​​Coronavirus' Impact On Hospitality Businesses Is Profound

Law360 (March 25, 2020, 4:35 PM EDT) --
R.J. O’Hara
R.J. O’Hara
It is not news that the coronavirus makes people sick. It is not news that the virus impacts some people far more than others. Some individuals infected with the virus may be asymptomatic, while others who are infected die. We all know by now that certain groups of us are more affected by this virus than others, like the elderly or people with certain preexisting conditions, but without further analysis it is impossible to know why one person gets very ill and another does not.

The impact of this coronavirus on specific individuals and to our population at large has an analogous impact on our overall economy, on specific industries and on individual businesses within the larger economy. This insidious virus is causing devastating obvious as well as less obvious damage, and potentially irreparable damage on the economy and certainly so on the hospitality and alcoholic beverage industries. And lawyers who provide legal services to hotels, restaurants, bars, airlines and cruise lines, and entertainment and sports venues are suffering, severely, right along with their clients.

For purposes of this discussion, let’s define the hospitality industry as including businesses that sell food and alcohol at retail to the public, including hotels, of course, but also restaurants and bars of every sort and location, brew pubs, winery pubs and distillery pubs, contract food service providers, wedding and meeting facilities, entertainment destinations — such as movie theaters, casinos, bowling alleys, museums, concert and fine art performance venues, and convention centers — as well as airlines and cruise lines.

The alcoholic beverage industry is comprised of alcohol manufacturers, such as breweries, wineries, distilleries and cideries, alcohol wholesalers, liquor and package stores, whether private or government owned, as well as convenience stores, including those at gas stations, and supermarkets, and all of the other members of the broadly defined hospitality industry. Some members of the alcohol industry, notably grocery and convenience stores, have been far less impacted than other members of the industry, because they have been deemed essential during this crisis, but they are feeling an impact from the virus of a different kind and degree.

It is an axiomatic proposition that all three tiers of the alcohol industry — from manufacturing, to wholesaling, to retailing — are interdependent, perhaps more so than any other industry. All the segments of the hospitality and the alcohol industries are intertwined. But the alcohol industry in the U.S. is perhaps the most heavily regulated as a result of the mandated three-tiered system created and imposed at the repeal of Prohibition in every state and federally. (Alcohol bears the distinction of being the only product that is the subject of two constitutional amendments.)

For the most part, all licensed retailers must purchase the alcohol they sell from a licensed wholesaler, all licensed wholesalers must purchase the alcohol that they distribute to retail licensees from a licensed manufacturer, and all manufacturers must sell only to licensed wholesalers. States that still maintain ownership of some aspect of the alcohol industry, such as by being the sole or dominant wholesaler or retailer of wine or spirits, as is the case with Pennsylvania, even feel the impact of this virus. The Pennsylvania state-owned wine and spirits stores, of which there are about 700, are now all closed to retail sales. (On the last day before the shutdown of the state stores, the stores set an all-time single-day sales record.)

The cancellation and indefinite postponement of single entertainment events and entire professional sport and theatrical seasons obviously impact the revenue normally generated by those businesses and leagues, but also negatively impact the revenue generated through the economic ripple effect they have on separate but symbiotic businesses, including parking lots and retail apparel stores, as well as restaurants, bars and hotels.

All told, the individual entertainment events and pro sports and fine arts seasons normally employ thousands of people across the country, but when you add the people employed in the businesses that serve them, the number is multiplied many times. The cancellation of the NCAA’s March Madness Tournament, the postponement and possible cancellation of the NBA and Major League Baseball seasons, the cancellation of events at performing arts venues, and the closing of movie theaters across the country will have a nearly incalculable impact.

Let’s look at the big picture. There are over 50,000 hotels and motels in the U.S., some of which are large, urban, full-service hotels, with dozens if not hundreds of employees, while others are mom and pop businesses in remote areas of the country, with perhaps two full-time employees. Hotels and motels employ about 15 million people in the U.S. The nonmanagerial employees at hotels and motels are 40 years old on average and earn about $15 dollars an hour. Hotels and motels generate roughly $162 billion dollars a year in revenue, in normal times.

There are roughly a million restaurants in the U.S., depending on how and what you count. Restaurants generated $863 billion in revenue in 2019, and were projected to generate $899 billion in 2020, before the coronavirus spoiled the economy. Restaurants employ approximately 15 million Americans, and nine out of 10 restaurants have fewer than 50 employees. Restaurants sold in the neighborhood of $105 billion of beer, wine and spirits in 2016.

So, what happens if all restaurants and hotels close? Our economy loses well over $1 trillion in revenue and over 30 million jobs. Let that sink in.

Industries that employ millions of people and generate billions if not trillions of dollars clearly rely on lawyers for a whole host of reasons, and many of those clients have ordered a complete or near-complete cessation of legal work. It is “pens down” for lawyers providing services to hotel chains, restaurant companies, and sports and entertainment venues and companies. If any work is being done, it is either on issues that are truly legal emergencies, and even those are accompanied by requests to hold the billing until a later date.

National chain restaurants and hotels, iconic companies with household names, are advising law firms with whom they have long-standing, trusting, close relationships that work must stop and billing cannot occur without special permission. Larger law firms that are well-financed are providing or considering providing legal services without charge, at deeply discounted rates, or with billing indefinitely delayed.

How can these very significant companies lay off thousands of employees at their locations, and thousands at their corporate headquarters, and continue to pay for legal services that are not true emergencies? The answer: they cannot. Law firms that provide a heavy concentration of legal work to the broader defined hospitality industry are laying off staff and attorneys.

Of course, the question is, when the coronavirus is defeated, will all these hotels and restaurants that closed be able to reopen? One nationally known dine-in casual restaurant chain reports that its sales were down 80% last week, and are likely to be down further this week. If the economy were to return in a sudden, steep-curve manner, rather than in a soft U-shaped manner, this chain estimates that if the crisis lasts two or three months, it could take two or three years to get back to even.

Currently, hotels and restaurants, even convenience and grocery stores and gas stations, are putting on indefinite hold almost all current and longer-term projects that require capital, or that require manpower that is scarce in the grocery and convenience store sectors. This cessation of projects will have a ripple effect. Contractors and equipment providers will lose scheduled work, and people who are not employed directly by the hospitality industry will be out of work because of the impact of the coronavirus on the hospitality industry, and of course the lawyers involved in drafting contracts and providing other legal services will feel the pinch.

As we all know, not all restaurants are closed, but more than half the states have ordered that there be no on-premises dining, and social distancing rules foreclose their normal operations. Restaurants that are able, or for whom it may be worth it, to stay open just to sell food to go or for delivery (if they are permitted by their state and local liquor license agencies), may be able to generate revenue, but will it be sufficient to maintain the businesses, pay employees, and cover rent and other costs? Will they be able to save enough revenue to restart their operations once the virus is beaten back?

Typically, restaurants licensed for on-premises dining are not permitted to sell alcohol for off-premises consumption, either via take-out or delivery. In the time of the novel coronavirus, many states have taken progressive and forward-thinking action and altered their laws to temporarily allow restaurants to sell alcohol via takeout or delivery. This alteration in state and local liquor laws provides at least some revenue for restaurants that would otherwise be closed, gives the restaurants the ability to keep employees on the payroll, helps stop the spread of the virus by limiting contact and promoting social distancing, and provides meals to folks who may not eat regularly otherwise.

It is impossible to say at this time precisely how much revenue restaurants will make on food and beverage takeout and delivery during the coronavirus crisis, or what percentage of their normal sales will be made up by this new business model. But clearly there are numerous restaurants, including chains, that have decided that the takeout and delivery model will not work for them and have closed altogether.

At the same time, we are beginning to see hotels close outright. Based on pre-virus business, takeout and delivery sales by restaurants during the virus emergency could bring in 50% or more of the total pre-virus sales for the most successful restaurants during the virus crisis, but this is only an educated guess. In 2015, takeout and delivery sales at U.S. restaurants totaled about $30 billion, out of total sales that year of about $780 dollars. That’s close to 4% of the total sales. Last year, in 2019, of total sales, full-service restaurants sold up to 17% in take-out and delivery orders.

Prior to the virus hitting, takeout and delivery sales were growing at as much as 300%, depending on the geographic area and its demographics. Of course, pizza and similar restaurants that were takeout-oriented prior to the coronavirus are more oriented and well-suited for successfully increasing takeout and delivery sales during the virus crisis. The more interesting statistic will be how much revenue are restaurants bringing in post-virus (with only takeout and delivery sales) vs. pre-virus (with a combination of on- and off-premises sales).

The expectation is that alcohol sales by restaurants for off-premises consumption will vary widely by state and city, and by restaurant type. One thing is for certain, there is no doubt that being permitted to sell alcohol for off-premises consumption will provide some economic relief for restaurant owners and their employees, as well as some form of relief for their customers. A decrease in alcohol sales will have a direct impact on alcohol wholesalers and manufacturers, of course, and the economic ripple effect on workers and companies will be measured in millions of people and billions or perhaps trillions of dollars. The impact of business closures will reportedly impact 45% of the entire economy.

The revenue brought in by major league sports leagues and teams, keeping in mind that these seasons have all been postponed indefinitely and nobody can say when or if they will resume play, is breathtaking in normal times. These teams and leagues generate billions in revenue for themselves, from television contracts, ticket and apparel sales, food and beverage sales, and sponsorships. But it cannot be challenged that these teams also generate incredible revenue for the cities in which they reside and the hospitality businesses in proximity to their venues, and even further afield for bars and restaurants far removed from the venues that offer places for fans to gather and watch games and to eat and drink. Cab drivers and Airbnb operators and countless obvious businesses benefit from the presence and the presence of their fans.

Professional sports and performing arts are part of the larger hospitality industry — as they host, feed and entertain their fans. The NCAA tournament brought in over a $1 billion in revenue in 2018, and would likely have generated more this year. From the revenue generated by the tournament, NCAA distributed $167 million to D1 schools last year.

Since 2001, the tournament brought about $85 million in revenue to businesses, like hotels and restaurants, in Dayton, Ohio, which normally hosts early NCAA tournament rounds. Houston businesses made a reported $300 million from the tournament in 2016 alone, most of which likely went to the greater Houston hospitality industry. It was projected that in 2020, well over 100,000 fans would have descended upon Atlanta for the NCAA Final Four, likely generating over $100 million in revenue for businesses in the city. Vegas sports books took in $495 million in bets on the NCAA tournament last year.

During tournaments, between 10 million and 20 million fans per game tune into watch from their homes, with friends, and at bars and restaurants, and across the country there is a demonstrable spike in beer and pizza sales (both up almost 20% during the tournament), and in chicken wings (up 23%) and restaurant and bar sales in general.

Major League Baseball generated nearly $10 billion in revenue in 2019, showing an increase in revenue for 17 straight years. MLB franchises generated revenue of between $218 million on the low end and $668 million on the high end. Major League ballparks in the U.S., at which 2,429 games were played last season, seat between 30,000 and 50,000 people, with an average per-game attendance of about 28,000 fans per game. The MLB games drew 68.5 million fans to ballparks last year.

The NBA generated nearly $9 billion in revenue last year, with teams generating between $224 million and $472 million each. An average of nearly 18,000 people attend every NBA game, with a total of about 22 million attending all NBA games last year. The NHL generated about $5 billion in revenue last year, with teams generating between $102 million and $270 million. Attendance numbers for the NHL are very similar to the NBA, with an average of just under 18,000 attending every NHL game, and with a total of about 22 million attending all NHL games last year.

Other entertainment venues are also suffering. The iconic Metropolitan Opera in New York has also ceased business and laid off all employees, including performers, stagehands, ticket sellers and others. Over 800,000 people saw an opera produced by the Met last year. The Metropolitan Museum of Art experienced record attendance prior to the coronavirus pandemic, with about 7 million guests last year. Even though the theaters on Broadway in New York are by no means large when compared to pro sports venues, there are many of them and they are always busy, with about 13 million people attending plays and musicals in New York City last year.

The closure of these arts-oriented businesses is heartbreaking for the people impacted and the culture of the city of New York, but New York is far from the only city where people go to performances. Over 72 million Americans attended a live performance somewhere in the U.S. in 2016. And let’s not forget about the popularity of watching movies in cinemas, as about 260 million people went to the movies last year. The impact that these businesses have on the broader economy is staggering.

Certainly, a large percentage of the revenue generated by major league sports leagues is derived from television contracts, and the revenue generated by major league sports and other live events and performances is owned and distributed by the companies producing the events, leagues and shows, to their employees, to cover costs, and to pay the owners themselves, but when people attend performances and sporting events, they also dine in restaurants, stay in hotels, take cabs, rent buses, buy souvenirs, even fly via an airline to see their favorite events. To call the economic impact of closing large and small entertainment venues due to social distancing requirements on hotels, restaurants and airlines and the broader economy “dramatic” would be a gross understatement.

As demonstrated, the broadly defined hospitality industry literally employs hundreds of millions of people and generates hundreds of billions of dollars, even without extending the calculation to other sectors of the economy. Shutting down all or a large portion of the hospitality industry will, of course, be devastating to many fellow Americans and American businesses, but the virus commands it. The real, important work will be getting a quick post-virus economy back to where it was pre-virus.

R.J. O’Hara is president of Flaherty & O’Hara PC. He co-founded the Alliance of Alcohol Industry Attorneys and Consultants and chairs its board.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

For a reprint of this article, please contact reprints@law360.com.

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