Apr 17 2020
Social distancing measures imposed by the US and Canadian governments in an attempt to slow the spread of COVID-19 have sent shock waves throughout the two countries’ economies. The US and Canadian Accommodation and Hospitality sectors (72) are among the most affected by social distancing. In this article, IBISWorld looks into how mass restaurant and food service closures have halted a thriving industry in its tracks, in addition to the supply chain effects of their shutdown.
Many US states and Canadian provinces have mandated the closure of restaurants and food service businesses in their COVID-19 response, permitting restaurants to operate on a takeout basis only. Nevertheless, this decision has had adverse effects on both sides of the border. The Canadian restaurant sector laid off 800,000 workers in March, according to a survey taken by Restaurants Canada, an industry association. This figure comprises two-thirds of Canadian food service employment, and Restaurants Canada has warned that 30.0% of restaurants will not reopen if the situation continues for another month. According to IBISWorld projections, revenue generated by the Full-Service Restaurants industry in Canada is projected to decline 6.8% in 2020 (IBISWorld report 72211CA).
In the United States, industry associations are also reporting substantial losses in the sector. The National Restaurant Association wrote a letter to the White House asking for aid, stating that restaurants could lose as much as $225.0 billion in sales and suffer job losses in the range of 5.0 million to 7.0 million individuals. In contrast, total unemployment claims in the United States have risen at a rate of 5.2 million weekly. Small and locally owned restaurants remain the most vulnerable. Overall, IBISWorld estimates economic output generated by the Single Location Full-Service Restaurants industry in the US to decline 4.5% in 2020 (72211b).
Supply chain effects
In the United States as well as Canada, supply chain shortages have abounded as a result of COVID-19. However, in the case of restaurants and food service businesses, oversupply is the primary problem, as the closure and decreased sales of restaurants, which buy farmers’ dairy and meat products, has left farmers and food companies with an overabundance of product.
Sales to restaurants are a fraction of what they once were, causing American producers to dump thousands of gallons of milk, dispose of eggs and turn pork belly into lard, as they cannot redirect their extra supply to grocery stores due to sizing, packaging and labeling restrictions. Canadian farmers are experiencing the same problem, with the Chicken Farmers of Canada choosing to reduce the size of its national summer flock by 12.0% due to fears that the coronavirus could affect Canadian meat processing. The major markets of the Meat, Beef & Poultry Processing industry in the US (31161) and Canada (31161CA) are diverse, but still derive a substantial portion of their revenue from sales to food service establishments. For example, the industry in Canada derives an estimated 8.3% of its revenue from food service establishments. However, 21.7% of the industry's revenue is dependent on sales to the Beef & Pork Wholesaling industry in Canada (41316CA), which derives 19.7% of its revenue from food service establishments. Overall, the adversity currently facing food service industries is likely to trickle down to its suppliers.
Meanwhile, the United States has passed its Coronavirus Aid, Relief and Economic Security (CARES) Act, whose Paycheck Protection Program (PPP) represents a “nearly $350.0 billion program to provide eight weeks of cash-flow assistance to small businesses.” These loans are federally guaranteed to employers who maintain their payroll throughout the crisis, though some restaurateurs have expressed their dismay with the PPP due to the eight-week limit to spend funds required to receive loan forgiveness. Some restaurant owners claim this is impossible amid their struggling sales environment and are thus hesitant to accept PPP funds. Conversely, the terms of PPP loans are advantageous to their recipients. The loans are offered at a maturity of two years with only 1.0% interest and banks are permitted to offer favorable loan terms such as delayed payments.
For more information on the PPP, please see our recent article Industry Implications of Small Business Relief Funds.