Sosiago


September 27, 2022

Rayjin Teppanyaki

Beauty in design

How Covid helped Olive Garden and Chipotle dominate the restaurant business


New York
CNN Business
 — 

Restaurants of all sizes have had a difficult few years — but chains are coming out on top.

Several new challenges have made running restaurants and (working in them) even harder than usual, including pandemic restrictions, staffing challenges, supply chain disruptions and increasing costs. About 90,000 US restaurants have temporarily or permanently closed their doors because of the pandemic, according to The National Restaurant Association.

Big chains, even vulnerable ones like casual dining establishments, have fared a lot better than small restaurants and independents, thanks in large part to easier access to cash and the ability to lean on parent companies to lead the way on strategic shifts. In 2021, the top 500 restaurant chains accounted for 63% of total US restaurant sales, up from 58% in 2019, according to restaurant consulting firm Technomic.

They’re now in a position of strength, poised to fill the gap left by restaurants that didn’t survive.

“The pandemic caused a lot of small independents to go out of business,” said Joe Pawlak, managing principal at Technomic. They “didn’t have the financial wherewithal [or] sophistication to make it through.”

An empty New York City restaurant stands in December 2020.

Access to capital and economies of scale allowed large chains to dip deeper into pockets and make strategic shifts that set them up for success today. Many smaller operators didn’t have that option.

That upended pre-pandemic trends, in which chains were taking a little bit of share from independents, but at a snail’s pace. “Year-over-year, it was a very small crawl,” Pawlak said. “We’re talking about tenths of a point a year.”

Now, as consumers decide where to dine out, they’re more likely to see larger chains than smaller ones or independent restaurants. The landscape could become a new normal.

“I think it’s a permanent shift,” said Pawlak. “It’s more of a chain market now.”

Independent restaurants are often at the forefront of innovation, testing out culinary trends and concepts that are later picked up by larger chains. Without them, the restaurant landscape could get more boring — and lose character.

“Small restaurants like mine are … the heart and soul of local communities,” said Jimmy Rizvi, a restaurant owner in New York City.

Olive Garden’s triumphant return

Back in March 2020, when restaurants were told to close their doors to stop the spread of what was then called “the novel coronavirus,” Darden Restaurants’ then-CFO Ricardo Cardenas made a bold prediction.

“We haven’t looked two years in the future. We’re looking hourly and weekly right now,” he said. “But we believe that our position helps us become even stronger when we come out of this.”

Darden

(DRI)
is the owner of brands including Olive Garden, Longhorn Steakhouse and Eddie V’s: sit-down restaurants that were particularly affected by dining room shutdowns.

Olive Garden has made quite a comeback from spring 2020.

At first, it didn’t seem at all certain that Darden would bounce back, much less come out of the pandemic in a stronger position. The stock plummeted that March, and its total sales dropped 43% in the three months ended May 31, 2020.

But Cardenas was right. Since then, the company’s stock has recovered and then some, hovering around $135, or about 12%, above the price in late February 2020. And the company reported record sales in December 2021.

Darden is now in a position to pick up the customers of restaurants that were unable to survive the pandemic.

“There are fewer restaurants today than there were last month, and the month before and the month before that. They’ll eventually get filled,” Cardenas, now COO, said during an analyst call in March. “What we want to do is be there to fill some of those restaurants and pick up that market share.”

It’s not just Olive Garden. Popeyes is planning to add more than 200 locations in North America this year, following a year of rapid expansion in 2021. Chipotle

(CMG)
said in February that its goal is to operate 7,000 North American locations in the long term, up from the previous target of 6,000.

But as these chains are thriving, independents were — and still are — struggling just to stay afloat.

Capital is king

When the pandemic hit, companies like Darden and The Cheesecake Factory took actions like suspending dividends and drawing down credit to free up cash to stabilize the business.

For smaller independents, of course, those lifelines weren’t an option.

“The biggest challenge is access to capital,” said Rizvi, owner of New York City’s GupShup, a contemporary Indian restaurant, and Chote Miya, a kiosk-like spot that serves Indian street food and opened during the pandemic. He said that without government support like the Payroll Protection Plan, his businesses wouldn’t have survived.

Rizvi, like most operators, has struggled to hire staff. That means he’s had to wear many hats himself.

“I have to be on the floor, I have to be the manager,” he said. Filling in at the restaurant means Rizvi has less time for administrative tasks. Because of that, “we are very much behind on our paperwork,” he said.

Popeyes has big expansion plans for this year.

Rizvi has managed to keep his restaurants open, but they haven’t totally bounced back. “Right now we are not profitable,” he said, adding he expects it will be a year or two before his restaurants recover.

Larger chains are also better able to negotiate lower ingredient prices, leveraging their order volume in a way independents can’t, noted Pawlak. Starbucks

(SBUX)
, for example, has said long contracts help it secure low coffee prices even as the commodity soars. Smaller chains are more exposed to fluctuations.

For James Moore, executive chef and partner at Fully Belly — a decadent breakfast and lunch spot that opened in San Antonio, Texas, in February 2020 — keeping the business afloat meant leaning on personal financing. Along with his business partner, “we really stretched out as far as we could to keep it alive.”

Just weeks after Fully Belly opened, when many restaurants pivoted to takeout and delivery, Moore decided it made more sense to close temporarily.

“We hadn’t been open long enough to stay open just for takeout and delivery,” he said. “That was definitely a hit.”

Moore also pointed to government support as a lifeline, saying “every dollar that we’ve received in assistance has absolutely saved us.” Today, Moore considers himself fortunate. Though Fully Belly isn’t yet profitable, it’s growing — and Moore even plans to open at least one more location this year.

Thinking about the restaurants that didn’t survive “hurts my heart,” he said. “I do want everybody to succeed.”