Last year, lockdown measures due to the COVID-19 pandemic cost the U.S. restaurant industry $270 billion. Many businesses that survived the crisis managed to stay afloat through a life-or-death struggle.

Now, as the economy begins a strong recovery, surviving restaurants are preparing to ride the wave of rising customer demand.

According to data from the U.S. Department of Commerce, the economy grew at an annualized rate of 6.4% in the first quarter of this year, and restaurant and bar sales in March rose compared to Februarysurged 13.4%. The consumer confidence index in April rose toits highest level since February 2020, boosted by $1,400 federal stimulus checks and pent-up consumer demand accumulated from months of frugal living at home.

As vaccination rates rise and businesses reopen, chief financial officers (CFOs) in the restaurant industry are preparing for a wave of customers in the warmer season. They are strengthening inventory, improving scenario planning, stocking backup suppliers, exploring consolidation opportunities, and ensuring access to funding in case of setbacks such as a new wave of infections.

CFOs are also testing the durability of pandemic-driven business model changes, including restaurant layout adjustments, adoption of new automation technologies, and greater reliance on takeout and delivery operations.

John Mootz, a culinary consultant and third-generation restaurant operator, said their preparations offer lessons for CFOs in less pressured industries on how to maximize returns during an economic boom.

Mootz said, "The restaurant industry has shown the ability to adapt and respond to situations beyond operators' control. I hope people in other industries can be inspired by what restaurant owners have done."

Jim Tyson/CFO Dive, data sources: U.S. Census Bureau, National Restaurant Association

The restaurant industry was hit harder by the pandemic than most industries. According to theNational Restaurant Association(NRA), 110,000 U.S. restaurants closed permanently or long-term last year, and nearly 2 million employees lost their jobs.

Lockdowns hit "casual dining" particularly hard. Unable to pivot quickly to takeout or delivery, Sizzler and Ruby Tuesday filed for bankruptcy last year.

New customer preferences and concerns have forced restaurants to completely overhaul their business models.

The NRA said 68% of adults said they are more likely to order takeout from restaurants than before the pandemic, and 70% of customers said they are willing to dine in temperature-controlled outdoor settings.

Permanent change or passing phenomenon?

Industry experts say that as the pandemic eases, restaurant CFOs need to determine whether these consumer attitudes will fade or take root. They also face other major challenges.

Many restaurants that borrowed billions of dollars from the U.S. Small Business Administration may need to repay theirPaycheck Protection Programloans if they fail to meet loan forgiveness conditions. Rising borrowing costs could slow their efforts to reduce debt and improve balance sheets.

Restaurants are struggling to rehire and recruit staff, facing shortages from servers to chefs to managers.

Industry experts say employees are choosing not to return to work due to fear of the virus and the $300 per week federal supplemental unemployment benefits. In response, from fast food to upscale restaurants, they are offering incentives such as signing bonuses or higher pay.

Experts also note that restaurants need to prove to customers that dining out is both safe and more satisfying than takeout or delivery. Those that successfully attract diners back need to find a balance between human contact and cost-cutting automation, such as QR code menus.

Mother of innovation

Some restaurants overcame the immense challenges of the pandemic and discovered opportunities through innovation.

In addition to electronic menus, restaurants have installed other tabletop technologies that can integrate beverage and food orders and allow customers to pay without a server.

Many restaurants strengthened loyalty programs, while others invested in technology to streamline drive-thru ordering. Fast-food outlets expanded the use of self-service kiosks.

In some venues, cashiers use electronic tablets to take orders outdoors, and servers deliver food to expanded outdoor seating areas.

According to NRA data, 62% of upscale restaurants, 56% of casual dining restaurants, and 37% of fast-casual restaurants have increased investment in outdoor seating areas since 2020.

Industry experts say "ghost kitchens" or virtual kitchens will also become increasingly popular with support from private equity and other capital. Successful kitchens will benefit from stronger preferences for online ordering, delivery, and eating at home while maintaining food quality.

Consolidation among franchise operators and large chain holding companies has also improved the prospects of many restaurants, and experts expect the pace of consolidation to accelerate in the coming months.

In March, Flynn Restaurant Group acquired NPC International—the largest franchisee of Pizza Hut and Wendy's—which filed for bankruptcy in July. Inspire Brands, which owns multiple chains including Jimmy John's and Sonic Drive-In, completed its acquisition of Dunkin' in December.

Survival of the fittest

Dartcor's successful rebound during the pandemic highlights the rewards of agility and innovation. This privately held company has provided on-site catering services to corporate clients in the New York City area for years, a market that is extremely competitive and was hit hard early by COVID-19.

When clients closed offices in March 2020, Dartcor shut down its buffet-style cafeterias and laid off 70% of its staff.

For clients allowing limited employee access to offices, Dartcor launched an app that lets employees order meals delivered to "outpost stations" near their desks. According to Jason Leeds, vice president of business development, the company consolidated demand across multiple office buildings and centralized meal production in "central kitchens" that had long served its catering business.

He said, "We had ghost kitchens before people knew what ghost kitchens were. It was a huge asset."

Leeds said that by taking orders through the app and centralizing meal prep, Dartcor reduced food waste, improved efficiency, and lowered costs, giving it an advantage over larger competitors.

He said, "We saw a huge opportunity to go on the offensive and become more agile," noting that Dartcor added a record number of new client accounts over the past year.

Pandemic immunity

Checkers & Rally's also controlled pandemic-related losses and emerged in some ways stronger and more agile.

According to CFO Bob Baker, same-store sales fell for about four weeks starting in mid-March 2020, then rebounded 7.8% for the year.

Baker said Checkers & Rally's cut capital expenditures, reached rent adjustment agreements with landlords, improved terms with suppliers, launched a loyalty app linked to e-commerce platforms, and promoted third-party delivery. E-commerce channels now account for 12% of sales, up from 6% before the pandemic.

The chain also adjusted its menu and promotional strategies to meet growing demand during dinner hours for combo meals featuring the Big Buford burger and Mother Cruncher chicken sandwich.

Baker said in an interview that last summer, when pandemic-affected beef suppliers slowed production, Checkers & Rally's increased reserve supplies of key products. It now maintains a 90-day inventory of beef.

Baker said the chain's menu eased pandemic pressures. "People were just looking for comfort food—burgers and fries—and we were right in the sweet spot."

Additionally, its drive-thru-only format with no dining rooms was naturally suited to lockdown conditions, giving it an edge over fast-food competitors.

Baker said, "If you were going into a pandemic and said, 'Gosh, I need a restaurant concept that could be considered pandemic-immune,' that would be Checkers & Rally's."

Baker said the chain increased liquidity on its balance sheet during the pandemic and prepared for stronger demand. He added that he is satisfied with the company's capital structure and has no plans to take on additional debt.

Despite the pandemic, Checkers & Rally's added 40 new franchise locations last year and another 10 so far in 2021, bringing the total to 850.

Regarding future growth, Baker said, "In the markets where we currently operate, I could build 30% more restaurants, so we will grow through same-store sales and unit expansion."

Meanwhile, some competitors are mimicking Checkers & Rally's by shrinking or eliminating dining rooms and shifting more toward off-premise models. Baker said, "It's interesting to watch."

Baker said that regardless of the pressures a company faces, restaurant CFOs today should maintain more cash reserves, ensure reliable credit lines, and "always have a list of contingency plans to generate liquidity on short notice."

Leeds, meanwhile, advises CFOs to strengthen scenario planning and keep a firm grip on downside risks.

Leeds noted that during the record expansion of more than a decade before the pandemic, restaurants and other businesses focused only on "continuous growth, continuous capital investment, without really thinking about a recession."

He said, "It can't always be roses and growth. Everything can collapse at any time."