The Food and Beverage Industry's Global Challenges During the COVID-19 Pandemic
By Lucheng Wang Part-time Teaching Assistant, Florida International University | June 28, 2020
This article was co-authored by Timothy Flohr, Program Manager, University of Memphis - Kemmons Wilson School of Hospitality & Resort Management
Since the first patient was reported in December 2019, according to the World Health Organization (WHO), the COVID-19 outbreak has infected more than 1,800,000 people worldwide. Over 170 countries and regions have reported infections with the United States, China, Britain, Italy, Japan, South Korea accounting for the most casualties (WHO, 2020).
Needless to say, many popular travel destinations around the world have been impacted (WHO, 2020). COVID-19 was declared a Public Health Emergency of International Concern on January 30, 2020 (WHO, 2020). With the escalation of the pandemic and the increasing number of infections worldwide, the impact of COVID-19 continues to expand. In the U.S, the stock market has been hit hard, and, the unemployment rate jumped to 4.4% in March 2020, the highest level since August 2017 and well above market expectations of 3.8%. (U.S. Bureau of Labor Statistics, 2020).
Under various pressures, the food and beverage industry is facing great operational difficulties. In order to avoid people gathering and reduce the infection rate, authorities around the world have issued regulations that either prohibit dine-in guests or mandate limitations on the number of dine-in guests in the restaurant.
For example, since March 16, New York City has limited its bars and restaurants to delivery and takeout only (Sadurní, 2020). The large number of outright shutdowns and sharp decline in sales volume have forced the food and beverage industry into its biggest crisis in a decade. According to the National Restaurant Association (NRA), there was a net loss of over 417,000 jobs in eating and drinking establishments in the United States in the month of March 2020 (National Restaurant Association, 2020).
Further, a survey of more than 5,000 restaurant owners and operators found that sales were down 47% nationwide during the period from March 1 to March 22. (National Restaurant Association, 2020) Practitioners in the food and beverage industry are eager to find solutions. In order to gain a better understanding of the challenges and coping strategies employed by the food and beverage industry associated with COVID-19,it is of value to refer to the actions taken by food and beverage operators in both China and the United States during the duration of their pandemic outbreak experience.
The outbreak of COVID-19 in China occurred during the Spring Festival, which is one of the peak periods of tourism, and thus for the food and beverage industry. In order to avoid the forming of crowds, the majority of celebratory dinners and wedding banquets during the Spring Festival were canceled, and a large number of restaurants were closed.
According to statistics from the China Restaurant and Hotel Association, compared with the previous year, 78% of catering companies lost 100% of their operating income; while only 5% of companies incurred a loss less than 70%. During the seven days of the Spring Festival, the COVID-19 pandemic caused a $7 billion loss of catering industry sales (China Restaurant and Hotel Association, 2020). Due to confidence in sales performance forecasting during the Spring Festival, most F&B companies in China did not maintain a positive cash flow before the pandemic, which has led to a growing shortage of funds for catering companies. The resulting impact being that as the time goes by and the dine-in ban continues, more and more food and beverage companies will go bankrupt, especially the small-scale restaurants.
Despite the tremendous challenges, there are still many Chinese food and beverage companies that found ways to expand their business scope and extend the brand boundary. For example, Haidilao, China's largest hot pot chain, made the decision to shut down their 589 chain restaurants. Since the government had not yet issued the dine-in ban at the time, Haidilao was widely praised for its socially responsible behavior.
In order to continue to generate income during the pandemic, Haidilao has developed new semi-finished food products. Different from the traditional ready-to-eat products, these new semi-finished foods use fresh ingredients, the longest shelf life of each product is no more than 4 days. Using Haidilao's central kitchen and well-developed logistics technology, the raw ingredients will directly be delivered to the consumers' homes. Through this new product development, Haidilao was able to expand its influence among consumers and effectively generate income.
Many other food and beverage companies actively cooperated with the Chinese government to provide dishes for medical staff and patients, supporting the fight against the pandemic while also making up for some of their income loss. Food and beverage companies in China also cooperated with their communities, providing food or ingredients for those most at risk (ex. the elderly population, the disabled) who were unable to cook or go outside (Yang, 2020).
As the pandemic gradually eased, the food and beverage industry in China began to recover. In order to increase people's willingness to consume these services, governments have issued dining vouchers to residents, and many local government officials have appealed to residents to dine out. Although the Chinese food and beverage industry has suffered a huge loss, now most of the businesses are already back on track. In China, the 1st of May vacation season is typically a peak time for the hospitality industry. This year the volume of sales that food and beverage companies achieve will be an important reference for the annual performance of the Chinese food and beverage industry.
In the United States, the efforts to mitigate the influence made by the spread of COVID-19 have been instituted by all levels of government: federal, state, and local. As in China, the vast majority of restaurants in the United States were limited to only takeout and delivery options during the peak of the COVID-19 outbreak. With the restaurant industry's business model already consisting of razor-thin profit margins, eliminating dining room operations has nearly decimated the entire industry to near apocalyptic levels.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which allocated $376 billion in relief aid for American workers and small businesses (Small Business Administration, 2020). The CARES Act is "the single largest economic relief package in U.S. history at $2.2 trillion." (National Restaurant Association, 2020, para.1). The CARES Act includes payments to both individuals and families, loans for small business loans with loan forgiveness provisions, and enhanced unemployment insurance and payments (National Restaurant Association, 2020).
In addition to the government, industry associations are also helping food and beverage companies to survive this crisis. The National Restaurant Association, for example, has set up the Restaurant Employee Relief Fund (RERF) to assist with restaurant employees who are experiencing hardship as a result of COVID-19 (National Restaurant Association, 2020). All such efforts will help the industry especially those companies facing cash flow shortages and individuals living without income due to layoffs and furloughs.
Due to the difference in virus transmission time and the outbreak point of each country, it's with a high probability that what is happening in China now will happen in the rest of the world in the future. In order to avoid more losses, food and beverage companies also need to develop self-saving strategies. The following are suggestions for such strategies:
- Actively cooperate with the government's epidemic prevention arrangements. Only by letting the pandemic subside as soon as possible can the status quo be fundamentally changed. In line with government policies, reducing aggregation and outings can greatly reduce the number of infections.
- Try to ensure that funds be sufficient. From the case of China's catering industry, the importance of cash flow is self-evident. According to the China Hotel and Restaurant Association, during the epidemic, 35% of the food ingredients were eventually discarded due to the decline in sales volume, over 27% of ingredients were sold to the public. Further, labor costs and rental costs can also put pressure on restaurant operations. There are very few restaurants with liquidity that can support more than 3 months of such costs; 31% of restaurants with cash flow that can support 1-2 months, and 27% of restaurants have said they can no longer support (China Restaurant and Hotel Association, 2020). To avoid the risk of bankruptcy, companies need to have enough funding to cover a fixed cost of at least three months.
- Ensure proper disinfection, prevention, and sanitation in the workplace. Restaurants and bars may also consider providing employees with medical supplies or equipment, such as thermometers, rubbing alcohol, and disinfectants, and perform health checks for employees each day, as well as keep records of guest visits to ensure the safety of customers and employees. As soon as an infected person is found to have visited your business, operators must report to the health department as soon as possible and contact guests at risk of infection. Such rigorous anti-epidemic measures could not only ensure the safety of consumers and employees, it can also help restaurants build a reputation.
- Change the business model to a variable operation format to make up the lost income. Diverse business models can help companies increase revenue, such as food delivery, long-term food orders, ingredient processing services, etc. In the last 5 years, Online Food Delivery (OFD) service has had great development both in China and the U.S. In 2018, OFD users in China reached 400 million people, with an average spending on OFD of $212 ($12 higher than in the U.S.) (Mei & Li, 2020). Considering the difference in per capita income between the two countries, the potential of OFD services in the United States is still significant. During this epidemic, due to the limitation of people going out, there in an opportunity for increased development of OFD service. Restaurants and platforms can seize opportunities during this epidemic, transform potential customers, and convert them into long-term customers.
- Connect with the community and assume social responsibility. During this pandemic, all walks of life are suffering. Actively communicating with the community and taking part in socially responsible activities will not only help us overcome difficulties faster, but also allows us to discover potential needs and grasp future opportunities.
Since we are still in the midst of the COVID-19 pandemic and the full impact has yet to be determined, it may be impossible at this time to predict what the future will hold. Given the fluid and nonstop information that we are currently receiving about COVID-19, it is expected to be increasingly important that valid and reliable data is available for future research and analysis. Current and future research should consider the following:
- Preserving data during pandemics has historically been an issue, so a coordinated effort to ensure timely, accurate, and accurate archiving of industry-related data about COVID-19.
- The efforts from organizations (both for-profit and non-profit) and governmental agencies to mitigate COVID-19 should be documented and analyzed. Best practices from across different industries and continents will help future leaders make more informed decisions. Fact-based modeling will help in future humanitarian efforts and business operations.
- Specific to the food and beverage industry, current and future research should focus on best practices that were implemented during all stages of the COVID-19 pandemic. This must include not only a study of WHO stages, but corresponding stages from federal, state, and local governmental agencies.
- A thorough analysis of business continuity and crisis response teams within food and beverage operations should be studied. While the duration of COVID-19 is uncertain at this time, it is already clear that many businesses – small, medium, and large - aren't in a position to withstand short-term economic hardships. A thorough "postmortem review" of both successful and failing businesses will mitigate future risks and promote iterative best practices.
- Operating practices from food and beverage operations from across the globe should be thoroughly analyzed and codified by researchers. If this situation were to reoccur, a thorough analysis of current practices will help future operators reduce risk on multiple levels.
The war against the COVID-19 virus will be a difficult and long battle that will test the patience and confidence of all individuals, businesses, and organizations across the globe. Even now, as no one can accurately forecast the end time of the pandemic, experts predict that this pandemic has great possible to continue into the second half of this year. The only way to combat and defeat the COVID-19 pandemic will be a collaborative, global effort from every individual, organization and governmental agency across the globe. We need to collectively realize that, in this case, size doesn't matter. Just as we've realized throughout the course of human history, a microscopic virus can wreak havoc on the entire globe.
In the same vein, the food and beverage industry is but one small piece of the coordinated global effort to prevent, detect, and respond to this global pandemic. However, the sooner we realize that the size of the company doesn't matter and that collectively we all have a vital role to play in defeating this common enemy, the sooner our world gets better.
China Restaurant and Hotel Association. (2020). Development Status and Trend of China's Catering Industry under the COVID-19 (pp. 3-4). Beijing. (Chinese)
Mei, L., & Li, X. (2020). Catering and tourism industry analysis of sales outside the Meituan-sprint in the second half, space, pattern, and value (pp. 6-9). CHINA MERCHANTS SECURITIES.
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Sadurní, L. (2020). New York Orders Schools, Bars and Restaurants to Shut Down. The New York Times, March 16, 2020 (Section A), Page 1.
Small Business Administration (2020). Coronavirus Relief Options. Retrieved 13 April 2020.
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Yang, G. (2020). Henan issued 11 measures to promote consumption. Henan Commercial Daily, (March 6), A05.
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