Why franchises fare as badly as small restaurants amid COVID, Delta variant surge [Video]

Restaurants walloped by COVID-19 have suffered a silent epidemic of financial woes among an unlikely segment: Franchise eateries.

The pandemic’s impact on the food industry has been well chronicled, with many having to shutter, drastically cut staffing and hours, or resort to other desperate measures just to stay afloat. However, some experts say franchises — third party operators licensed by larger brands — are just as vulnerable to closure and operational struggles, like food and labor shortages.

A staggering 20,000 franchisees nationwide closed in 2020, and employment in the sector plunged by 11.2% to 7.5 million last year, according to data from the International Franchise Association (IFA).

That represented a loss of approximately 940,000 jobs across food and leisure establishments in an industry that generated $680 billion worth of output to the U.S. economy, the IFA estimates. Still, franchise jobs are expected to jump by over 10% this year to nearly 8.3 million as the recovery continues.

The IFA added that many of these positions will come from retail, food and services. Yet many franchise operators — including smaller “mom & pop” operations — continue to struggle as the Delta variant leads to a slowdown in job creation and economic activity. In fact, several McDonald’s (MCD) U.S. franchisees are weighing closing their dining rooms again, amid the rampant spread of the Delta variant, Reuters reported recently.

“We don’t know what’s going to happen. There’s a lot of unknowns.There’s a lot of people coming down with COVID,” said Dan Hester, a franchisee of Your Pie restaurant in Dublin, Georgia, told Yahoo Finance in a recent interview.

A recent study by Robin Gagnon, co-founder of We Sell Restaurants, found that less than 10 percent— or just under $3 billion worth of federal restaurant aid — went to franchisees.

“A franchisee of a restaurant model invests everything, just like an independent operator. They gamble on everything,” Gagnon explained to Yahoo Finance.

“Now they have a name on the door and they have a system that they can pass questions, and ask for help and assistance,” she said.

“But the franchisee is in just as critical of a financial position, and facing just as many burdens, as an independent operator in this crisis [and] they certainly did not benefit to the same degree,” Gagnon added.

Businesses are at the end of their rope. The virus is surging, summer weather is ending, and months of debt are piling up.Erika Polmar, executive director, Independent Restaurant Coalition

Several large restaurant chains have increasingly offered incentives from signing bonuses to free appetizers to hire and retain interested workers. At the same time, big retail corporations like Amazon (AMZN) and Costco (COST) have raised pay to at least $15 an hour, which also makes it harder for smaller employers to compete.

But the still-raging pandemic is raising the stakes for restaurants that need foot traffic, and worsening an already acute labor shortage. Big food chains like KFC and Taco Bell that are located in the South have cut hours as staff members call out sick from COVID-19 infections, Reuters reported.

All of which suggests the restaurant industry will be hard pressed to rebound to pre-pandemic levels.

Data from the National Restaurant Association projects restaurants and food service industry sales will jump nearly 20% to $789 billion this year, from $659 billion in 2020. However, that’s still far below pre-pandemic sales of $864 billion, the group said in its midyear report, and restaurant and bar employment still has nearly 1 million jobs fewer than it did before COVID-19.

Figuring out ‘a way to get through it’

A man parks his low rider car as two boys look on outside one of the city's most popular restaurants amid the coronavirus disease (COVID-19) outbreak, in El Paso, Texas, U.S. November 15, 2020. REUTERS/Ivan Pierre Aguirre

A man parks his low rider car as two boys look on outside one of the city’s most popular restaurants amid the coronavirus disease (COVID-19) outbreak, in El Paso, Texas, U.S. November 15, 2020. REUTERS/Ivan Pierre Aguirre

Meanwhile, serious challenges loom, especially for soaring coronavirus infections that have become a drag on new jobs — even as employers report worker shortages that’s forced them to drive up wages. And the uncertainty has made it hard for many establishments to pay rent as the recovery appears to lose momentum.

More than 2 out 5 restaurants (45%) were unable to pay their August rents, a five-point jump from the prior month, according to a new survey from Alignable, indicating the industry is backtracking as the Delta variant spreads.

President Joe Biden’s economic recovery plan established the Restaurant Revitalization Fund (RRF). Under the U.S. Small Business Administration, the initiative provides funding to help restaurants and other eligible businesses keep their doors open.

Yet the $28.6 billion fund was exhausted in just days, leaving more than 170,000 applicants without aid. Currently, there’s a bipartisan effort to replenish the RRF with $60 billion.

“We gotta look at it as a short term problem,” Your Pie’s Hester told Yahoo Finance. “We gotta figure out a way to get through it.”

While the hospitality restaurant remains in limbo, it’s still unclear if Congress will provide additional funding.

“If our representatives don’t prioritize replenishing the Restaurant Revitalization Fund immediately, restaurant and bar workers will pay the price,” said Erika Polmar, Executive Director of the Independent Restaurant Coalition, in a statement.

“Businesses are at the end of their rope. The virus is surging, summer weather is ending, and months of debt are piling up,” she said.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv

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