‘Profit Doesn’t Exist Anymore.’ Restaurants That Barely Survived COVID-19 Closures Now Face Labor, Inflation and Supply Chain Crises
It’s easy to poke fun at terrible restaurants, like the one on Gordon Ramsay’s show Kitchen Nightmares that served a mayonnaise-and-cheese sushi pizza, or the Washington D.C. Popeyes that went viral after a video revealed the franchise was overrun with gargantuan rats. Unfortunately, they were not Pixar-type rats that hide under chef hats to enhance recipes. The restaurants have been closed down permanently. Most likely for the best.
Restaurants with great food, skilled staff, and clean kitchens can often struggle to stay afloat. Over- or under-staffing will result in poor service and customer complaints. A bad location can deter guests from entering the restaurant, while a good one can make chefs more efficient. This means that even under normal economic circumstances, 61% of all guests will not be able to come through the door. IndependentlyAccording to Ohio State University research, three-years after opening, restaurants that are operated fail.
“It’s an incredibly high-cost, low-profit-margin business, that in the best of times only barely works if you have almost a full house for every meal service that you’re selling,” says Sean Kennedy, the executive vice president for public affairs at the National Restaurant Association. “If you can make that happen, you have a good shot of getting a 3% to 5% profit margin.”
These odds are made worse by the Covid-19 plague. After long bans on indoor eating and slow recovery of consumer confidence over the past months, Restaurant sales in the United States fell by $240 billion from 2020. According to the National Restaurant Association estimates, approximately 80,000 restaurants were closed temporarily or permanently since the outbreak of the pandemic. This is a decrease of 110,000 during the height of the pandemic.
“It was like we hit a brick wall,” says Sara Sawicki, 48, co-owner of Portland, Oregon’s Fire on the Mountain chicken wing restaurants, recalling the aftermath of March 2020. While she was preparing for March Madness and Spring Break, her profits dropped by around 40% over the course of 2020.
Many restaurant owners felt a little relief this summer. Combining vaccine availability, warm weather and an almost universal sense of pandemic fatigue with small business loans led to packed dining rooms and increased profits. But they’re hardly out of the woods. Two years of poor profits have left restaurant owners facing a series of challenges. One, inflationary pressures on key ingredients as well as paper products has driven up operating costs. Another is a worldwide supply chain crunch that has prevented delivery of all the necessary items such cream cheese and chicken wings.
According to the September survey by the National Restaurant Association, nearly 85% reported lower margins after the pandemic.
“The restaurant industry,” says Kennedy, “can only defy the business laws of gravity for so long.”
The new price of oil and missing chicken wings
Customers at Sawicki’s chicken wing joints have come to expect one thing when they visit her three locations: chicken wings. Sawicki was unfortunately unable to find the product due to global supply chain limitations. Her suppliers would tell her, “‘I’m shorting you 10 cases of chicken [wings] on the delivery tomorrow,’” she says, “or the delivery just wouldn’t come.” In order to keep serving her restaurant chain’s staple product, Sawicki’s staff would drive to the warehouses to pick up the wings themselves. She would have her three restaurants communicate with each other, giving one the opportunity to borrow a couple of cases when she was nearing running out.
“We were able to keep our supplies from running out quite often. If we did, it was towards the end of the night,” she says. “But to make that happen, it took a lot of effort.”
It can be attributed to the unseasonal 2021 cold spells in America that claimed hundreds of thousands of birds. Covid-19 outbreaks at meat production plants further encumbered the supply chain, just as America’s pandemic eating habits—more casual takeout, less fine dining—caused a wing and pizza supply-demand imbalance that still hasn’t reached equilibrium.
Osama Yoursef, owner of North Carolina’s two restaurants, was forced to temporarily eliminate wings from his menu. However, the shortages do not end with wings. He’s also had to nix fried mushrooms and chicken strips due to sourcing problems, and has struggled to stock enough take-out packaging. Mehr than The National Restaurant Association Survey found that 90% of restaurateurs experienced shortages or delay in supply of certain food items or beverages during the previous three months.
In recent months, restaurants have been finding more difficult to source ingredients. A September survey revealed that 91% of restaurants reported spending more on food. In 2019, a case of bacon cost Yousef $47.96. This same product now costs $85.58. The price of a crate containing onions has risen from $24.95 up to $40.72. Yousef is now paying 140% more for fry oil. This essential ingredient in American restaurants, it’s a key ingredient. Nick Martschenko (48) reports that the same amount for fry oil in New Canaan costs him twice.
Yousef’s restaurants have added a 15% surcharge on all receipts at his two restaurants—he used to own three, but one closed permanently during the pandemic—in attempts of counteracting the price increases, but the extra tax hasn’t put his businesses back in the green. “The profit doesn’t exist anymore,” Yousef, 51, says. “We worked hard all this year for almost nothing.”
‘My standards have lowered’
Owners of restaurants are struggling to retain and hire reliable staff.
A part of this shortage is due to the continuing pandemic that has made it difficult for would-be workers to find childcare or safety. The omicron variant—which has already shuttered daycares and caused some schools to resume virtual-only learning—may further exacerbate the Covid-19-induced labor imbalance.
Experts and restaurateurs also point out that Trump’s strict immigration policies discourage immigrants from coming to America, thus denying restaurants the opportunity to hire people willing to do low-paid work. The November issue InsiderAnalyses show that nearly two-thirds (or more) of America’s three million workers shortage are immigrant laborers who didn’t move here.
The pandemic’s instantaneous elimination of many of restaurant industry jobs—and thus the employees’ livelihoods—back in March 2020, caused many in the sector to reconsider whether they wanted to stay in their relatively low-paid roles or move to more stable, higher paying ones. Employees “don’t want to return to backbreaking or boring, low wage, sh-t jobs,” Robert Reich, former U.S. Secretary of Labor in the Clinton Administration, told TIME in October. “Workers are burned out. They’re fed up. They’re fried. In the wake of so much hardship, and illness and death during the past year, they’re not going to take it anymore.”
The Bureau of Labor Statistics reports that more than 4,000,000 workers quit in October. This near record high was felt the most in the food and accommodation industry, which saw the highest rate of separations than any other sector.
Martschenko has raised wages in the last year to be able to retain enough servers to stay open, but facing negative profit margins—and hundreds of thousands in loans he had to take out during the pandemic and still has to repay—can’t afford to boost them much more. The restaurant owners are now forced to think outside the box. Two of Martschenko’s three Connecticut restaurants cut down on lunch service and are open for dinner five days per week instead of seven. Two of Martschenko’s restaurants will have QR code systems that allow customers order and pay using their mobile phones. This is to help reduce pressure on the small staff.
On numerous occasions, Yousef has opted to send all of his employees to staff one restaurant and temporarily close the other because he hasn’t had enough employees to fill both. He admits he’s also had to lower his expectations too. “People just don’t show up to work. You can’t really fire them because you need them,” he says. “There’s so much my standards have lowered.”
The next steps in the industry
Restaurants have been offered aid to get through the past two years’ challenges. The Paycheck Protection Program provided assistance to three small businesses by providing them with repayable loans that could be used to pay off payroll, interest on rent or mortgages. Restaurants, bars and caterers were also helped by the March 2021 American Rescue Plan Act. The Restaurant Revitalization Fond (RF) provided $28.6 million in grants to the sector.
But it wasn’t enough: Within three weeks of the RRF program opening applications in May, the Small Business Association received more than 360,000 applications seeking more than $75 billion in RRF relief—nearly triple the amount of funding available. There are currently 176,000 applicants who qualify for assistance.
Martschenko as well Yousef blame many of the problems restaurants face on the myriad government assistance that was given during the current health crisis. They included numerous rounds and increased unemployment funds. It also hurt their ability and caused delays for their suppliers. “Instead of giving people money to stay in business,” says Yousef, “stop giving people money to stay at home.”
The National Restaurant Association states that one of the biggest issues facing the nation is the inability of many restaurants to receive RRF funding. A bipartisan bill to replenish the program’s funds with an extra $60 billion is currently stalled in Congress.
California Democrat Rep. Ro Khanna supports the Restaurant Revitalization Fund Replenishment Act. He also plans to present a bill that provides tax credits for small brick-and mortar businesses. This would help even the playing field with online retailers that have thrived in the U.S. tax code which allowed them to skip sales taxes. His argument for supporting the RRFA is to introduce this bill. He believes that policies would benefit small businesses as well as their communities. “Having a vibrant Main Street and cultural center with small stores and restaurants is essential to a community’s health,” he says. “The shutting down of these businesses and restaurants is a harbinger for the decline of a community itself.”
Experts say that whatever solutions may be, they must come quickly. “The challenge right now is that Congress is only able to focus on things when they are truly at a cliff’s edge. Our message to Congress right now is the restaurant industry is absolutely at that point,” says Kennedy. “If there isn’t action soon, a number of restaurants will not survive.”