David speaks with Neal Sherman of TAGeX Brands about what the restaurant industry has experienced during the Covid-19 pandemic, and what to expect in the years to come.
About this segment of Blackbird TV
Recorded: March 23, 2021
Published: April 20, 2021
Neal Sherman joining us today from TAGeX Brands, one of the foremost auction companies and liquidators in the restaurant industry, and I’ll tell you, Neal, you must be a busy guy, everybody’s talking about the restaurant industry right now, we’re coming out of the pandemic and I’d like you to share with us what you see as happening in the industry right now relative to the restaurants. Well, David, thank you for inviting me and thanks for the opportunity I appreciate it. What a long strange trip the last year has been shall we say it’s going into it as things were hitting the fan a year ago, March of 2020, everybody assumed as you’ve mentioned before in our discussions that there would be a tidal wave of closures. That there would be amazing piles of surplus equipment, there was an initial blip in when the pandemic began and those were largely from restaurants who probably should have closed before there was a pandemic, because there was over capacity in the U.S. somewhere between 12 and 20 percent, and as the pandemic kicked in and then government money came to bear some of the operators that didn’t really see a path out of this thing decided “okay I’m gonna hang in there, I’m gonna take the government money, I’ll keep some people employed, I won’t have very much revenue because I’m only doing carryout or delivery, and my concept doesn’t lend itself to that,” and the surviving operators were very value-driven and were buying in the aftermarket, so our demand went up of surplus equipment, but not as many closures occurred during this last year that any of us would have thought there would be. We anticipated a tidal wave by December / November, we thought this was coming in and it didn’t happen. But that doesn’t mean that it may not, you have referred to restaurant owners as being scrappy and independent, and those people are hanging in there, and we’re not seeing a lot of those closures, the government has just kicked out some more money which will bring people along, and it seems to be working. So what do you see through 2021 into 2022? So, I agree with you the government and you mentioned before it was fairy dust you know sprinkle it on and keep everybody going, the survivability of a restaurant food service operator is second-to-none in terms of their need to survive with perishable products and everything else, so they’re buying in the aftermarket keeping that going but I see now when the dust settles there’s the reality of a business that you need more revenue coming in then you know expenses going out, and historically restaurants, C-stores (convenience stores), supermarkets, areas where we operate operate on very thin margins and if the government in many places still has constraints on capacity that’s just the recipe for disaster so I think in the next 12 to 24 months we’ll see a slow burn of locations closing. The banks and the real estate companies that have the leases in these places aren’t moving as quickly or rattling their sabre as as much as they have before, because there’s not as many people lining up to go into the business, so what is the line from the Godfather, “dead men don’t pay,” and so if you if you put the person out of business and there’s no one lining up to go into it, what are you gonna do? So I think people are being very judicious in their steps. So from that point, let’s talk about the equipment that’s in this restaurant, in this kitchen, as collateral both of our clients are banks, and bankruptcy professionals, and oftentimes the stuff that’s in there is pledged as collateral, so what happens when the bank finally says, “hey, Mr. Jones, it’s time to do this,” is this good collateral still? Was it good collateral before? How has that changed through the pandemic? Sure. So, many of the times that you get brought in, you get brought in on an overall enterprise, what is the value of the business you know operating value the other assets? The contents have obviously much greater value in-place for the next operator, or the current operator, than they would in the aftermarket if you pull it out, because of the leasehold improvements that were conducted to to make those a reality, assuming that the next operator could use that. I think that to this point the used market has held in the restaurant food service business and has even been higher than it’s historically been. I don’t know how long that’ll last. Those are for assets that are being removed from the property, correct? Correct. Okay. Correct and then you then you say, “okay, well what are you going to do with the property?” So in some cases where they got rid of the restaurant and put in a cell phone or mobile phone operator, that’s easy because you had to get the equipment out of there to put the new tenant. In some cases, it has very little value if it’s not being used, relative to the to the collateral amount, right? So I think people are moving much slower than the normal slow methodical pace of a landlord or a bank or a lender. Because of the forbearances that are in place and the moratoriums of the foreclosures and this is all slowed down but over the next 24 months this will work itself through the system, is what you’re saying? Yeah, I think it’ll work itself through the system. I’m not sure what what the end-game is for some of those locations. I mean if you I think two years ago and we’re a national company, so, I spend about a month in Southern California and a month in Texas, and already two years ago pre-pandemic, major retail centers and thoroughfares saw a lot of failures and there’s a lot of empty locations and there’s even more now. Now, alternatively if the real estate has a drive-thru, because everybody wants to drive-thru now, or has a smaller footprint the operators are getting much more engaged in in that and everybody wants a piece of that action. So it’s interesting you point out that the flight from the retail mall, the mall location and those kinds of places, has hurt the restaurant industry, is the same thing going to happen in commerce centers now that people are working from home? These downtown restaurants in certain centers, what’s going to happen to those people? It’s brutal. I was on the phone with a client the other day who has a number of locations, two of which are in Chicago, one is in the Merchandise Mart which is one of the biggest office / showroom buildings in the world, and he closed it, I said “well what happened,” and he said, “well it’s tough to make a living on eight percent of the occupants showing up every day.” I thought to myself, “lord, I mean, unbelievable.” Then in the Hancock Building or whatever it’s called now, one of the biggest buildings in the world, he closed the location, he goes “that’s a little better, it had 12 occupancy.” 12 percent, in downtown Chicago, you know that area. Yeah. By water tower and everything else these are beautiful areas and they are just hurting. Now there’s near-term pent-up demand for people to go to those places, so they want to go out to dinner they want to you know entertain but no one’s meeting there’s many businesses across sectors that are not allowing any outside guests to come visit, their people and many other people are working from home, you know so yeah big sea changes business wise and as our society reinvents how we mingle and eat, and be social and do business, and all of this will impact how the retail—excuse me—the restaurant industry is going to to come out of this pandemic, and as you said at the beginning of this we’re not through it yet, for the restaurants and it’s a long time coming. Neal really good information and insightful we’ll come back and revisit this soon I really appreciate your time thank you. Thanks David, appreciate it.