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  1. Home
  2. / Jim Cramer

Jim Cramer: The Death Knell of the Traditional Sit Down Restaurant

After listening to the Yum call you know that almost every restaurateur seeking to make a profit will most likely fail.
By JIM CRAMER Jul 30, 2020 | 01:31 PM EDT
Stocks quotes in this article: YUM, WING

Stick a fork in it.

That's what I have to say about the traditional restaurant after listening to the recent publicly traded restaurant calls.

We are seeing the end of the brick and mortar establishment that we take our families out to, that we look forward to going as a break from our routine. Going out. An American pastime is going bye bye without a vaccine that makes us forget the risk of sitting next to someone and not being worried about that someone sneezing and killing you.

This morning Yum Brands (YUM) reported and while the reception to the quarter was awful, the conference call sent a chill down my spine. That's because Pizza Hut, long considered a second-rate pizza brand, had a stellar quarter, a 1% percent comparable store gain, but more importantly each month got better and better so that 1% dramatically underestimates the positive change. That means you could be seeing some 4%-5% numbers coming up if the cadence holds.

So isn't that good news for going out?

No, not at all. Because it's doing these numbers with just a small number of its dining rooms open. Same goes for KFC and Taco Bell.

Yum is the largest restaurant chain in the world. And Pizza Hut, which is the largest division, might actually not need dining rooms at all. As David Gibbs, the CEO tells us on his call, "The reality is that we have got 24,000 dining rooms that are closed today" and, he says, the dining room it turns out "is not critical to our success."

I would go a step further: after listening to all of the protocols they have to put in to open those dining rooms, it might not be worth the effort. As Gibbs says, "the dining room piece is really something that we've been able to overcome."

Holy cow: the largest restaurant chain doesn't need to be a restaurant to make a lot of money. How is that possible? Perfect pickup and excellent delivery that 's how.

As a restaurateur I get a chill up my spine. Look, I totally get it when I see Wingstop (WING) have an astounding 31% same store sales gain. We've loved this $150 stock since it was $27 after we met the CEO, Charlie Morrison, and knew that this was entirely take out and delivery. No dining room.

But Pizza Hut making this much money with just take-out and delivery? That truly is the death knell of the traditional sit down restaurant.

Right now many restaurant owners are hopeful about opening so people can sit down or stand at the bar. But the authorities have decided that bars and restaurants appear to be the most likely hot spots out there.

So they stay closed or they try to make it up in take out, delivery and outdoor dining - typically on the sidewalk.

For most, though, it's not working. There isn't enough room for enough tables outside. In three months it will get cold and nobody will want to eat outside. The same distancing protocols that would apply to Pizza Hut would apply to the independents which means at least a 50% reduction in seats and, while Pizza Hut doesn't have a lucrative bar, the bars at stand alone outfits have proscribed limits on how many people can stand around a bar and it might as well be as much as 70% fewer than you had before the pandemic.

So, how about delivery? The big outfits like Yum or a Wingstop can cut deals with the delivery outfits that make the economics work. But the independents? Forget about it. They typically have to give 25%-to-30% of the check to one of these delivery companies, far far larger than the big guys have to pay.

Now, let's add it all up. A regular fine dining restaurant will be about to serve only half the people it did before and there isn't room at the bar for them to wait. The food typically does not travel well and the profit isn't there after the delivery companies take their cut. The rent and the labor still cost the same amount of money.

Yum sees this. It knows the numbers. If it were really necessary or lucrative it would have insisted that the franchises open their dining rooms with strict protocols. It isn't. Not worth it. Not with social distancing, masks, temperature takes, you name it. But your favorite sit down restaurant, the one you enjoy, the one you get together at, the one that's a vacation for the person or persons in the home who makes the meals? That restaurant better be a labor of love because after listening to the Yum call, where the largest restaurant chain in the world says it can overcome the brick and mortar part of its business, you know that almost every restaurateur seeking to make a profit will most likely fail, taking with it millions upon millions of jobs along the way.

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Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no position in the stocks mentioned.

TAGS: Earnings | Economy | Investing | Markets | Stocks | Trading | Restaurants | Jim Cramer | Coronavirus

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