A Shake-Up Is Coming for Quick-Service Restaurants after COVID-19

The COVID-19 shutdown forced many companies to shutter or change the way they do business. Restaurants were especially hard-hit; shelter-in-place orders closed dining rooms and made it impossible for most to do business as usual. Quick-service restaurants (QSRs) – a natural fit for takeout meals – were possibly the best suited to weather the storm. But things are still hard as QSRs’ lockdown measures lessen. Supply chain issues, real estate, new customer habits, and simple customer confidence will likely shake up the current landscape. GLG talked to Robert Wright, former Executive Vice President and Chief Operating Officer for Wendy’s Co., to find out what QSR might look like in the new normal.

There have been reports that at least 1,000 of Wendy’s roughly 5,500 stores are out of beef due to the COVID-19-induced shortages. How can the QSR industry combat a significant beef shortage?

This highlights how much our supply chain depends on a somewhat stable supply/demand curve. The last time we experienced something like this with beef in our country was three years after the 2008 recession. Ranchers were at all-time lows with their herds. In this case, it was a supply issue that went all the way back to the cattle herd size. This one’s different: It’s all about the beef production and processing, and being able to keep up with demand.

Wendy’s is unique. It depends on a 100% fresh beef supply. That doesn’t leave much slack in the supply chain. And as we saw early on with consumers and toilet paper, there’s hoarding even in the restaurant space. When restaurants hear they may be short on supply, restaurant managers load up. This pulls the slack out of the supply and some restaurants get left short.

Producers are strained to keep up with beef production. Beef has the longest gestation period and the smallest yield in terms of calves per cow. Other protein industries – pork, chicken, and fish – have a much easier time closing the gap and catching up to demand.

But what we’re seeing is spot outages. Meat is still being delivered throughout the country to all consumers, retailers, and restaurants. There’s little chance of a major supply chain disruption. The U.S. has a robust supply chain, and fortunately, we’re primarily food independent as a country.

As restaurants start to reopen, what challenges to you think players like McDonald’s, Wendy’s, and Burger King face?

This truly is uncharted territory. Approximately 60% to 70% of QSR sales were lost at the beginning of this crisis. The question is, where do they go from here? How do they capitalize on their brand strengths? And, more important, how can they make people more comfortable coming back to their brands? This is all about consumers finding comfort and confidence. The brands that have already invested in the right technology have created that level of comfort.

Smart companies have created a contactless, frictionless experience. They can turn on a dime and improve their technology in this crisis. But this might mean customers’ expectations have changed. Can a customer still place their order in advance? After adapting to this new technology, can a customer reduce the amount of time they spend in the dining room and make their day more efficient? Delivery is here to stay, but I think what we’ve probably seen more than anything else is an acceleration of the off-premise business that was coming our way anyway.

When do you think we may see pre-COVID-19 levels of in-store traffic?

First, off-premise business will likely become permanent, especially for brands that have taught their customers just how seamless and convenient it is. Opening the dining room will take some time. We’ll get customers back into restaurants and probably achieve some level of normalcy in 12 or 18 months.

But what we might be seeing is bigger than just refilling the dining room. Restaurants have, for decades, taken advantage of the intersection of human behavior, where people work, where they shop, and where they live. We’ve already seen macro-shifts in how people work. Working away from a central location is forecasted to last even as normalcy returns. When you add to that macro-shifts in retail where people have learned that online retail is even more convenient than they thought, their behavior may be different. Now that the work-and-shop components of that travel pattern have been massively disrupted, a certain portion of both those behavioral changes are probably here to stay.

As restaurants reopen, all the major QSRs are making a concerted effort to make their employees feel safe. What labor challenges do you foresee once businesses go back to normal?

This is where this local ownership and local management of the individual location makes all the difference. It’s where franchising and mom-and-pop restaurants shine because they have true relationships with their employees. Employees in these places want to come back because they feel a sense of belonging with that team.

As a whole, the tactical stuff has to happen. You’ve got to have whatever standards are considered the minimum standards for the personal protection equipment, employee safety, sanitation. It seems acceptable for people to have their temperature taken in a non-contact fashion whenever they’re coming on board because it makes them feel like they’re in a safe environment with their coworkers, about whom they care a great deal.

How might the competitive landscape among QSRs look after the COVID-19 dust settles?

There will be a shake-up. The financial pressures alone through this crisis will probably cause several restaurant concepts to lose locations. Large chains will lose restaurants because those marginally performing locations will close. Franchisees and franchisors are going to take advantage of this and close those.

We’ve already seen some bankruptcies announced in the private equity world because they’ve had these highly leveraged buyouts. Likewise, many franchise organizations have had franchisees investing a tremendous amount of capital, much of which has been leveraged over the last five years. The second half of this growth economy was poured back into this business. If they’re struggling to just find four-wall economic profitability and cash flow, it is certain that general and administrative expenses are not being taken care of. This is what will crush them. There’s going to be a shake-up – no doubt about it.

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About Robert Wright

Bob Wright is a 32 year executive in the restaurant, QSR and hospitality industry. Most recently, Bob was the Executive Vice President and COO of Wendy’s from December 2013 to May of 2019. In this role, he ran operations for over 6000 company and franchise restaurants located in the U.S. and Canada. Previously, Bob was President and COO of Charley’s Philly Steaks where he was responsible for all aspects of company and franchise operations, marketing, operations services, purchasing, IT, HR, business analysis, real estate and development, finance and accounting. He led a record expansion to over 500 restaurants operating in 43 states and 19 countries, generating a 25% unit-growth in just three years as well as same restaurant sales CAGR growth of 9% – the strongest 3-year performance in the sandwich sector. He is an eligible board member for privately-held and public companies and for private equity.

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This article is adapted from the May 13, 2020, GLG teleconference “Quick Service Restaurants: Industry Update and Business Model Outlook.” If you would like access to this teleconference or would like to speak with Robert Wright or any of our more than 700,000 experts, contact us.

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