A lot of correlations are drawn between the Great Recession and COVID-19 in terms of potential recovery. But there are considerable differences. For one, coronavirus is a global crisis. And more, it’s bulldozed “business as usual” for operators segment-wide. In some ways, it’s more similar to the challenges faced by restaurants in disaster events. New Orleans’ landmark Commander’s Palace, for instance, closed for 13 months after Hurricane Katrina—a move that cost it $6.5 million.

Hordes of restaurants, pronounced in the independent sector, have shuttered for several months now. Yelp’s Economic Impact Report, released Wednesday, showed nearly 140,000 total business closures on the review platform since March 1. Of those, 41 percent are labeled permanent. Restaurants made up 17 percent of that six-digit figure, with 53 percent indicating they weren’t going to reopen again.

The National Restaurant Association predicted “tens of thousands” would exit. Restaurants lost $40 billion in May, it said, bringing the three-month total to $120 billion after March dropped $30 billion in an abbreviated window and April sank $50 billion as stay-at-home policies covered the entire month. Overall, restaurants are expected to lose $240 billion by year’s end.

While the majority of restaurants shifted to off-premises-only formats, others elected to sideline the option for financial or brand reasons. It was either unrealistic from a bottom-line perspective or an operations one.

And that’s where the real difference lies between now and 2008–2010. In addition to discretionary income concerns (more than 45 million people have filed unemployment claims since the onset of COVID-19), restaurants are also fighting a fear factor and potential erosion in consumer willingness to dine out. Yet to the disaster comparison, there’s also an element of restarting in the mix that presents a costly proposition. Restaurants owe rent and have past due invoices for food. The Association called the costs tied to new safety measures, like PPE for employees and Plexiglas shields, “extraordinary.” Kiko Japanese Steakhouse, in Missouri, made the social media rounds recently when a customer’s receipt showed a $2.19 COVID-19 surcharge. The restaurant removed the practice, but said it would raise menu prices due to higher charges from its supplier. The Original Pancake House, according to the Miami Herald, added a 15 percent “service fee” to all orders, not including tip.

Post Katrina, Commander’s Palace was mandated to operate under new restrictions. Water had to be boiled and food could only be served on plastic.

COVID-19 shattered the operating status quo on a hyper scale. The No. 1 challenge, though, remains how to satisfy all these costs, hurdles, and new directives with limited capacity seating and still make money. It’s why 75 percent of operators believe it’s unlikely their restaurants will turn a profit within the next six months, according to the Association. On June 18, Sen. Roger Wicker in the Senate and Rep. Earl Blumenauer in the House introduced the RESTAURANTS Act, a bipartisan $120 billion relief package intended to help independents, especially those left behind by the Paycheck Protection Program. The revitalization fund “provides hope of survival for small business restaurant owners from the smallest towns to the broadest urban streets,” the Association said.

But nobody knows when this aid is coming, or even if it’s coming.

Given these roadblocks and realities, we can look at the Great Recession not as a mirror event exactly, but as a recovery comparison point.

Rabobank recently released a report on the industry’s post-pandemic path back. It projects COVID-19 could reduce long-term foodservice growth trajectory by 50 to 100 basis points, “as the current dislocation is far worse and more pervasive than anything the industry has experienced in a long time—perhaps ever.”

“Though we are reluctant to make apocalyptic predictions about the ‘new normal’ or dramatic changes in long-held cultural/consumer behavior patterns, it’s clear that the U.S. foodservice industry will not go back to ‘business as usual,’ even as current restrictions are eased/lifted,” Rabobank said.

More probable: A lot of the current trends/strategies you see today will be cast aside or accelerated. Others will emerge. Here’s a look at what operators think those might be.

Rabobank expects a full recovery from the current disruption to take longer than the seven quarters restaurants needed to return to pre-recession levels (from Q3 2008 to Q2 2010). It sees pre-COVID-19 sales levels returning in the mid- to late-2022 range.

Restaurant business has improved sequentially alongside reopenings in recent weeks. In the period ending June 14, total major restaurant chain transactions declined 12 percent versus the same week in 2019, according to The NPD Group. That’s 1 percent below the previous week, but the ninth consecutive period of improvement, year-over-year. Quick-service restaurants bumped slightly to negative 11 percent (compared to last year) from negative 13 percent the previous week. Full-service chains upped 12 percentage points, week-over-week, to negative 26 percent.

However, it’s still early days in terms of understanding COVID-19’s lasting impact on things like social gathering norms, public/corporate policies and regulations, and consumer spending and behavior. And while data hasn’t shown a correlation between case spikes and fewer restaurant visits thus far, stocks tumbled Wednesday in fear of future fallout. Some brands might elect to re-close dining rooms, just to be on the front foot with employee and customer safety, as Kolache Factory did Wednesday.

There’s also the element of a second wave and when it might actually land. Beyond what that could do to consumer sentiment, restaurants in many markets across the country, particularly in the already battered Northeast, might lose their outdoor dining lifelines as winter approaches. If that coincides with a surge in cases, there’s no guarantee full dine-in service will be available to cushion the blow.

At least 4.5 million of the roughly six million jobs lost in the food and drink industry came from independent brands.

Rabobank’s 2022 target stems from two main detractors: lower contributions from foodservice growth (price and unit growth, which accounted for nearly 90 percent of foodservice expansion over the last five to 10 years), and a likely protracted economic recovery, notwithstanding the surprising quick jobs recovery outlined in May by the Bureau of Labor Statistics, when restaurants gained 1.4 million jobs.

What also needs to be considered is how the speed of recovery won’t track uniform across all sectors.

U.S. restaurant sales increased at a consistent compounded annual growth rate (CAGR) over the last five, 10, 20 years (5.3, 5, and 4.9 percent, respectively) compared to a steady deceleration in food retail trends (2.7, 2.9, and 4.9 percent).

This growth, though, was not one-size-fits-all. And those divergences are poised to only accelerate as restaurants emerge from COVID-19 lockdowns.

To put this in perspective, limited-service restaurant sales increased at a 6.9 percent CAGR over the last three years. That’s nearly twice the rate (3.6 percent) of full-service venues. Rabobank expects this to widen as counter-service sales lift 3.5 percent over the next three years versus a decline of 2.5 percent for sit-down brands.

The reason: The standard drivers of quick-service growth—demographics, convenience, behavior trends, improving quality—will not only remain in play in a post-COVID-19 landscape, but will be further augmented by a higher number of full-service closures, permanent dine-in constraints/changes, lingering health-and-safety concerns and a slower recovery during periods of low or no economic growth. Additionally, older, more wary consumers typically over-index to full-service restaurants.

Nearly two-thirds of independent restaurants are full service (versus 15 percent for chained/franchised). It’s a segment more at risk of permanent closure than any other. The Independent Restaurant Coalition said in June that 85 percent of independents could close without direct aid, which would strike a severe blow to the industry. Independents generate about $760 billion in sales and employ 11 million people. The Coalition warned independents were more in danger of permanently going out of business due to the pandemic because consumer spending at these establishments has been disproportionately affected and they lack the same access to capital markets.

“Mass failure may also destabilize the commercial real estate market if these restaurants cannot pay rent, which could also incite a spillover effect in the larger economy,” it wrote in a report released by Compass Lexecon.

The Coalition added independent restaurant revenues dropped more than 70 percent in the final two weeks of March and are still 60 percent lower compared to last year. At least 4.5 million of the roughly six million jobs lost in the food and drink industry came from independent brands.

Generally, independents have lower margins and access to less relief on rent and other fixed costs. They also entered COVID-19 with underdeveloped off-premises business and higher levels of financial stress.

A post-COVID-19 survey of small businesses by the National Bureau of Economic Research showed only 30 percent of restaurants expected to remain open by the end of the year if the current disruption lasted even four months. That was last among all retail/consumer sectors.

Rabobank, even with the CARES Act in consideration, projects as many as 50,000 to 60,000 independent restaurant closures, or 15–20 percent of the entire field. Looking at the bigger picture, it would slice 8–10 percent of all restaurants in the next 12 months.

Where the investments are headed

Coming into COVID-19, off-premises sales increased nearly four times faster than dine-in business, accounting for about 80 percent of restaurants’ U.S. dollar sales growth over the last three years. Many chains have seen their numbers triple in recent weeks.

Rabobank said the trend should strengthen meaningfully after the crisis as consumers become comfortable with off-premises options given the extended trials during lockdowns, the continued growth of delivery platforms, the expansion of operators’ off-premises capabilities, and the evolution of kitchen and packaging capabilities to narrow the gap between the carryout/delivery and on-premises experience.

In other terms, it won’t boil down to customers fearing dining in, and thus ordering takeout or delivery (like it has for months). They’ll tap the option because of trends that were already surging, such as convenience. Only now, the adoption rate will be much higher and the consumer far more comfortable with the service.

A lot of restaurants, so far at least, appear to be holding off-premises sales gains as dine-in business rebounds. This has been true of Bloomin’ Brands, Darden, and Chipotle. The latter of which said it’s sticking in the 70–80 percent range.

This, coupled with the ongoing strength of quick-service off-premises sales, leads Rabobank to project off-premises will account for more than 100 percent of restaurant sales growth over the next three years.

During the Great Recession, only 5,000 net new restaurants were added between 2007 and 2010, compared to nearly 25,000 in the three-year period before the crisis.

What’s going to happen to the restaurant landscape?

On the topic of growth, the count of U.S. restaurants and bars increased at a 2.2 and 2.5 percent CAGR over the last there and five years, respectively. Roughly 45,000 new restaurants (net of permanent closures) opened in the last three years—more than in any other comparable period over the last 25-plus. It’s something that was leading many pundits to suggest a course correction, like the one that flooded retail, was in the works already. There were just too many restaurants, too many choices, and too few customers.

In a story about the sudden proliferation of bankruptcies in the foodservice sector, Dave Bennett, CEO of Mirus Restaurant Solutions, previously told FSR the industry could be headed for a 15 percent reduction over the next few years, or the elimination of roughly 100,000 restaurant sites. Darren Tristano, CEO of Foodservice Results, also said earlier oversaturation was leading to declining traffic. In turn, restaurants started to raise prices to remain viable. Those who couldn’t found themselves “on the bubble.”

What did this course correction project to? Bennet explained it as a split into two industries: retail focused and convenience, where the food is brought to you.

It’s not all that different from what Rabobank envisions. The rate of expansion accelerated meaningfully, from growth of 1.7 to 1.8 percent over the last 20 years, as operators jumped in to take advantage of decades-low unemployment levels, rising discretionary incomes, favorable demographics, and multiplying delivery and ordering options, which totaled more than a third of overall foodservice sales growth in the last three to five years.

But this benefited some more than others. A “zero-sum game” as Bennett called it, where one concept’s growth potential came at the expense of somebody else’s. Rising rents in retail malls and high-traffic areas, such as the urban locations so many fast casuals gravitated toward when prices dropped, put the industry at an inflection point pre-COVID-19. These brands were suddenly strapped with expensive leases, declining guest counts, and high costs (mostly jump-started by wage pressure). Also, there was an abundance of inexpensive money dipped into by restaurants out of the financial crisis. And as interest rates climbed back, those same parties had to write debt at a higher interest rate.

Which leads us to the post-coronavirus world. Rabobank said the pandemic’s weight will likely impair the restaurant industry’s long-running expansion cycle. The company believes the pace of new restaurant openings will fall back to long-term averages, shaving 40–60 basis points from the future outlook.

Some reasons why:

New consumer habits and regulatory requirements will discourage potential new entrants. While it’s too early to understand what COVID-19-fueled changes will stick, there’s little doubt heightened safety concerns over public gatherings, increased telecommuting, less corporate travel, and a greater shift to off-premises consumption will linger. Many additional state- and city-wide rules and regulations will also pressure potential new restaurants and make it harder for current restaurants to reopen, even as restrictions are eased or lifted.

This could lead to, as other reports have suggested, the big chains getting bigger out of COVID-19.

Permanent closures will rise steeply, much worse than past economic recessions. During the Great Recession, only 5,000 net new restaurants were added between 2007 and 2010, compared to nearly 25,000 in the three-year period before the crisis. As explored earlier, the financial downturn spurred future growth due to lowered barriers to entry, like rent, but it didn’t happen amid the heart of the problem.

Rabobank predicts a much greater rate of attrition from COVID-19, including a recession on the heels. Noted earlier, 15–20 percent of all restaurants are at risk, particularly independents and small chain/franchisees.

Elevated operating cost pressure EBITDA and cash flows. This will heighten if the currently mandated capacity reductions and safety-related procedures become a lasting part of restaurants’ operating procedures. Most independent and smaller operators were likely generating single-digit EBITDA margins before facing additional/elevated operating costs from coronavirus disruptions. This will make it even harder for current operators to stay open and attract new ones.

Growth capital becomes scares for independents and smaller franchisees (less than 10 units). Banks could demand a higher rate of returns in light of potentially higher operating and bankruptcy risk.

Larger competitors scale back expansion expenditures as they look to build up cash reserves, reduce leverage, and ramp up investments behind off-premises capabilities. Rabobank said strengthening the balance sheet with greater financial flexibility will likely remain the top priority well beyond 2020/2021, closely followed by further investments to improve off-premises and digital capabilities. For some, this could relegate expansion plans to the backburner. For others, like Chipotle, which wants to broaden its drive-thru footprint, it might present a landlord-friendly dynamic to grow the aspects of its business best suited for a post COVID-19 world.

More M&A, bankruptcies?

Rabobank said M&A opportunities are ready to accelerate as COVID-19-driven sales deterioration, along with economic recession, spur the pace of exit and consolidation in an already highly fragmented industry. Nearly half a dozen relatively high-profile closures/bankruptcies have already occurred since mid-March.

Rabobank added the pace could quicken as temporary lifelines, like the CAREs Act, expire and weaker restaurants run into even more stringent liquidity return hurdles to stay in business. Sellers’ motivation could be further enhanced by an uncertain future tax outlook due to potential changes in the political environment and/or the necessity if paying for the recent stimulus measures.

Here’s another sign to keep an eye on: Large publicly traded restaurant companies have raised significant cash (new issuance and/or drawdown on existing credit lines) since COVID-19 landed. In some cases, it’s come in far excess of their near- to intermediate-term cash needs. In fact, Rabobank said, aggregator cash holdings by 25 of the largest public brands have more than doubled, from $9.4 billion pre-virus to nearly $20 billion in mid-May. Each of these chains now carries more cash than before coronavirus struck.

Rabobank believes this recent cash build-up is not just a defensive strategy intended to improve liquidity and project balance-sheet strength. It also could signal a more aggressive M&A stance, as foodservice sales recovery takes hold and economic recession brings acquisition multiples down to attractive levels.

Dollars will be up for grabs in a less saturated industry, leading larger and stronger brands to go after new customers.

Restaurants focused on off-premises and value-oriented service will have a chance to quickly expand through “bolt-on” acquisitions. Companies with deep or patented technology, and logistical capabilities for online sales and delivery will be attractive. So will those with innovative concepts, like ghost kitchens.

A more moderate sales growth outlook and limited balance sheet flexibility may reduce sellers’ expectations, too, eliciting greater interest from both strategic and private-equity buyers. “Though the companies/brands likely to be available would potentially be most at risk from a more challenging operating environment, we believe that even some of the more desirable targets will attract opportunistic buyers as acquisition multiples return to attractive levels,” Rabobank said.

To put in plainly, the industry is in line for significant changes. The dynamics might never look the same. Like with any major change event, winners and losers will emerge based on their relative positioning and how fast they adapt to new norms.