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Maria Bartiromo conducted another excellent interview this week with Michael Milken, the legendary financier and philanthropist. We quoted him a little over a month ago, on March 16th (the link is just below) and his views have been borne out so far.


He continues to be constructive and relatively  optimistic about most companies, including restaurants and retail, “surviving, in some form”. Our focus, this morning, is on the operative “in some form”

Let’s deal with the (assumed)worst case alternative: bankruptcy. That is a “form” of survival, and, importantly,  allows retailers to jettison unattractive leases. One situation that comes to mind, bankrupt twice, is Toys R Us, founded by the legendary Charles Lazarus in 1948. The Company was  sold to Interstate Stores in 1974, was successfully reorganized, came public in 1978 and did very well for decades. It was bought, with a lot of debt of course, by KKR led private equity in 2005, declared bankruptcy again in 2017. Toys R Us survives today, but the “form” is as a licensor of its name in Europe. Relative to this possibility: it is not necessarily  the worst alternative and there are hordes of lawyers and investment bankers that stand willing to help. These are the same advisors that helped operators to expand too rapidly, diversify into too many brands, and leverage up to buy back stock.

It’s starting to become clear what retail form will gain market share. It seems safe to say that increasingly “stay at home” consumers will be even more value conscious than they were before the pandemic. Hardly anyone will come out of the shutdown feeling more prosperous than before.  There will be less travel, for business or leisure, for the foreseeable future. More meals will be consumed at home (or in the car) than has been the case. If you don’t want to cook, Domino’s and almost everybody else delivers. If you don’t want to worry about the delivery person handling the food or the timing of the delivery, it’s not that much trouble to jump in the car and pick up the meal at the restaurant and you save the delivery charge and the tip.

Large physical footprints are least ideal (how’s that for an understatement?), as well as locations at airports, resorts and sports arenas. Online ordering, delivery, takeout, curbside pickup, ghost kitchens, anything other than dine-in full service will be most important. All of the above is very obvious by now. Every retailer that has remained open has done their best to build off-premise activities.

The big questions are still in place, however. The largest fixed cost, rent, is still an open issue. Landlords may have collected most of the rents due on April 1st, but are wondering how much will come in on May 1st, and operators are having as many conversations as possible in an attempt to negotiate “adjustments”. A percentage of sales, rather than the current fixed (or fixed minimum) amount seems like an obviously fair middle ground. Since the cost structure as well as the sales level is a guess at best,  it will be months before operators know what is practical and how many stores they want to operate going forward. Investment analysts are paid to make projections, but almost every publicly held restaurant/retail company has appropriately withdrawn forward guidance. Nobody knows what sales, costs, or balance sheets will look like.

Sales projections are dependent on the “mix”, once the dust has settled, of dine-in combined with off-premise. Virtually every company that has reported sales since the pandemic hit has indicated that off-premise sales have steadily increased as customers have become familiar with the alternatives and operators have improved their capabilities in this area. Still, comps are running down from 10-40% for QSR and Fast Casual Operators (depending on drive-thru and other previous off-premise focus). Larger footprint full service operators are generally still running down 50% or more. The unknown answer to the question is: What percentage of the current off-premise sales can be retained and will that be enough, combined with the return of dine-in activity, to match the previous sales level. Since costs will be higher, including labor/sanitizing activities and delivery costs, margins will potentially be compromised even if total sales come back. The answer to the just stated question will not soon be apparent, because the phased opening of the national economy will take many months. Only 25-50% of the seats will be available for months and nobody knows how the public will react to masked and gloved greeters and servers. Safe to say that the dining “experience” will be seriously compromised.

There will be some winners. Pizza has always lent itself to off-premise service. Domino’s (DPZ) and Papa John’s (PZZA) have reported encouraging results. Noble Roman’s (NROM) opened their most recent Craft Pizza and Pub (in Brownsburg, IN) in the middle of the pandemic and reported over $50,000 of sales in the first week, about double their (seven store) system average, obviously without dine-in sales. Chipotle, who has done an admirable job with online ordering, pickup and takeout, and has the advantage of a small footprint and double “make line”, has also had relatively promising results.

Lastly, the game has changed for asset light, and heavily leveraged (to 5-6x trailng EBITDA) franchisors.  Their franchisees are hurting in almost every case, and royalty relief in some form or another will have to be provided. In March, 2019, we wrote an article: “It’s a New World”. The link is below. In a nutshell, royalties and fees are too high. The economic equation, the split of store level profits between franchisor and franchisees has become outdated over the decades.


The pandemic has accelerated the timeline of long term developments in a lot of ways. As Warren Buffet famously put it: “When the tide goes out you see who is swimming naked”. Businesses that have outlived their relevance, but were hanging on with the help of suppressed interest rates, will finally fade away. On the positive side, suppliers of goods and services that can operate in a “form” most relevant in our new world will survive and prosper.

Roger Lipton





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