The restaurant industry is known for its strength and resourcefulness. Regardless of what is going on in this country, restaurants find a way to adapt and survive. This vital American industry has worked through catastrophic events like natural disasters, wars and now a pandemic.
At Ceterus, we are fortunate to serve many businesses in this dynamic industry. The biggest concentration of those customers is in a well-known franchise – Jimmy John’s. We currently serve more than 230 Jimmy John’s locations, which has given us a front row seat to witness how the pandemic impacted the brand and how the brand was able to adapt quickly and effectively.
The graphic below shows the change in average revenue, expenses, and net income for our Jimmy John’s customer base over the past two years on a period by period basis.
The pandemic’s impact on revenue is obvious. You can clearly see that revenue began to fall off in Period 3 (ended March 26) and bottoms out in Period 4 (ended April 23). What caught my eye though was the red line in the graphic. The red line represents the change in expenses compared to last year. These Jimmy John’s business owners took quick and decisive action to reduce expenses to cover the dramatic loss in revenue. These actions are why you do not see a significant decline in net income (green line) even though revenues dropped off dramatically in Period 3 and Period 4.
So where did Jimmy John’s Entrepreneur’s create savings? Let’s begin by being fully transparent. Some cost savings were automatic based on the franchise model. Things like royalties, marketing fund, and merchant fees are expenses that are calculated based on a percentage of revenue. With revenue being down dramatically, we would expect these expenses to be down as well. There is very little lag to the reduction in expenses, generally a week.
The franchise model doesn’t tell the full story though. As we dig into the data we can see what really happened. Overall, our Jimmy John’s customers saw a revenue reduction in Period 4 of nearly 40%. The data shines a light on just how quickly and effectively these Entrepreneurs adapted their businesses. In response to the significant revenue reduction, costs were cut in a quick and meaningful way. Cost of Service expenses were down 38% and Cost of Labor was down 37% in Period 4. We can also see these business owners negotiated successfully with their landlords as Rent and Occupancy costs were down nearly 32% in Period 4. We can see this expense reduction trend throughout the various profit and loss line items for this group of customers in Period 4.
What stands out to me as I look at our customers is there was simply no escaping the impact of COVID-19. Even if we could have seen this coming, there was no way to plan for all the ways COVID-19 would affect small business. No one knew how to react to what was happening. The Country, customers, and business owners alike were trying to carve out a new path on the fly. That said, these Entrepreneurs weathered this crazy storm impressively. Quick decisions were made that minimized the impact of this pandemic on their businesses. As we look at Period 6 and Period 7, you can see these businesses are generating more revenue and net income than they did in 2019. This is truly remarkable given everything going on in the Country today. By no means is this over, but I have total confidence in this group of business owners to take on whatever storms may be headed our way in the future.