Following an unanticipated period that reshaped the U.S. restaurant industry, some banks are beefing up their ability to finance the sector in anticipation of a busy year ahead.
While many independent restaurant operators have struggled during the pandemic, lenders who focus on the industry see reasons for broad optimism. Many chains and franchises have recently posted some of their best years ever, with quick-service and fast-casual operations proving particularly resilient. The restaurants that have survived have also learned to operate more efficiently, in spite of staffing challenges.
What’s more, shifting consumer behaviors and higher grocery prices are expected to work in favor of dining out, and increased merger activity in the restaurant sector will drive demand for specialized financing, bankers say.
“Mom-and-pops took it really hard, but probably the bulk of the industry — polished casual, casual, fast-casual — have all pivoted to drive-thru, takeout and delivery platforms, and have done a really good job,” said Scott Tocci, senior director of restaurant finance at Synovus Financial in Columbus, Georgia.
Tocci recently joined the $56 billion-asset Synovus to lead its new restaurant finance team, which operates out of Atlanta. He moved to Synovus along with Jay Sim and Kelly Nyquist from Regions Financial in Birmingham, Alabama. For Synovus, which had previously financed some food service clients, the move to consolidate its restaurant financing into a new group is part of a broader effort to diversify its commercial banking business.
It’s also a reflection of an expectation — shared by other banks — that the restaurant industry will become more profitable as consumers navigate a pandemic that is moving into its third year.
Last spring, Mitsubishi UFJ Financial Group
In an effort to boost productivity, many restaurant operators have pared down their menus, Tocci said. Quick-service and fast casual restaurants have often found they can process roughly the same volume in drive-thru and pickup orders that they can in the dining room.
“They just became much more efficient,” he said.
Some lenders also believe that consumers’ expectations about restaurant service have shifted during the pandemic. They say that eateries probably wouldn’t have seen as much adoption of curbside pickup options had it not been for the virus.
“If folks had rolled it out without the pandemic, I don’t know how it would have been received,” said Austin Davis, senior director of wholesale banking at Synovus. “It’s a convenience factor if you don’t have to get out of your car and go inside, but you can still get a meal that you want.”
Pocketbook economics may have also shifted in favor of dining out. Amid a spike in inflation, the rising cost of groceries is playing a role in consumers’ choices, said Nick Cole, MUFG’s head of restaurant finance.
“One of the things we pay attention to is the relative cost of food at home versus food away from home. … That had been in favor of food at home, but now food away from home is cost-competitive,” Cole said. “That usually is a good forward indicator for restaurant sales.”
Bankers also anticipate
Labor remains a question
The tight labor market has been a challenge for the dining industry. While U.S. restaurants added employees through the first seven months of 2021, employment in the sector remained 8% below its prepandemic level, according to a September report by the National Restaurant Association.
The challenges that restaurants have been facing in hiring employees are an oddity for a recession, said Aaron Allen, the founder and CEO of a food service and hospitality consulting firm in Chicago. “Every other recessionary period has resulted in improved labor,” he said.
With COVID-19 still circulating and new variants introducing uncertainty, a lot of would-be restaurant workers have gravitated to other jobs.
“Entry-level labor has shifted from the hospitality sector and moved to other sectors of the economy, namely transportation and warehousing,” said Meghan Hinds, Wells Fargo’s head of restaurant finance.
While experts are divided on whether some of those erstwhile restaurant workers will return to the sector, the industry’s ability to adapt has given bankers confidence. Some lenders say they expect the labor market problems to gradually be resolved over time.
“I do think some of it is just temporary displacement. There are just a lot of people who decided to try something different, and I think that’ll settle out over time,” Cole said.
Some restaurant operators have invested in technology to expedite job applications, so they can hire and onboard new staff faster, Hinds said. Meanwhile, the increased use of kiosks, online ordering and apps have helped the restaurant industry to forgo hiring more cashiers, which can ease some of the labor challenges, Allen said.
“All of those things are reducing the bottleneck of the cashier,” he said.
In light of the uncertainty of the last two years, many bankers specializing in restaurants said they have been pleasantly surprised by how well the industry has adapted.
“The reality is, for restaurant operators, trying to figure out the operating model for a set of circumstances that has never occurred before is incredibly challenging,” Hinds said. “Trying to remain as efficient and operationally flexible as possible is key.”
