Health Hack #47 - Restaurant Life During COVID
This week marks six months since COVID-19 became a certified part of our national dialogue. What was “some virus” quickly engulfed the parameters within which we live, and flipped things upside down virtually overnight.
Of the variety of aspects of life that saw stark, immediate change, few were as austere as those imposed upon restaurants, and the retail industry at large. Draconian measures - which, to be clear, were mostly levied with seemingly good reason - instigated mass closures, since dining in, and even ordering in, were quickly forbidden. Many restaurants, particularly of the fine dining ilk, possessed very little takeout delivery experience and infrastructure, and as a result they were left with no choice but to close. Fast food, fast casual (the category that we fall into), and even fine casual establishments fared better than others in the beginning, given their familiarity with the takeout game. But in the end, virtually no restaurant that previously relied on customers ordering and/or dining in has been spared. Interestingly, the pizza industry has managed to do quite well. A large component at play is the fact that ordering and dining in-store comprised a very small contingency of business, pre-COVID; in other words, their modus operandi didn’t actually change quite much. The more that the experience and the theatrical components play into one’s decision making process, the harder it’s been for that particular establishment to stay afloat. Ambience, music, hospitality, vibe. Gone.
Streeteries have helped convert parts of Philadelphia into a European experience, with finer dining establishments getting creative in how to sustain themselves. This unfortunately boils down to luck of the draw in many ways, since only certain businesses have a frontage opportunity ample enough to conduct worthwhile outdoor business. They’re all trying and doing what they can, but it’s a far cry from what they’re used to. Inclement weather could easily knock off 25% of a week’s potential seatings, and at the end of the day, even a robust outdoor arrangement is highly likely to pale in comparison to the overall indoor headcount.
There is a much more nuanced conversation occurring within the industry itself, namely surrounding the manner in which restaurant leases are being handled. For the unfamiliar, it’s extremely rare for an urban-based restaurant to own the space in which they operate, and this is true even of most free-standing buildings in lesser dense regions of the city. On the surface it seems like a no brainer - the restaurant is highly compromised and operating at a fraction of standard capacity for reasons entirely outside of their control. Reduce the rent to match the reduction in volume. However, the totem pole is a bit larger than meets the eye. Above most landlords holding urban commercial real estate typically sits a lender (i.e. a bank), seeking payment on a monthly recurring mortgage payment. A landlord’s ability to service a mortgage is generally contingent on their ability to collect rent from their tenants. Unless these closed door negotiations between bank and landlord amount to favorable term adjustments for the landlord, there may not be a favorable trickle down effect extended from landlord to tenant. Granted, each lease is different, and some may carry force majeure clauses that can be cited to the benefit of the tenant, but there doesn’t appear to be many straightforward, ironclad agreements being struck. Frankly, it’s very difficult since no one knows what the future ramifications of this pandemic will look like.
These tensions would largely all be moot if pandemics qualified as “business interruptions” from an insurance carrier viewpoint, but pandemics are excluded. A riot that shatters a storefront and ravages an interior is deemed an interruption to business because of the physical implications it carries. Things were broken and things were stolen. A pandemic has no physical impact on a restaurant, and therefore it’s not a business interruption. Go figure.
|What Makes the Restaurant Industry Unique|
Navigating how to operate a restaurant within a highly compromised, entirely new paradigm, on the fly, is obviously quite difficult. Compound that with the background concerns of rent payments and lease re-negotiations, and it can begin to feel a bit overwhelming. Granted, most lifestyles and companies have endured extreme change too, so we’re not very unique in that sense. But the restaurant industry is quite unique in one particular manner, which has amplified the strains on owners and operators, and is likely to have plenty of ripple effects into the distant future.
Statistically speaking, if you’re aiming to start a profitable business, you’d be a complete idiot to open a restaurant. The failure rate is astronomical. The industry-accepted margins for success are razor thin. There is truly no less desirable industry when judging via propensity for a return on investment. Aside from the occasional unicorn, most mainstay restaurants are doing a little better than treading water. For many, it’s a pursuit of passion. The drive to enact change within the food landscape, to scratch one’s own itch. Ego is a huge driver of new restaurant openings. All of those other players fail because they’re lousy. I can do it better. You watch.
The starting point for most restaurants is one of thin ice. They’re statistically doomed to fail. So what happens when a pandemic starts to crack that ice? Where is a restaurant to turn?
By now, most of us have heard of PPP, the acronym standing for the Payroll Protection Plan. Fewer are aware of the EIDL, the Economic Injury Disaster Loans. These federally instituted programs have managed to help businesses of all sorts stay afloat, and assuredly they’ve helped some more than others. The PPP, which has received the majority of the news spotlight, has had a very ironic slant in its application to the restaurant industry. It compelled employers to re-open their doors, or in some cases for businesses already open, to swell their operations. It incentivized restaurants to do so by offering forgiveness contingencies to the loan. Apply a certain amount towards payroll, and that amount is forgiven. Apply the remainder towards rent, utilities, and debt service, and see that portion forgiven as well. The irony within our industry is that bringing things back online in response to PPP meant that most restaurants were operating at a theoretical loss. Yes, labor was free. Yes, utilities and rent were covered. But at the end of the day, most restaurants were barely able to turn the dial on their sales. It helped to re-invigorate energy and breathe life back into the establishments, and it definitely helped the staff, who have suffered immensely during these past six months. But generally speaking, it didn’t do much to improve the health of the overall restaurant.