Too Small To Fail: How To Save the Restaurant Industry Pt.1
The Issues: Part 1
Intro
“Everybody’s saying that restaurants won’t make it back, that we won’t survive. I imagine this is at least partly true” […] The conversation about how restaurants will continue to operate, given the rising costs of running them has been ramping up for years now; the coronavirus did not suddenly shine a light on an unknown fragility.
We’ve all known, and for a rather long time. The past five or six years have been alarming.” — Chef Gabrielle Hamilton
There’s a graph created by SocialBackers that shows the impact that Covid had on social media, meaning, it showed when the conversations around the virus spiked on both Instagram and Facebook. That was March 11th, 2020.
When I first started writing this article it had been 4 months since Covid took over our lives for a whim on a ride no one had asked for. As I edit this essay that has been burning in my heart and brain like a rampant fire, 9 months have passed, and unfortunately, things have gotten worst for the restaurant & hospitality industry.
That’s all it took: initially, 4 months to go from what we knew as ‘normal’ to a complete shutdown and the unfortunate death bell to the restaurant industry’s reality.
around April 2020 I posted a picture on my Instagram in a closed winery in Sacramento time. My thoughts were already raging about how this entire situation would affect restaurants. That is my caption — a worried and somber Mario deep in thought wondering what on earth would happen to the culinary industry.
And so, I got obsessed (insanely passionate as I like to call it) with reading articles, listening to podcasts, asking friends and colleagues, and having open conversations on LinkedIn and Facebook about the dire situations restaurants that restaurants were in, and asking what their thoughts were on the potential post-covid restaurant industry situation.
Amazingly, during a random quarantine-Instagram live, I happened to formally meet Chef David Viana, Partner & exec chef of New Jersey’s Heirloom Kitchen and a participant on Top Chef Season 16 (it was truly an honor to have him on and at the same so random). We spoke about the crazy reality restaurants faced. He, being a restaurant owner, touched on some incredibly good points which I further talk about later in this article.
This has all lead to a nine-month journey of macerating ideas on a restaurant restructure proposal to share with the world. Bear with me, there’s a lot to cover, and please, it would mean the world if you would add to the conversation by leaving your comments, sharing this with your network, and adding any other ideas you may have after reading parts 1 and 2.
Restaurant Industry’s Link to Demise
My name is Mario Andres LimaDuran. I am the Executive Performance Chef at Trifecta, the nation’s largest organic meal delivery company and I am also the partner Executive Performance Chef for the UFC. I get to cook for UFC athletes and have developed the world’s most advanced sports performance program in the world, in collaboration with the nutrition team at the UFC Performance Institute.
I am a product of my many years in restaurants. I’ve worked in restaurants in Miami, Denver, and Los Angeles ranging from casual to, my latest, a two-star Michelin restaurant in LA (Providence — major shout out). I’ve been in the sports nutrition world since graduating from college 6 years ago.
I am writing this out of desperation. I am writing intending to present solutions, possibilities, collaborate, and get all these burning ideas out of my head — I firmly believe change needs to happen to avoid restaurants from being found once again with their pants down, vulnerable as fu*k, and one step away from disappearing.
I am also writing this piece out of passion, love, and respect, and because I don’t know how else to contribute. Forget standing on the sidelines and being a critic; I intend to be a thought-leader and to pay respect to the industry that forged him and gave him so much.
Let’s start with the root cause of the problem.
The Problem
1. Restaurant Profit Margin: What The Fu*k Were We Thinking
In my conversation with Chef David from NJ’s own Heirloom Kitchen, he openly stated that restaurants are one of the few businesses that willingly open doors with the knowledge that the average profit margin is 9%. NINE. PERCENT. The range is 0% to 15%.
On top of this, the business only has two streams of income within a typical restaurant business model: food and beverage sales. This wouldn’t be an issue if one or the other had a massive profit margin, right? That’s not the case, unfortunately.
Let’s put that in context with a pseudo example for the sake of argument.
Let’s say I run a taco stand on the corner of J Street and 23rd in Sacramento (that’s my home-base). Because I’m paying the overhead cost of rent of a building (just follow me here), sales are light, and I’m paying a team to help me prepare my insanely delicious and intricate tacos, I net $1,000 per week or $4,000 per month. I’d love to include other services like wine sales, but that would make the example a little too complicated.
This means that after paying all my employees, paying all my bills, the average ‘net profit’ of my dope taco stand comes in at a very very humble $360 a month (9% of $4,000). This is not accounting for tax responsibilities and other real costs.
Let that sink in.
For further context: I am actually starting a business with an initial potential profit margin above 50%. An advisor told us in the initial steps of building the business model that unfortunately, that profit margin was too low and that we needed to reassess our approach.
Dave Chang mentions in his show what makes restaurants too small to fail. “For far too long the restaurant industry has accepted the fact that it was not profitable. Being open to the change, to trying and failing is how the restaurant industry gets to blossom moving forward” — The Dave Chang Show: Too Small To Fail Vol 8. Ben Leventhal
In the case of restaurants, an accepted break-even point and minimal profit margin have been the reality for years now. A silent acceptance based on passion. This brings me to the following point.
2. Ego & the ‘Sell Out ’Fear
In the restaurant industry there exists this quite peculiar unspoken ego-driven belief for this pursuit to be ‘unique’ and to avoid ‘selling-out’.
For some reason, kitchens can carry a heavy ego-driven attitude. It is my opinion this is because food is an extension and an expression of a chef’s experience, journey, and philosophy.
A chef’s food can be classic, rustic, or finesse-driven, or maybe even molecular gastronomy oriented to name a few styles. Every person brings their own take to the food they are serving. And so, when someone critiques their food, a chef more often than not feels directly attacked.
Hence the ego. It’s that artist’s difficulty in separating work from self.
This, in my opinion, has created an unbelievable resistance to a ‘pop culture’ success. Or as we refer to it in the culinary industry, of ‘selling out’.
Selling out refers to a chef who has made it big time, and has created a brand so strong that he/she has transitioned from owning an insanely good single-independent restaurant to owning several restaurants in different cities, under different chefs de cuisine, and in various formats. This means, having your name in hotels, or casino restaurants. It means having lines of food you sell at the grocery store or having collaborations with cookware brands, or stores like William Sonoma and Sur La Table.
If you ask me, what I just described looks like success.
This is what multiple sources of income look like and ultimately, what the creation of a brand does to support the operations of restaurants in a sustainable long-term manner.
But internally, very silently, cooks look down on chefs who do this. There’s a silent hard judgment of making it big and not staying independent, true, and glued to one’s roots…
Why? I’ve never had a clear explanation for it.
3. Lack of Marketing
Along with problem #2, restaurants typically do not rely on marketing tools to attract a consistent stream of repetitive costumers to a restaurant. Word of mouth, though the strongest form of free marketing, often only gets you so much.
It seems like, from personal experience, aside from the detail that restaurants don’t have a massive budget for this purpose due to problem #1, marketing one’s restaurant seems to be more a way to downgrade the quality of your place rather than to have a strategic approach to welcoming more guests into your dining room.
The signs on doors or outside restaurants tend to be the way people acknowledge and recognize restaurants, and how newcomers or bystanders find out about the restaurant.
Yes, if your restaurant is big enough or you as a chef are good enough to make it into a list or even a show on TV, these tools are incredible free organic marketing. More often than not James Beard nominations and awards, or Michelin and St. Peregrino lists come with the inherent reward of a spike in business. So do features in magazines, and other recognized media outlets.
But if you are an independent restaurant (like my imaginary taco place on the corner of J and 23rd in Sacramento), marketing tends to be an out-of-sight-out-of-mind business strategy.
4. Systematic Issue
As I was doing my research for this article, having conversations with friends over the Internet, asking questions on LinkedIn, and asking business owners what the two main expenses were for their restaurants, two patterns emerged (which may be obvious but I’m here to lay it all on the table): rent and payroll.
Let’s talk about rent, and how this has become a massive burden on restaurants. This quote from NYC’s East Village restaurant, Prune, Chef Gabrielle Hamilton explains it better than I could ever write about it:
“The concerns before coronavirus are still universal: The restaurant as we know it is no longer viable on its own. You can’t have tipped employees making $45 an hour while line cooks make $15. You can’t buy a $3 can of cheap beer at a dive bar in the East Village if the “dive bar” is actually paying $18,000 a month in rent, $30,000 a month in payroll; it would have to cost $10.
I can’t keep hosing down the sauté corner myself just to have enough money to repair the ripped awning. Prune is in the East Village because I’ve lived in the East Village for more than 30 years. I moved here because it was where you could get an apartment for $450 a month.
In 1999, when I opened Prune, I still woke each morning to roosters crowing from the rooftop of the tenement building down the block, which is now a steel-and-glass tower. A less-than-500-square-foot studio apartment rents for $3,810 a month.”
That’s the absurd reality restaurants have lived in for a while now, which has led many establishments to fail.
As you can see, over the years rent prices for commercial real estate have increased substantially (also applicable to non-commercial real estate). This means that even as restaurants get busier and busier, and income increases, margins tend to remain the same.
This is a systemic issue that needs help and support from government officials. It’s in a way the same situation as when you slowly bring a pot of water up to boil with a frog in it. The frog doesn’t realize the water is getting hotter and hence that it’s losing its life. In this case, the water temperature increase symbolizes rent, and the frog symbolizes restaurants.
It’s gotten to the point where restaurants’ legs can’t react any longer to jump quickly out of the water. To top it off, COVID became the lid of the pot. Even if we wanted to jump out, independent restaurants have faced an awful reality check.
Help is needed from the government to change this issue.
5. How All This Fucked The Restaurant Industry
So let’s bring all of these facts together into a few digestible paragraphs:
Because profit margins have been low, and rent has continued to increase year over year without any support from government officials on proper rent control regulation (for commercial restaurant real estate specifically), it is said that a minimum of ( 25% — it was 25% when I was originally writing this article…) 65% of independent restaurants in the US will never reopen the doors post-pandemic, creating a massive crisis for the industry.
The National Restaurant Association has reported that as of the end of April, 4 in 10 restaurants have closed.
To date, restaurant operators have gotten incredibly creative to keep their business’ afloat. Menu items changed, curbside pickup became a norm, social distancing outdoor seating was added everywhere, and many food operations changed to fast-casual establishments.
Though restaurant chains seemed less affected by the restrictions and the pandemic itself, here’s how independent restaurants were affected.
This has a larger effect on the country’s economy. According to smallbizgenius.net, the restaurant industry employs 15.3 million people in the US.
As well, according to the National Restaurant Association, 9 of 10 restaurants employ 50 or fewer workers, with about 1 million restaurants in existence pre-pandemic; meaning, about 900,000 restaurants in the US were considered small businesses.
To provide further context, by early May of 2020, unemployment in the US was at 24.912 million. In April alone the restaurant workers lost 5.5–7.5 million jobs, according to Eater, and by April the National Restaurant Association reported 8 million+ restaurant employees fired or furloughed. In a separate news article, Eater claimed that in March restaurant and bar employees made up 60% of lost jobs in the US.
The Morning Brew newsletter released June 06, 2020, conveniently highlighted the following, confirming Eater’s claims:
“Hotels and restaurants, which suffered the worst of the damage from lockdowns, added 1.2 million jobs in May after losing 7.5 million in April”
7.5 million is half the amount of the industry’s size — that’s 50% for those who like percentages over words. As it’s known in school, that’s a big fat F.
From the crazy number of 21 million lost jobs, 35% of the total US unemployment throughout COVID belonged to the hotel and restaurant industry.
That’s how fragile our industry has been, and that’s how badly exposed it was left once the pandemic hit.
Aside from all the statistics and numbers, let’s talk about the fact that major influential neighborhood restaurants are closing.
A tear dropped when I heard that Major Domo in Denver had to close its doors. This restaurant was iconic to the Denver scene. I also got quite emotional to hear how Fabi + Rosi also closed its doors in Austin, as well as countless restaurants in major cities like San Francisco, LA, NYC, and Miami.
Hearing Dave Chang cry in his podcast over the impotence of being unable to keep one of his highly profitable restaurants and most beloved restaurants open… it’s disheartening. Truly disheartening to see the life work of chefs go away in a matter of months.
Share Link with Friends
This is part 1 of 2 on this topic. Follow me here and on social media to be notified when part 2 comes out.
It would mean the world if you can share this link with your network to reach more people and have a wider conversation. Thank you!
