Few sectors over the past two years have faced the level of tumult experienced by the restaurant industry. First, the pandemic shut down the indoor dining options for months, forcing restaurants to rely entirely on takeout and delivery to survive. But when the pandemic restrictions lifted and some degree of normalcy came back to daily life, new economic challenges, including supply chain disruptions, labor shortages and record-high inflation brought another wave of problems to this sector.
The result of these traumas has been acute. New data published by the small-business networking company Alignable found 45% of independently owned restaurants were unable to pay their rent in July, up from 38% in June and up from 35% in December 2021. On a regional level, the restaurant industry has locally distinctive challenges on top of the issues that face their peers around the country.
“The industry is doing probably better on the national level than they are on the New York state level,” said Melissa Fleischut, president and CEO of the New York State Restaurant Association. “Because we were one of the states that was hardest hit by the Covid pandemic, we were shut down longer than some of the other states out there. I think the struggle to build back in New York has been even harder than in some of the other states where the restrictions probably weren”™t as strict on restaurants.”
Across the border, Scott Dolch, president and CEO of the Connecticut Restaurant Association, is dealing with problems within his state.
“With each of the owners I talked to, they said the good thing is people are out supporting restaurants around the state,” Dolch said. “But the challenge is being able to turn a profit and be successful. You can only increase your menu prices so much to offset these increased costs. And you”™re working with an industry that has a national average of a 4% to 6% profit margin in good times.”
Dolch observed that rising costs in food, labor and electricity is making “everything more expensive now than it”™s ever been, and my fear right now is making sure these restaurants can make it through.” Fleischut agreed, noting that the ongoing economic hardships are driving many restaurants out of the realm of profitability.
“The expense side has really been squeezed that and I read the National Restaurant Association was saying some restaurants are down to as little as 1% profit margin,” she said.
On the positive side, the inflationary economy is not scaring away restaurant customers. A recent survey from marketing technology firm Popmenu found 40% of individual or family food budgets in the U.S. is spent on restaurants each month and 45% of Americans eat in restaurant dining rooms at least twice a week.
“Restaurants play an important role in everyday life, from making meals to making memories,” said Brendan Sweeney, CEO and co-founder of Popmenu, who added, “Quality, convenience and value are top of mind.”
But Dolch was concerned if this level of public enthusiasm is sustainable.
“The good thing is that we”™re in the heart of the summer and people are out supporting,” he said. “But I do worry about the tipping point ”” how increased costs will allow the middle class to be able to go out and support these restaurants.”
Fleischut observed that “by and large, the sales for the industry have come back ”” customers are supporting restaurants. It”™s really inflation and staffing on the expense side that are continuing to hurt the industry.” While restaurants can raise prices and cut financial corners, Fleischut pointed out that working with smaller staff is an even greater challenge for restaurants.
“I think by this point they”™ve probably adjusted to the fact that they just aren”™t going to be staffed at the same level that they were in early 2020 or even 2019,” she said. “The industry in the state and across the country is still down in number of total employees. One of the ways they have adjusted is to cut hours, so they”™re not open as many days per week or may not be open as many shifts. Some have cut out lunch and kept dinner, others have cut out maybe Sunday, Monday or Tuesday, or they are probably closing earlier.”
But within this difficult environment, there are still some entrepreneurs who are willing to open new eateries.
“We are seeing new restaurants open,” Fleischut acknowledged. “I don”™t know if it”™s going to be significantly more than what we”™ve seen closed, but there are members of ours that we”™ve talked to who are opening a second location or a third location. I guess if they”™ve survived so far and are managing okay, they feel like they can continue to move forward with that.”
Fleischut added that the new openings she has witnessed were “slightly different operations, probably with a smaller footprint and taking takeout and delivery into consideration in how much of their space they need. They”™re probably planning for fewer people to dine in, more to do take out, more drive throughs and more outdoor seating ”” lessons learned from the pandemic.”
In Connecticut, Dolch is also seeing more quick-serve restaurants among the startups in the sector.
“I”™m not seeing as many independent, brand new out-of-the-box concepts open,” he said. “I think the independents are definitely more nervous to probably try to open something new or trying to expand, just because of the climate we”™re in. And the first industry that was hit the hardest, when you go back to 2007-2008, was the hospitality industry. If there is a recession, you”™re going to see more and more restaurants and hotels and other hospitality businesses struggle to make it.”
