How COVID-19 is Reshaping the Food and Restaurant Business

In ways often surprising, COVID-19 has profoundly altered many sectors of the U.S. economy. Experiencing enormous change have been companies involved in the manufacture and distribution of food eaten at home, as well as those involved in food eaten away from home. To find out how companies in the food, food service and restaurant businesses have coped and how they are likely to be different post-pandemic, Industrial Exchange recently conducted a virtual roundtable discussion. Participants at the roundtable, moderated by Industrial Exchange CEO Jon Cooper, were:

* Mark DeMichaelis, CEO and President, Olivia’s Organics/State Garden Inc., Boston, Mass.

* Jim Ilaria, Interim President & CEO, TooJay’s Deli•Bakery•Restaurant, West Palm Beach, Fla.

* Cara Loeys, Principal, Executive Insights at IRI, Princeton Junction, N.J.

* Tim Raven, Managing Director, Worximity Technology, New York, N.Y.

* Mike Sher, Partner, Atlas Holdings, Greenwich, Conn.

Their comments, edited for clarity and brevity, follow. 

Industrial Exchange: To kick things off, which developments in this space currently are being misunderstood or ignored? 

Jim Ilaria: One area that’s growing and misunderstood is virtual kitchens. How do you value a restaurant without a dining space? Is it going to be three-times revenue for the virtual/ghost part and six- or seven-times EBITDA for the brick-and-mortar part? Maybe the dining part will be worth less in the future. I don’t think anyone has the answer right now. 

Tim Raven: That sounds like the big brands may be going out of the manufacturing business to get a better return on equity for shareholders by being a brand management company. That could shift the assets to those in the contract manufacturing business.

Jim Ilaria: Ghost kitchens shift the manufacturing. But at some point, someone’s got to make the food. Who’s doing the labor? What’s the return on that equity? What’s the return on sales? What’s the return on assets? It all has to get reimagined. 

Mark DeMichaelis: It’s funny. We recently tried to launch a prepared salad kit to go after the “catering” type of a customer. But we have been having some real trouble launching now because demoing and sampling, which we’ve used in the past, are not allowed due to COVID. Also because of COVID, we’re not seeing the large office complexes that supply food to workers come back yet. But we’ve been lucky because our business went up quite a bit with the traditional retailers of the world. One problem that isn’t being discussed much is that despite massive unemployment, it’s impossible to find workers. As a result, I’m looking for any way I can to reduce headcount in our facility through automation. 

Jim Ilaria: For the restaurant industry, a $15-an-hour minimum wage is an existential threat. The jobs can’t all be automated so you’ve got to take menu prices up, which will affect frequency, especially in casual dining and particularly in legacy brands. Anyone going after middle- and lower-middle-income people or seniors is going to be disproportionately hit. 

Cara Loeys: What’s surprising is that the switch we expected to value types of products in home foods hasn’t happened. Instead, the reverse has taken place and people are indulging where they can and buying nicer foods, probably because they’re not spending on a lot of other experiences. We see this shift consistently across age cohort groups, across income groups and across different types of retailers in most categories. We saw increases in the private-label share in the very beginning months of COVID, which was more due to big brands going out of stock and people buying whatever they could find. But the private-label share has mostly flattened since then, even though it’s more developed than it was after the Great Recession. We’ve also seen frozen foods do a lot better than they have in the past, even while people continue to buy fresh produce. Alcohol also is doing very well.

Mike Sher: All that corroborates what we’ve been seeing at our Flagstone Foods. I think we’ve been a net beneficiary of the current conditions because we make snacks that people want to graze on while they’re spending more time at home. The challenge we face is that while we’re coming up with all sorts of fantastic new products that are getting great reactions from customers, it’s been a challenge to get out there and spread the word about them.

Tim Raven: From what we do as a small-factory digital-manufacturing solutions provider, we see the challenge to the labor issue that’s been mentioned as one of offsetting rising labor costs through efficiency. In a way, that’s a lot easier than the issue Mike mentioned, which is how you get new sales when you can’t get out to the buyers.

Industrial Exchange: How have delivery platforms like Grubhub, DoorDash and Instacart changed the food business? 

Jim Ilaria: Off-premise has become more than half our business. I think it’s here to stay because of today’s immediate consumption, immediate gratification way of life. But it’s probably going to come down from that because some business will return to in-restaurant dining due to people getting tired of eating at home and wanting to share a meal with friends. There’s a lot of pent-up demand for that.

Mark DeMichaelis: The volume through these platforms is huge, and I don’t think a lot of it is getting tracked through the register. Our customers who use Instacart as a platform are thankful they have it, but are unhappy with the fees.

Jim Ilaria: Most restaurants now are throwing those commissions back onto the consumer. 

Cara Loeys: Instacart got most of the post-COVID spike because they had an easily scalable model, but we’re starting to see some of the largest retailers start their own delivery services. 

Industrial Exchange: Let’s talk about inflation. Corn and soy futures are at six-year highs and palm oils are at about a 10-year high. Are you seeing inflationary pressures?

Mike Sher: One thing that permeates discussions throughout our portfolio, particularly through the last several months, is freight. I think it will be a big theme over the coming quarters.

Mark DeMichaelis: I agree wholeheartedly. We’ve seen some really stiff freight increases year over year. There’s a shortage of drivers, there’s a shortage of equipment, and when you add higher diesel prices, it’s going to be a big issue.

Jim Ilaria: I’m not seeing fundamental inflation coming in food for the categories that we buy. We’re actually looking at saving some money on m eat this year if we keep volume the same. But one large system I know is assuming 1.6% food inflation.

Cara Loeys: Even though people have been buying more premium products, which brought up the average price paid, when it comes to the shelf price, we haven’t seen a lot of movement yet. That said, we are hearing consistently from some clients that they feel pressure from shipping costs, which they are looking to pass onto retailers. At the same time, retailers want to get traffic back into their stores, so they may be unwilling to raise prices.

Industrial Exchange: Given the growth and influence of ESG investing, do those social, environmental and governance factors enter into your decision-making on a day-to-day basis? 

Mike Sher: At Flagstone, which is our only food platform, we spend a ton of time talking about sustainability. And that’s not only from a sourcing perspective, but also in our packaging. The big issue is how to balance sustainability and other ESG factors with the need to remain economically competitive. We also have 100 locations around the world, and the competitive dynamic at each of those facilities is different. 

Jim Ilaria: The restaurant world is now about survival, so a lot of ESG initiatives are probably on the backburner for now. But the mandates from municipalities and states around packaging, for example, have forced change. As we crawl out of this, those issues will again come to the front.

Mark DeMichaelis: I understand that many private equity groups and larger investors check an ESG scorecard they have developed before making a move on any company. Since our customers want to know what we’re doing, we have ESG audits now, too. The plastic issue is not going away. And we’re going to really focus on new technology to reduce our use of plastic. The issue will be whether customers are willing to pay more for sustainable packaging? People have been willing to pay a premium for organic food. But will they be willing to pay $4.19 for something that now costs $3.99 because the packaging is sustainable? Customers definitely want us to do it, but there will be resistance. The packaging prices have to come down. 

Cara Loeys: Yes, we see that sales of the products that have sustainable packaging aren’t necessarily doing better. 

Industrial Exchange: And that brings us to our last point, which was touched on before: How do you innovate when it’s so difficult to speak with people directly? 

Jim Ilaria: In the restaurant business, true innovation is very difficult right now. A lot of people are going back to doing something they’ve done before and trying it again. 

Mark DeMichaelis: We’re trying to launch a couple of different lines right now, and instead of focus groups, we’ve made makeshift gift packs and sent them to family and friends to try out. Some of the moms sent us videos of their kids drinking one of the juice products. It was the first time the child had ever had a green juice. It was adorable.

[SIDEBAR]

About the Participants and Their Companies

Mark DeMichaelis, CEO and President,Olivia’s Organics/State Garden Inc.

The founder and owner of Olivia’s Organics/State Garden Inc., Mark DeMichaeilis heads a Boston based company that specializes in the growing, packaging and sales of fresh, ready-to-eat salads for retail supermarkets on the East Coast. 

Jim Ilaria, Interim President & CEO, TooJay’s Deli•Bakery•Restaurant

With experience as a consultant and as an operating company executive at PE-owned companies in the food business, Jim Ilaria currently serves as head of a delicatessen-concept restaurant chain in South Florida that went through bankruptcy. He is in charge of the company’s turnaround. 

Cara Loeys, Principal, Executive Insights at IRI

IRI is a leading provider of big data, predictive analytics and insights that help companies in the consumer packaged goods, OTC healthcare, retail and media sectors. A consultant with the firm for the past 10 years, Cara Loeys currently is helping clients focus on how to prepare for the future.

Tim Raven, Managing Director, Worximity Technology

Worximity Technology creates real-time apps that provide an overview of production. Tim Raven works with mid-market manufacturing companies in the food and beverage sector, as well as those in plastics, packaging, metals, building products, wood and lumber processing.

Mike Sher, Partner, Atlas Holdings 

At the private equity firm Atlas Holdings — a diversified group of manufacturing, distribution, service and trading businesses that operate in the building materials, capital equipment, energy, industrial services, packaging, pulp & paper, steel, and trading & distribution segments — Mike Sher has been working with Flagstone Foods, a portfolio company that is a private-label manufacturer of wholesome snacks