From RRF grants to potential mergers, it's time to consider all options.
A bipartisan group in Congress continues to chase $60 billion in further restaurant aid. A dozen senators and 150 House members sponsored legislation this week to replenish the Restaurant Revitalization Fund, which has faced its share of heat in recent days. The grant program rescinded nearly 3,000 minority- and women-owned applications due to a federal court ruling that accused the SBA’s 21-day prioritization program of discriminatory practices. Two restaurants in Tennessee and Texas filed lawsuits, and two of three judges accused the SBA of "racial gerrymandering" and called its decision-making effort to award grants "unconstitutional.”
The SBA, in turn, cancelled funds to previously approved restaurants and doled out money to the next in line.
Thomas Suozzi (D-Glen Cove), one of the senators sponsoring the fresh legislation, said, as reported by Newsday, "The massive demand for the RRF shows that thousands of restaurants and catering halls are still facing financial woes due to the effects of the pandemic ... It's clear Congress must replenish and better fund this critical relief program."
The RRF saw more than 362,000 applications seeking $75 billion. During the first two weeks, the SBA received applications from north of 122,000 women business owners, 14,000-plus veteran business owners, and over 71,000 economically and socially disadvantaged individuals.
Regardless of the program’s future, restaurants across America find themselves in very different stages of recovery. Is it time to sell? How do you get creative to drive revenue at this point?
Stephanie O’Rourk, partner at CohnReznick, who has worked with businesses across the hospitality industry over the past year to navigate COVID-19 relief options, and Cindy McLoughlin who leads the firm’s consumer, hospitality, and manufacturing practice, caught up with FSR to discuss where the industry goes from here.
Let’s start with restaurants that did receive RRF grants. What do operators need to be aware of now? Particularly in terms of reporting requirements. What are some missteps to avoid?
It is very important for operators who received an RRF grant to understand the permissible expenses and uses of the funds. There are many allowable options to utilize the funding, but operators should take the time up front to understand whether their planned usage of the grant is allowable to avoid issues down the road.
Operators should also note that there is an annual reporting requirement as a stipulation of the RRF grant. They will be required to substantiate how they are spending the grant funding each year. It is always a best practice to keep organized and properly coded books and records but especially now. This will make it much easier for those who received an RRF grant to fulfill their reporting requirement at the end of each year.
Many restaurants that got an RRF grant also received a second round of Paycheck Protection Program funding and may simultaneously be applying for the Employee Retention Credit (ERC) program for 2021. Recipients must make sure they are not “double-dipping” between the various programs. Operators should certainly leverage all the opportunities available to them but must make sure they are eligible and utilizing each relief option properly.
What are your thoughts on the recent push to replenish the fund with another $60 billion? Is that something you figured might happen when the program was first unveiled?
There has always been bipartisan support of the RRF grant along with significant grassroots support to drive momentum. However, it is no secret that there is a lot going on in Congress with many competing priorities, so a replenishment may take some time to come to fruition.
While funding has been halted for priority applicants due to the recently filed court cases, we know that the Small Business Administration is still actively working on RRF applications and requesting information from those restaurants that applied. This is a positive indication to us that some level of RRF replenishment may be passed.
Moving on to restaurants that did not make the RRF cut, what are some other strategic options they should be looking at to emerge successfully from the pandemic?
The ERC is an exceptionally equitable option for this industry, yet we are still encountering operators who are unaware of the opportunity. The ERC is available for the remainder of 2021 and it is a worthwhile route for many restaurants to consider.
Aside from government relief, restaurants must continue to become smarter and more efficient operators. Owners and managers should examine their financial and operational infrastructure to identify inefficiencies, streamline processes, and equip themselves with as much information as possible to aid in decision-making.
What are some challenges still facing the industry?
The labor pool shortage is a tremendous challenge for the industry. While some of the shortage may be attributable to continuing unemployment benefits, some workers have chosen to leave the restaurant industry for opportunities they deem more stable or resilient to pandemic-related circumstances. Workers are afraid furloughs and layoffs could potentially occur in the future.
Pandemic-driven supply chain delay issues also continue to have a ripple effect in the industry. From equipment to ingredients, restaurants are finding it more difficult to purchase what they need and are also experiencing higher prices due to a lower supply.
How can restaurants use tech, and a data strategy in their decision making, to help address some of these issues?
Technology has been on the rise for several years as a tactic to obtain real-time data for day-to-day smart decision-making. The pandemic has accelerated that trend and enhanced ways to use technology to interact with customers, such as with digital payment systems, QR code menus, and more. Technology-enabled restaurants had to do business differently, and in many cases, technology enabled them to be smarter and better operators during the pandemic which they are continuing to reap the benefits from with revenue trends on the rise.
Data is critical in understanding what is and what is not working during both tough and good times. The more real-time, accurate data you have, the quicker you can pivot your strategy to move the business forward in a positive, profitable manner. Restaurants can use data to garner insights in areas such as revenue trends, prime costs, brand recognition, customer acquisition and retention.
When should a struggling restaurant consider a merger or acquisition? What are some telling signs that you’ve reached that point?
An unhealthy, struggling restaurant is not well-positioned to contemplate a transaction. It is more ideal to pursue a merger or acquisition when profits are strong, as the valuation of the business will be higher.
A restaurant that has struggled over the past year, but has historically done well and was not overleveraged before the pandemic, does have an opportunity to explore capital options through private equity or other avenues. The restaurants we are seeing that are now considering transactions are the ones that performed well before the pandemic. A merger or acquisition may have been planned pre-pandemic, or the transaction is simply a way to grow or enhance a strong brand. We are seeing an increase in proactive diversification of brands through transactions as one way to strengthen restaurant groups.
The restaurants that were already facing challenges before the pandemic are now exploring restructuring or bankruptcy options to manage their current situation.
Talk about some outside-the-box ideas for operators to kickstart revenue, from accelerating value creation to getting creative.
Have fun! While adhering to local guidelines and regulations, takeout or signature cocktails have become a popular avenue to serve customers, and they offer great margins and offer an opportunity to enhance one’s brand and customer outreach.
We are seeing growth in consumer packaged goods such as a sauce, baked goods, ice cream, or another special product that customers associate with the restaurant brand. This is an expensive endeavor, but “pandemic-friendly” given that consumer packaged goods can be sold through e-commerce or in grocery stores and drive brand awareness.
Other ideas include family meal takeout options, leveraging e-commerce curated marketplaces to extend the brand nationally, and continued outdoor seating to increase restaurant capacity.
What are some of the biggest opportunities for restaurants today, especially when you consider a more rationalized field and pent-up demand?
We are not quite there yet, but we expect there to be significant real estate opportunities coming out of the pandemic. Because many restaurant chains and retailers have reduced the number of their brick-and-mortar locations, there may be an opportunity to acquire top-tier real estate for mid- or lower-level prices. Depending on how much additional government relief is provided, we may see these opportunities in the next 12–18 months.
What do you think will be the most visible and lasting change to endure after all this passes?
Technology, including the ability to manage online ordering and more digital touchpoints with customers, is definitely here to stay. The pandemic simply accelerated where the industry was headed.
We knew third-party delivery was a growing phenomenon before the pandemic, but its role has been solidified over the last 15 months. Restaurant operators must be mindful of third-party delivery and should consider incorporating it into their strategy if they haven’t already.
Especially among casual dining brands, the pandemic brought a more acute understanding of their customer base and the best ways to reach them, which is valuable information to retain after the pandemic recedes.
Finally, the pandemic created an inflection point for many people in realizing how important hospitality is in their daily lives and how much they missed it when it was not available. There is, and will continue to be, a time and place for the convenience of takeout and delivery. However, the pandemic has created greater appreciation for the social experience of dining out.