Faculty Research: An Uncertain Future for Restaurants
July 15, 2020
“The current state of our limping economy does not bode well for the restaurant sector,” writes Isenberg Hospitality and Tourism Management Associate Professor Atul Sheel in an article published last month on the website Hospitality Net (hospitalitynet.org). Employing several measures, he portrayed an industry in relatively robust health—until Covid-19 hit in late February/March. “Before that, the restaurant industry was on track for continued prosperity,” he notes. “COVID-19 changed everything.”
With reduced consumer demand for their services, restaurants have been shedding employees and shutting down—some of them permanently, observes Sheel. Most vulnerable, he says, are local mom-and-pop establishments, which account for more than 70 percent of all restaurants. That, he adds, reflects the restaurant sector’s chronic status as the industry most prone to bankruptcies.
Sheel’s article, which he wrote in March, draws on two principal sources: the National Restaurant Association’s 2019 Restaurant Performance Index and restaurant stock return trends as tracked by Morningstar. The RPI—a composite measure that combines sales traffic, performance expectations, various expenditures, and other indicators—affirmed strong performance by the sector in 2019 and cautious optimism for its continuation. But that preceded data from 2020. Sheel’s analysis of restaurant stock trends, which included the first quarter of 2020, was more sobering: restaurants had begun their free fall with returns for the first three months of 2020 at −5.04%, −7.59%, and −3.38%.
“Supply chains for food—the industry’s principal raw material—are broken,” emphasizes Sheel. You need only visit your supermarket to experience erratic supplies. “If there are winners in that market it would be services like Grubhub and local farm-to-table restaurants. Fast food restaurants also have an advantage, accentuating a trend that preceded the crisis.”
On the demand side, “most important is that people are not coming,” Sheel continues. You can attribute that in good part, he says, to recent shut-downs and legislative mandates that require social isolation. But even with the relaxation of social isolation and distancing, peoples’ fears will contribute to a lag in the industry’s recovery. "U.S. restaurant indices are experiencing their worst levels since 2008,” he insists. “And their current situation is far worse than the 2008 recession. That was mostly economic. This one is economic and medical, with a greater psychological halo. We won’t emerge from this—restaurants included—until 2021 at the earliest.”