Restaurants are among the hardest hit segments of the economy worldwide. Layoffs have been extensive. Some restaurants are making do plugging along with takeout fare, but with the more lucrative bar segment effectively shuttered, profit margins are sinking. In some areas, restaurants were suffering prior to the COVID outbreak due to higher costs including higher wages. The saying “Never invest in anything that eats or needs repainting” is true for a reason: the restaurant business is brutal and it is difficult to make money. More so now.
The future of the restaurant business is open to rampant speculation. Just Google “The future of restaurants Covid” and read some interesting articles. This article from Food and Wine Magazine has some interesting ideas. Here is my take on what we might see in the near future, which is whenever restaurants are allowed to open up again to in-seat dining:
- Fewer Restaurants: Sadly, many restaurants will not reopen. Some projections: 50% of restaurants in San Francisco will close (Golden Gate Restaurant Association). 110,000 restaurants will close nationally (Business Insider). It’s going to be really bad.
- Fewer Seats/Lower Capacity: At least for the time being in the restaurants that make it through, seating capacity will be limited due to social distancing guidelines.
- Higher Prices: If the supply of restaurant seats is cut drastically through closures and reduced capacity while demand or potential demand either remains the same or reduces by a smaller amount, then prices will have to rise, and I think they will by a lot. I’m guessing we will have to pay 30% to 50% more for a nice meal at a quality restaurant. Maybe not so much at fast food places, but those too will have to increase prices, especially if the rumored meat shortage comes to fruition.
- Takeout Business Will Continue: Just because restaurants are allowed to open up again doesn’t mean that customers will flock back. A lot of people are genuinely afraid to venture out even if the government says it is ok to do so. Also, many people may find that they like ordering in and dining at home as much or more than they do at restaurants. Anecdotally, I believe the takeout/home delivery model was a big hit among younger people even before Covid. The DoorDashes and GrubHubs of the world are here to stay.
- Tax Deductibility: The 2017 Tax Cuts and Jobs Act reduced the tax deductibility of dinners out (while reducing the corporate tax rate). President Trump wants to restore full deduction of dinners out. Being a flat tax advocate, I am not in favor of using the tax code to influence taxpayer behavior, including in this case. However, I expect that something will get passed in this regard. Don’t look for it to be a big help.
- A More “Rare” Experience: I’m not saying here that people will be eating more Rare meat. I am saying that going to restaurants and eating in there will become a less frequent experience in people’s lives. The restaurants that survive will be crowded and will cost a lot more. People won’t be able to afford as much of it. That said, perhaps going to restaurant will become a more valued, savored experience, which is consistent with the way it was 50 to 100 years ago.
- Effect on Travel: Did you ever think that you won’t be able to travel somewhere because there are no restaurants available at your destination? Combined with the threat of getting sick, the dearth of dining opportunities will further diminish the experience of travel. Hope you like where you live now!
None of this is either good or bad, except if you own or work in a restaurant that has or will close. Then it is bad. But basically it will be another situation that citizens worldwide will have to adapt to. Restaurants will close, but soon entrepreneurs with short memories and big dreams will start new ones. Forests that burn start to regenerate soon thereafter. I don’t know how soon the restaurant industry will start to regenerate but it will, albeit in a different way. As for investing, I wouldn’t touch a restaurant stock or private restaurant investment with a ten foot pole. Don’t look for deep values here because there will be further bad news. Leave the investing to the professionals. Meanwhile, while you are still at home, support your local restaurants now by ordering takeout. It might help to keep your favorite restaurants in business through this godawful period.