The
Restaurant Business Needs a New Recipe
Few
industries have suffered as much, or been forced to change as much, as those in
dining. And the changes aren't finished. They're going to need a new model for
a changed society.
BY HOWARD TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH
INVESTORS@TULLMAN
Notwithstanding the latest habitual lies by
the Superspreader-in-Chief at his contagion campaign events, COVID-19 is
endemic--not going anywhere any time soon. In the real world, cases and
hospitalizations are setting new highs in dozens of states. One in four cases
in Wisconsin tested positive recently. Emergency rooms in some states
are turning away patients while Trump denies reality like a crazy person.
There's not going to be a vaccine before November 3rd or, unfortunately for
some time after. The collateral damage to millions of businesses and to our Main
Street (as opposed to Wall Street) economy is mounting in many different
sectors.
In the midst of this maelstrom, no American
business is more challenging or needs to be more entrepreneurial and resilient
to survive than running a restaurant. Few industries have been hit harder. A
big part of the current difficulties is obviously the pandemic, but there are
also fundamental, structural issues with the business model. Opening a
restaurant entails huge upfront investment and then the painful wait to see
when and whether a sufficient number of initial customers will appear and later
return. Today, the angst is even more complicated because there are serious
concerns about attracting any customers.
Much like COVID-19 itself, one of the biggest
concerns has to do with lingering behavioral changes in the way Americans will
be dining out in the future. For many of us, the idea of a gracious meal is a
fading memory, and it may never return. Sadly, today and for quite a while,
it's going to be all about "eating quickly and getting out in one
piece." Two-martini lunches were already on their way to oblivion, but
these days, given the budget-busting Covid-19 constraints on size, separation,
capacity and operating hours, even the restaurants themselves are posting signs
about how long customers can occupy their booths and tables. It's the worst
possible reminder and message. And hardly a way to encourage liquid lunches or
multi-drink dinners. As any good operator will tell you, liquor sales are the
mother's milk of the trade and represent almost the entire profit margin in
most places.
As the weather worsens and the misery mounts,
the prospects for the white tablecloth restaurant industry in general (QSR
chains being takeout focused) continue to dampen. These businesses operate perpetually
at the very edge of profitability and with little in the way of reserves,
credit capacity or rainy-day savings. Restaurants are basically perpetual
startups - at risk each and every week. They're at the mercy of various product
availabilities, vendor shortcomings, labor issues, health inspectors, weather
and, of course, viruses. They may have regular customers, but they rarely if
ever have regular, recurring, demonstrable revenues. Every day is a new day,
and the main goal is to get through it without any major catastrophes.
The various PPP plans and programs have failed
to acknowledge that, across the broad spectrum of the economy, the narrower the
margins in a given vertical, the greater the need for assistance. As we now all
know, the continuing pandemic wasn't just a couple of rainy days run together
or even a few weeks; it is a full-blown shitstorm that has yet to end except in
the fantasy land of Trumpville. It's entirely likely that, once the dust
finally settles and the air finally clears in major cities, we will have lost
30% to 40% of our favorite restaurants along with the millions of jobs those
businesses used to represent. And many of the survivors will just be limping
along.
While many restaurants have shuttered already,
the worst is likely yet to come, for a variety of reasons. Most obvious is that
it's no fun to sit outside in freezing cold weather in a tent, especially when
accompanied by the stench of space heaters. If the particles don't get ya, the
propane probably will.
Next up is the major shift to working from
home (WFH) rather than in the central and downtown business
districts, which means fewer and fewer customers, less catering,
infrequent gatherings and events today and a ton fewer tourists in major
cities.
Add in tens of millions of unemployed and
under-employed workers who won't be lunching or entertaining each other any
time soon. Then there are the millions of others with far less job and
financial security than they enjoyed less than a year ago who won't be spending
like sailors anymore. And finally, thousands of college students who are
staying home here and abroad who won't be supporting town-and-gown communities.
They'll be sorely missed. Not exactly the last supper, but pretty grim.
I asked a Chicago-based real estate expert to
offer me any light whatsoever at the end of this tunnel. He suggested that
landlords sitting with empty restaurants might partner directly with chefs to
reopen these spaces. It makes a ton of sense in that it eliminates the huge
upfront construction costs of a kitchen (probably $1 million in upscale
joints); there's the prospect of long term rent relief in exchange for some
profit sharing; in many high-end cases, the customers are more followers of the
chefs than the owners; and I've never met a true chef who didn't want to run
his own place, free of meddling investors or partners.
We're seeing a similar approach in the large,
emptying malls where, for example, the Simon Property Group and Brookfield
Property Partners are negotiating to buy J.C. Penney's retail operations to
give themselves a guaranteed anchor tenant. In fact, like it or not, we're
living through one of Schumpeter's evolutionary waves of creative destruction,
which will require both continuous innovation and the best entrepreneurs we can
find. We're going to need new ideas, great flexibility, support from the
various regulatory authorities, and considerable patience to save our
restaurants, but the alternative is just too painful to imagine.
