Action Plan: Crisis-Management Tips for the Hospitality Industry

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Crisis-management planning has been an important responsibility of company management and boards of directors. It’s fair to say that although hospitals have included preparing for pandemics in their crisis-management planning, the same cannot necessarily be said for most businesses in the hospitality industry. Businesses have been scrambling in the face of the current COVID-19 crisis to address its effects with little indication an effective and strategic plan had already been in place.

Although only several weeks into closures or significant reductions in offerings, we’ve identified the following areas where hospitality businesses have had to react and need future plans.

Leases
Most businesses have had to review their leases to determine their legal rights and practical options related to full or partial closures of their location(s). Following SARS, a number of landlords specifically included viruses as an exception in the “force-majeure” provisions in their leases to deny an operator’s right to use an epidemic or pandemic as a basis for avoiding its lease obligations. Even without that express exclusion, many businesses are surprised when told the force-majeure provisions of their leases may not allow them to suspend their lease obligations. As a matter of planning moving forward, we can expect this “boiler-plate” provision to be hotly negotiated in the future. 

Every operator is making its own assessment of its ability to survive the crisis or avoid a lease, with a careful eye on any personal guarantees under the lease.

Insurance
Having the right insurance in place to cover identified risks has long been an element of good crisis-management planning. The insurance industry also reacted to SARS and many insurers excluded viruses as an event triggering coverage in their policies.

Most business-interruption provisions require there to be physical damage to the business before coverage is available. Class actions have already sprouted up in the U.S. to address the denials of coverage that have been communicated in response to claims made in the industry. Denial-of-coverage responses have also been made to claims made by Canadian restaurants. It’s possible a restaurant could have closed because of physical damage caused by the COVID-19 virus, which we know can linger on surfaces for varying and lengthy periods of time. However, proof of that fact and the quantification of the loss relating to that event may be exceedingly difficult. Massive litigation over the application of business-interruption insurance can be expected in Canada as well with very uncertain outcomes. 

Communications
Businesses in the hospitality industry have had to hastily craft their communications messages to their suppliers, customers and, for franchisors, to their franchisees, without much evidence of advance planning having been in place. Health-and-safety shutdowns have long been identified as a serious risk factor in the industry requiring preparedness. Most plans, though, have centred on the need for operators to know who to call and to have public-relations firms at the ready to respond to social media targeting a location hit by a health-and-safety event. With COVID-19, no business in the industry has been left unaffected, so few have felt as if they’ve been put in the spotlight for adverse media attention. Nevertheless, proper messaging has been needed to ensure suppliers, customers and franchisees know the position of the business and its plan to function through — and survive — following the closures, including providing for customer and employee safety where operations have continued.

Formulating and communicating to franchisees what’s expected of them and what support is available to them is necessary to ensure franchise systems remain intact. Franchisors should be a resource to help franchisees with their own financial challenges, including guiding them through the various government programs and providing information that can be used commonly when addressing landlords, lenders and their own employees and customers.

Employees
Three important issues have arisen in managing employees during the current crisis. The first concerns their physical health and well-being. For those operators that continue, businesses have had to ensure those coming to work are aware of their responsibilities to themselves, their families, their co-workers and their customers to practice physical distancing and proper hygiene. The requirement to stay at home if any symptoms appear has been a clear message. The second concerns the necessary planning if any employee is identified as possibly having COVID-19. Restaurants must have their procedures in place for closing, disinfecting, identifying which other employees must self-isolate for 14 days, having replacement workers at the ready and communicating with customers. The third concerns lay-offs. Many businesses have had no choice but to lay off a significant percentage of employees. In the hotel industry, collective-bargaining agreements often address this right. For restaurants, the notion of a lay-off is often misunderstood. Lay-offs can give rise to constructive dismissal and employment-standards claims if the required notice period was not given. These dismissals will occur in a market where it will be difficult for terminated employees to mitigate their damages by finding new positions or know the future solvency of their employer to pay any entitlements.

It can also be expected that there will be a large number of talented and experienced people who will be on the market once businesses start back up. There are  projections that perhaps a third or more of all restaurants will not re-open for business once the pandemic passes. That presents an opportunity worthy of proper planning for those that want to access cooks and other staff.  

Public Relations and Public Affairs
The need to have a public-relations and, in particular, a social-media response to the linkage of a case of COVID-19 infection to a particular business may have lessened given the widespread impact and effects of the disease. It is, nevertheless, important that the hospitality industry use this time to plan campaigns for connecting with the public during the pandemic and have a re-emergence strategy. Restaurants are hygienic and safe places to eat while physical distancing, which may continue, could be accommodated. It can be expected that the public will return to dining out before it may necessarily go to a movie, concert or sporting event. Getting the message out early and building up the demand and ability to be ready for it is an important strategy, which is best planned for in advance.

Similarly, the industry associations have been hard at work lobbying governments and making their concerns known to those making decisions about their future, including the financial support needed by these businesses. It’s therefore important for industry participants to stay active and current and to know the people and resources they can access to get information on a timely basis. It’s often been said that by the time information becomes available to the public, it’s beyond its value for planning responses. The lesson here is to stay engaged with industry representatives and in front of the decisions that will be made affecting your businesses.

Finance and Resources
The pandemic has reinforced the need to have planned for cash reserves and credit available to allow businesses to survive through a shutdown. Whether for purposes of retaining key employees, keeping locations open where landlords may be challenging or funding necessary professional-service providers, financial resources are necessary at a time when revenues are either not available or significantly reduced.

Knowing which sources you’ll be looking to for timely and accurate information is also key. Whether it’s to know the state of the virus, projections for lockdown periods and recovery times and knowing which government programs are available or being considered, hospitality businesses must know to whom they can turn for timely and accurate information and advice.

It’s also a time where budgets must be revisited and financial planning conducted for a series of possible eventualities. These plans should consider weekly, monthly, quarterly, semi-annual and yearly scenarios using carefully considered assumptions to enable changes to be made quickly. It can be expected that those assumptions, and the results they produce, will change frequently given the fluidity of the pandemic and its impact.

Your Team
A good crisis-management program begins with the right team. Your key management personnel, board members where relevant, public relations, legal and financial advisors should all be in place together, with a communications plan, to allow meetings and real-time decision-making to occur.

Conclusion
It’s understandable that many in the industry had not accounted for this COVID-19 pandemic as part of their crisis-management planning. Nevertheless, we’re still at the early stage of this crisis in North America. There are many unknowns as we progress through the pandemic. Planning can and should continue following best practices.

Allan D.J. Dick is a partner with Sotos LLP, which is actively involved in crisis-management planning and advisory for the hospitality and franchise industry. He can be reached at adjdick@sotosllp.com or by cell at 416-805-8989.

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