadhouse logo
The future of restaurants such as Logan's Roadhouse, owned by CraftWorks, is in question as the coronavirus pandemic worsens.
Logan's Roadhouse

Key insights:

Many may soon find themselves unable to relive high school memories of slurping chocolate milkshakes at Steak ‘n Shake or wolfing down barbecued chicken pizza at California Pizza Kitchen, as dining chains face a reckoning during the ongoing coronavirus pandemic.

Restaurants, just like retailers, are facing undue hardship as they rope off their dining areas or shut down operations altogether to help contain the spread of the coronavirus.

Fast food providers such as McDonald’s, KFC and Taco Bell are at least able to retain some of their revenue by offering takeout, drive-thru and delivery. Such off-premises service, in fact, constitute a vast majority of these chains’ sales, said Lyle Margolis, a restaurant analyst at rating agency Fitch.

“Large, national fast food players are the safest given high delivery volumes, strong liquidity, economies of scale and leverage over suppliers,” he said.

But restaurants that rely on sit-in dining will be harder pressed to salvage sales. Even once the spread of the coronavirus is contained, pent-up demand later in the year—if there is any—won’t make up for a lost meal now.

“So many [chains] are at risk, it is hard to know where to start,” Margolis said. “In general, casual dining will fare much worse.”

Several regions in the U.S. have mandated that dining rooms be closed, which means restaurants have to survive off-site, Margolis said. This puts casual dining chains in a difficult situation because off-premises accounts for a low double digit percentage of revenue, if not lower. Even then, off-premises includes catering, which is perhaps the hardest hit.

Rating agency S&P recently added Red Lobster and P.F. Chang’s parent Wok Holdings to its list of distressed companies, for example.

But prior to the pandemic, Moody’s, S&P and Fitch all named Steak ‘n Shake and California Pizza Kitchen as businesses in danger of default. Both chains remain among the most vulnerable of distressed retailers, restaurant analysts said. Neither responded to a request for comment.

Food service will suffer billions in losses

More broadly, the National Restaurant Association last week said economic forecasts indicate the food service industry could lose $225 billion as a result of the pandemic over the next three months, while sacrificing between 5 and 7 million jobs.

The International Franchise Association, which represents small businesses, offered a similarly gloomy view and said that 8,000 to 10,000 restaurant locations could end up shuttering.

Losses of billions in sales are particularly devastating to food service providers that faced financial difficulties before the pandemic.

Starbucks’ comparable sales declined 78% in China in February while 80% of its stores were closed, which offers some idea as to the coronavirus’ negative impact. The difference is that Starbucks is not financially strapped and can weather a temporary downturn.

“I think that we could track China, though the trend could be shallower given the Chinese government was likely more consistent with establishing and enforcing quarantines than we seem to be,” Margolis said. “Given the patchwork nature of mandates in the U.S., it is possible the sales declines are more drawn out [and] the recovery takes longer.”

A bill that provides relief for companies and individuals, as well as funds bailouts of certain industries, is currently stalled in the Senate. And while airlines—and perhaps even airplane manufacturer Boeing, the U.S.’s largest exporter—are in line for bailouts, it’s unclear which other sectors might receive aid and how much.

The legislation being taken up by the Republican-controlled Senate, for example, proposes a financial lifeline of up to $150 billion for major industries outside of airlines and air cargo carriers. House Democrats, on the other hand, are pitching $500 billion for small businesses in the form of grants and interest-free loans.

As a service to our community, coronavirus-related articles are available to everyone with a free Adweek membership. Never miss a key story by signing up for our daily First Things First newsletter  and consider gaining full access and supporting our journalism with an Adweek Pro Subscription.

Recommended articles