Large Restaurants Insulated from Losses

It pays to go public. Unequivocally, 2020 will be the most difficult year that hundreds of thousands of independent restaurateurs have ever endured. 

Yet for most publicly traded restaurants, it has been just another year.

If the valuation at which investors are willing to invest is any indication of the ability of a restaurant to survive — and it is — then the nation’s restaurant chains are anywhere from 50% to 100% more likely to survive than independent restaurants. Disproportionately benefiting during the economic downturn, the numbers tell the story.

Consider McDonald’s whose shares dropped as low as -38% during the coronavirus panic. Today, its stock price has fully recovered, trading at the same price as it traded on January 1, 2020. The same is true for Wendy’s, equally and astonishingly unchanged in valuation since January 1. Jack in the Box’s valuation has fallen just 2% all year.

Although the valuations of privately owned restaurants are not quoted on exchanges daily, contrast those zero percentages with the predictions of bankruptcies for independent restaurants, which started at 25% in April and extend beyond 80%.

Although a bankruptcy rate of 80% by the end of the year sounded farcical at the time, data from Yelp today somewhat corroborates that forecast. As of July 10, of Yelp’s 26,160 “temporarily” closed restaurants, 60% have actually permanently closed. Worse, the rate of temporary closure is dropping; permanent shutdowns are increasing.

Wingstop has rallied 56% this year. Domino’s Pizza is up 32%, and competitor Papa John’s has performed even better, rallying 48%. Noodles & Co. is up 12%.

Due to their large size, public companies benefit from preferential treatment by passive investment flows. Passive investment is ultimately responsible for some 40% of all U.S. investment inflows, according to analysis from Logica.

Large companies also benefit from premium banking relationships, allowing them to seize government subsidies before everyone else. We previously reported on billionaires receiving free government money, with investigative reports on this subject earning the official cover of Forbes magazine.

Del Taco, another multi-hundred million dollar chain, has rebounded 118% from its lows this year. Today, it is valued a modest 12% lower than the beginning of the year. Texas Roadhouse is trading just 6% lower, and the multi-billion dollar Dunkin’ coffee chain is down a mere 9%.

Small restaurants are also heavily reliant on third-party delivery services, with 75% of UberEats partner restaurants claiming they would have closed without the support of UberEats food orders.

Yelp forecasted on June 25 that 53% of temporarily closed restaurants would permanently shutter. Just one month later, the results are even worse than its analysts expected. According to second quarter data released today, “The restaurant industry now reflects the highest total business closures, recently surpassing retail. As of July 10, there have been 26,160 total restaurant closures, an increase of 2,179 since June 15. Of the all closed restaurants in July, 15,770 have permanently closed (60%), accounting for 2,956 more permanent closures, a 23% increase since June 15. Meanwhile, bars and nightlife, an industry 6X smaller than restaurants, have endured an especially high closure rate, with 5,454 total business closures, 2,429 (44%) of which are permanent closures.”

Photo by Jeremy Bishop on Unsplash

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