Restaurants were just starting to recover after initial pandemic shutdowns and health precautions kept many from offering indoor dining. But the new, highly contagious coronavirus delta variant has quickly reversed summer gains, causing some establishments to revert to pandemic closures.
Megachain McDonald's (NYSE: MCD) recently made an announcement that suggests franchisees close their doors to indoor dining in markets with high case rates. Considering McDonald's is a massive player in the real estate sector, here's how COVID-related closures could impact the company and the real estate market.
McDonald's isn't loving it
McDonald's and other fast-food chains with established business models offering carryout are at a major advantage compared to other restaurants. But that doesn't mean they are immune to COVID-19's impacts. In 2020, when first-wave pandemic cases were at their peak, McDonald's revenues dropped 12% compared to 2019, and earnings per share (EPS) plummeted 23%. People weren't as comfortable eating out, and with indoor dining closed, the chain lost business.
Things were starting to look up for McDonald's in 2021. It slowly reopened its doors, achieving 70% of its franchises being fully open in July. The company's finances were rebounding, too: EPS for the six months ended June 30, 2020, shot up over double what it was for the same period in 2019.
But much of this progress could be erased as consumer confidence weakens with the increase in cases and hospitalizations. To get ahead of the surge, McDonald's leadership provided guidance to its franchise owners to return to drive-thru only in locations where confirmed cases met or exceeded 250 per 100,000 people on a rolling three-week average.
How does this impact the company?
Individual franchise operators and owners are ultimately the ones to decide whether to pause indoor dining operations. Right now, the partial closures are affecting just a small number of locations in the scheme of the McDonald's operational footprint, and shuttering dining rooms doesn't mean the businesses are shut down completely. But even limited closures put pressure on franchise owners and hurt McDonald's income, since the company earns a percentage of each store's sales.
McDonald's, along with many other retailers and restaurant operators, has struggled to find workers over the past few months, offering big sign-up bonuses and wages as high as $15 per hour in some cities. An insufficient workforce and positive COVID cases among employees had forced some stores to close temporarily, even before this guidance was rolled out.
This isn't the first time economic hardships have presented challenges and opportunities to McDonald's. In the Great Recession, McDonald's took advantage of record-low real estate prices, purchasing new property and land for future development, a strategy that paid off handsomely. The company always has a massive real estate portfolio to lean on during challenging times, allowing it to sell select properties to bolster its cash on hand if needed. But liquidation isn't very likely.
The Millionacres bottom line
Personally, I don't see this having a huge impact on the real estate market or affecting investors who don't directly own shares in the company today. What it does show us is that we're a long way from recovery. While there are signs of progress, we still have a challenging few months ahead.