Service industry survivors and thrivers: A look at how some hotels and restaurants weathered the pandemic and what that means for the future
The COVID-19 pandemic impacted virtually every business sector in the world. As many know, the service industry was uniquely affected by the events of the last year. With so many states instituting lockdowns and restrictions—coupled with a general reluctance of individuals to go out for the evening during the pandemic—everyone from restaurants to hotels felt the effect.
The impact on the service industry has gotten a high level of attention over the past several months. So many businesses around the country have needed assistance from the CARES Act and the Paycheck Protection Program in order to stay afloat. While it is clear that many businesses have struggled throughout, and in the wake of, the coronavirus pandemic, there are a number of businesses that have stayed the course in the last year. In fact, some have actually seen an increase in revenue.
As the country nears the one-year mark since the beginning of the pandemic and the nationwide shutdowns, there are some interesting trends in the services sector—many of them intuitive—that bear watching for 2021 and beyond. Let’s examine two areas of the sector: hotels and quick service restaurants.
State of Hotels
Occupancies at hotels dropped in 2020 more than the average daily rate earned by hotel assets—which is the key financial metric in the hotel industry. However, the July 2020 average daily rates in the luxury market were equivalent to those in July 2018.
As a result, cleanliness and sanitation became more important than price per room, allowing the luxury hotel market to hold up fairly well while other sectors were dealing with economic volatility. To this point, weekend occupancy—which is typically associated with leisure travel—was stronger than weekday travel, as many business trips and conferences were postponed or outright cancelled last year. For example, luxury and boutique secondary markets within driving distance of major metro areas – places like Savannah, Virginia Beach, St. Pete, Asheville, and Charleston – reported positive occupancy and revenue numbers in the midst of a very challenging time. Looking ahead, it’s important to note that there is a reported $1.5 trillion in savings in the economy of people who make over $80,000 a year—and those people are leisure travelers. Once people feel comfortable going out and traveling again, this money will be injected into the economy.
It is also important to mention that economy hotels were the first to bounce back in the earliest stages of recovery, roughly a month or two after the initial shutdowns. At this point during the pandemic, so many people were budgeting and were rather uncertain what their financial future would look like, as well as how long this crisis would go on, that economy-level product was appealing.
Many analysts project the hotel industry will not return to its pre-pandemic performance until 2024. Clearly much of the industry is trying to thread the needle through this downturn, with many negotiating for extended loan terms and/or deferring construction of new product. However, when you take into account the factors we have discussed – the appeal of luxury hotels, the difference geography and local attitudes make, the amount of pent-up disposable income available – and add to that an efficient roll-out of the COVID-19 vaccine, it doesn’t seem unreasonable to think that segments of the industry could see strong positive movement as early as Q3 2021.
State of Restaurants
When it comes to dining, one segment of the industry that saw a surge after the pandemic began was the quick service restaurant (QSR) sector. In fact, it was one of the few segments to move into positive sales, with same source sales rising by one percent as early as Q3 2020. This shouldn’t be that surprising when you consider that the drive-thru was already an existing, critical component of the business model for many of these businesses.
However, this segment of the industry did see some decline. Breakfast sales were down, as fewer people were commuting to work, cutting out those morning ritual stops at Starbucks, Dunkin’ Donuts and the like. But with that in mind, consider this, Inspire Brands purchased Dunkin’ Donuts for $11.3 billion last year—right in the middle of the pandemic when other companies around the globe were looking to cut costs.
In general, QSRs offer strong appeal during times like these. Customers are comfortable with using drive-thrus and they are becoming increasingly familiar with apps that allow them to order ahead of time. The latter actually leads to some of the industry’s most compelling potential. Adapting to the challenges of the pandemic may have sparked a new era of innovation and evolution in the restaurant industry that could lead to previously unthinkable growth. Some of that growth was already on the horizon, but the pandemic forced companies to accelerate the testing and implementation of innovative ideas and products. With several quarters-worth of experience logged, we may see some interesting new developments this year. For example, more QSRs may forgo dining rooms in new construction. Also, prompted by the mass adoption of food delivery services like Grub Hub and Door Dash, we may see some big companies experiment with their own delivery services.
Development and M&A Outlook
New development will be one of the more interesting areas to watch this year for the leisure and service sector in general. We tracked very little cessation in projects that were under construction at the commencement of the pandemic, but we have seen a not-insignificant decline in the number of new projects started in the past year. Projects that did not have permits or financing prior to March 2020 will likely be significantly deferred as underwriters take a conservative approach to the recession rebound. This means projects that were under construction at the time of the pandemic should provide a real competitive edge.
There is also reason to believe the sector will experience a wave of transactions beginning this year, particularly in the area of distressed debt purchasing.
To date, there’s been limited distress debt purchasing, but there was a high volume of loan extensions and load modifications granted during from March to December last year. As we approach the beginning of the next cycle of that debt, we believe lenders are going to be less open to negotiations with those borrowers, prompting much more activity in the area of distressed debt purchasing. Also, companies with nonperforming assets and too much leverage will look to shed those assets, but retain a smaller portfolio. This could present significant opportunities to either acquire assets through distressed debt purchases or purchases at a discount.
Ultimately, the service industry was uniquely impacted by the COVID-19 pandemic. It seemed like every day there was another restaurant or business closing its doors in the wake of the crisis. While it is true that many have suffered due to the pandemic, there have been a number of trends in the service industry that showed that many businesses operated in the green last year. And as the country has more experience with COVID-19 and vaccinations going into 2021, there are a number of trends that emerged last year that may be primed to continue over the coming months and years.