As Coronavirus Crushes Small Restaurants, Big Chains See Room To Move In

The Four Percent


NEW YORK (Reuters) – Prime storefronts left empty by failed businesses. Cheaper or even flexible rents. Landlords willing to add drive-thru lanes.

As the coronavirus permanently shutters some small businesses, big fast-food brands like Domino’s Pizza, Chipotle and Wendy’s that were doing well before the crisis want to grow – or continue pre-existing expansion plans – after the pandemic subsides.

David Deno, chief executive officer of Outback Steakhouse parent company Bloomin’ Brands, told Reuters in an interview that “I don’t mean to wish ill on anybody, but there’s going to be real estate opportunities,” for new stores or relocations to areas with “better visibility, better access and better parking.”

Chipotle Mexican Grill Inc, Taco Bell owner Yum! Brands Inc, and Domino’s Pizza Inc are among several household names planning post-pandemic growth, according to their CEOs.

“Brands that are doing well in this environment should have an opportunity to expand their footprint,” said David Gibbs, Yum chief executive officer, in an earnings call in late April. “There’s no reason to think that this brand… is not going to be a growth business long term. And unit development is a big part of that.”

In the month of April, retail properties collected less rent than other real estate sectors, according to a Citi note on Friday after a week of real estate investment trusts’ earnings reports.

Malls collected only 28% of rents and shopping centers 60%, among other commercial property declines, Citi found.

“It’s really a time of opportunity for these firms to entrench themselves into where they want to be,” said Susan Wachter, professor of real estate finance at the Wharton School of the University of Pennsylvania. “The retail landscape is going to be open for redeployment and for expansion of the firms whose market share is growing.”

“You are going to have a location reshuffle based on the tenants that offer what people will want post-COVID,” said Scott Crowe of the real estate investment firm CenterSquare Investment Management, including the ability to spend less time inside and lower prices.

Starbucks Corp and McDonald’s Corp could also be among those that grow, said Neuberger Berman analyst Kevin McCarthy.

“We’re in a period of a few years where independents lose and chains gain” as much as 10% to 15% of market share, McCarthy said of the restaurant industry. The winners of that share grab will be those models centered around convenience and accessibility.

“It was a trend going 30 miles an hour, now accelerated to 100 miles an hour,” McCarthy said. “It’s corporate Darwinism on steroids.”

There is precedent for fast-food expansion in the face of crisis. In 2010, Burger King was able to grow its brand in Western Europe at the tail end of the financial crisis.

“These were some of the best years we had… in Western Europe with many of our developing partners because there is tremendous opportunity,” said Jose Cil, chief executive officer of Restaurant Brands International Inc, parent company of Burger King and Popeyes, in a May 1 earnings call.

“Our business works in almost any environment,” Cil told Reuters, adding that it is positioned to capture market share in Europe, Asia, the United States and Canada. “We’re very excited and bullish long term.”

To be sure, the path to expansion could be choppy. Sales plunged in late March and April, leading many corporations to drop their financial forecasts and stop construction projects to save capital costs.

Even if they wanted to keep building, permitting has been temporarily halted in many places.

Occupancy restrictions will make reopening dining rooms tricky, and some restaurants may eventually change their floorplans to adapt to a new way of dining out.

Nonetheless, Shake Shack Inc CEO Randy Garutti said during a May 4 earnings call that “as additional real estate and development opportunities become available, we’ll be ready to capture the white space ahead.”

Wendy’s Co, Papa John’s International Inc and Yum China Holdings Inc also discussed post-coronavirus expansion during recent Wall Street calls.

“If there’s opportunities that make sense for us on the real estate side, we will pursue those,” said David Hoffmann, Dunkin’ Brands Group Inc chief executive officer in an April 30 earnings call. “But you also want to balance being a good corporate citizen and sticking to your values, and not being a shark either.”

(Reporting by Hilary Russ; Additional reporting by Uday Sampath Kumar in Bengaluru; Editing by Lisa Shumaker)


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