After COVID-19, will customers be willing to spend more on dining out?
In a recent 60-minutes interview, Chef José Andrés said that “Restaurants in America are the DNA of a functioning America. We'll not be an America as we know it if those restaurants don't come back to be part of the American way of life.” While COVID-19 has already taken he lives of tens of thousands of Americans, it is having a similar impact on American restaurants. While the sudden arrival of the virus is causing damage to all businesses, the restaurant industry was the hardest hit. The National Restaurant Association reported that Since March 1, the industry has lost more than 3 million jobs and $25 billion in sales. Roughly 50 percent of restaurant operators anticipate having to lay off more people in April. The virus quickly decimated restaurants. So, what happened? Why was there such a sudden and dramatic collapse of this industry in particular?
In the summer of 2018, I opened Blend 111, an intimate 14-table restaurant in Vienna, Virginia. Our focus, Latin and European food paired with organic French and Spanish wines. From the start, the community was extremely supportive of us and we enjoyed a steady stream of guests. We were lucky. Like all new businesses, it took a little while to get the staffing levels, service, menus, and food suppliers just right. After ten months, we were in the black and feeling good about the path we were on. Then, COVID-19 hit and a week later we were forced to shift to a carryout and delivery model and revenue was down about 80 percent.
What I personally learned over those ten months is that there is hardly any profit in the restaurant business. Chefs, sommeliers and restaurant owners across America are in the restaurant business because they love the business. In 2018, Forbes reported that net profit margin for full-service restaurants was on average 6.1 percent. Legal services, accountants, real estate brokers have margins in the 15–20 percent range. Technology companies will get into the 25 percent range. When a crisis, like a global pandemic, hits, there is no cushion for restaurants, no buffer.
The question then is why is there no profit for restaurants? In his 2012 book Restaurant Man, Joe Bastianich said, “restaurant math is easy” and he is correct. Labor should make up 30 percent, food and beverage costs 30 percent, administrative costs such as insurance and rent 20% and the rest should be your profit. The problem for most restaurants is that they can’t get to those numbers anymore.
Let’s start with labor. Guests don’t want slow service. To have a person greet guests at the door, efficient bartenders that know how to make drinks, pleasant servers that don’t make mistakes on orders, proficient cooks that can prepare grilled items, salads, desserts and a dishwasher that does not break all of your dishes is expensive. For us, labor costs are above the 30 percent target. We’re closer to 40 percent on a good week. The staff that work in the restaurant industry are some of the hardest working people in America and they are not well paid. There is no room for restaurants to reduce labor without compromising the guest experience, which would ruin the restaurant.
At Blend 111, we make our products in-house and work with high quality food providers. Guests would not tolerate old seafood, frozen, boxed food, or wilting vegetables. We work with a small number of importers and distributors to purchase organic and natural wine. We have very little waste and are very efficient at ordering, typically with orders coming in daily to ensure freshness. With all of that, our food costs are about 35 percent—not bad—but there is no room to get that number lower without turning guests away with inferior product.
Administrative costs are significant for us. In many urban and desirable areas, rent is high and landlords are extremely inflexible. Our rent is about 15 percent of our revenue. Add on insurance, business license fees, gas, electric, Internet, credit card processing fees, etc., it is another 15 percent. These are all fixed costs so restaurants do not have the ability to drive these costs down. And none of these numbers considers the massive costs that it takes to build a new restaurant.
So, there you go—that is how the restaurants “doing well” are left with about 5 percent. One slow weekend, spring storm, a small repair, or other unexpected expense results in no profit for the month. No margin, no buffer.
Over the past 30 years, menu item costs have not kept up with food cost inflation. If you were looking for a quality Filet Mignon in Vienna in 2006, you would pay $25. Fourteen years later at the same restaurant: $27, an 8 percent increase. The U.S. Bureau of Labor Statistics reported that prices for beef were 56.83 percent higher in 2020, compared to 2006. So, the Filet Mignon should be $39, but it’s not.
Unfortunately, restaurants now do not have a lot of options. With no room to drive down the costs, the only way that restaurants can achieve a reasonable margin, in the 15 percent range, is by raising prices. But, guests will not tolerate that. The restaurant industry has taken a “race to the bottom” approach trying to compete on price at every turn. Worse, checkout the online restaurant reviews of many popular restaurants and you will see countless guest comments that “the X was good, but expensive …” The Washington Post reported that Chinese hot pot chain Haidilao, raised their prices by 6 percent after COVID-19. There was a “public fury over its price increases” and they had to “reverse course and apologize to customers … for the ‘mistaken strategy’.
So, the big question in America is when COVID-19 is over, and we emerge from this crisis, will foodies take action and pay more for food? Restaurants do not need tax bailouts, loans, and other programs that do not address the underlying margin problem. This will just put them further underwater in debt. America needs an industry that is willing to price menu items fairly and guests that are willing to pay more for restaurant food. In the future, this is the only way we will have the diversity of dining options that we all enjoy and prevent this from happening in the next crisis. If not, restaurants as we know them today will not last and a $2 fast food combo meal may be one of our only dining options.
Michael Biddick is the head sommelier and owner of Blend 111. He is a Master of Bordeaux wine, a certified French Wine Scholar (FSW) and was trained by the Court of Master Sommeliers. Author of the award-winning book “43 Wine Regions” (2018) Michael has been a contributor to Somm Journal, Food and Travel, and Go World Travel magazines. Michael also founded one of the fastest growing information technology firms in the country in 2009, earned a Master of Science in Information Systems from Johns Hopkins University & undergraduate degrees from the University of Wisconsin-Madison. Michael speaks English, Spanish and French. He is also a certified barista & coffee roaster.