Restaurant Prices Are Going to Rise
We've accepted almost as a foregone conclusion that many restaurants will shutter by the time the country opens up again. The estimates range between about 20 and 30 percent, as revenue is slashed when the establishments are either only open for pickup and delivery or closed during the coronavirus shutdown. Meanwhile, fixed costs like rent and taxes remain high for an industry that was already plagued by thin margins.
What has been less discussed is that restaurant prices seem very likely to go up. Between making up for lost time, escalating meat costs, social distancing restrictions on how many people can be in a dining room (which will cap the number of food and beverage sales), less market competition due to closures of other places, deferred and rising taxes, and the massive fees levied on restaurants by delivery apps, customers can expect to pay more to eat restaurant food.
"Restaurants are already facing a lot of pressure to increase profits from every angle, and it’s only going to intensify," my friend Bryan Tublin, the owner of the health-conscious fast casual restaurant Kitava in San Francisco, tells Outkick. "Not only will they have to think about lost sales over the past few months, but a bunch of bills that have been deferred will all of a sudden start coming due. Everything from local taxes and fees being reinstated, to deferred rent payments and overdue vendor bills, will cause a huge hit to restaurant cash flow. And it’s not as if the public will all of a sudden flock back to their favorite establishments right away. Justifiable health concerns coupled with potential new restrictions on dining room capacity will severely impact dine-in traffic, the highest margin component of any restaurant’s business model."
"Not to mention the unknown, such as possible supply chain shortages, government funding drying up, and vendors increasing prices increases for meat, produce, and dry goods," Tublin continues. "Every restaurant will deal with these issues in different ways, but there’s no doubt we’ll all have to think long and hard about how to maximize profits in this new reality."
Silver sees trends of smaller restaurants in bigger cities on the horizon. "I think you’ll see smaller restaurants be a bigger thing," he says. "Rent is ridiculously high and it’s pushing out anyone who doesn’t already have a huge bankroll behind them."
A lone silver lining, he thinks, is that there will have to be some leeway in the commercial real estate pipeline. "If a lot of restaurants close permanently there will obviously be a lot of vacant spaces," Silver says. "Nobody wants that. Not landlords, banks and especially not the owner whose entire life and dream could be in their restaurant. Too many closures will tighten up banks on lending and make it harder for new owners to come in. I think you’ll see landlords more likely willing to work and negotiate rent with the little guy."
We haven't even gotten to delivery apps like GrubHub, Uber Eats, Postmates, and DoorDash. Customers who pay nominal fees to these apps do not necessarily realize they're taking a cut on both sides of the transaction. A number of Chicago restaurants are trying their damnedest to get people to order deliver from them directly.
On one end the delivery apps are marketing themselves as a service that helps keep local restaurants in business. However their fees to restaurants are typically around 30 percent, and in some cases that have gone viral, it's absurdly more:
As Kitava's owner Bryan Tublin mentioned earlier, tax bills are going to provide another burden. Last week, Carey Bringle, the owner and pit-master at Peg Leg Porker in Nashville, spoke out against a proposal to raise property taxes in the city amidst all the tumult in his industry:
Writing an op/ed for Bloomberg in April, the investor Conor Sen predicted that dining in restaurants will become a "luxury good," reasoning that social distancing and higher labor costs would combine to yield price hikes. "Ernie Tedeschi of Evercore ISI notes that between state insurance and the federal supplements, the average weekly unemployment benefit for workers in states such as New York, California, Washington and Massachusetts will be more than $1,000," Sen wrote. "That's the equivalent of $25 an hour for a 40-hour work week. For restaurant workers who earn significant tips, returning to work may offer enough economic incentive to be worth it. For lower-paid dishwashers and line cooks, unemployment might be a better deal -- at least through the end of July, when the benefits are set to expire. That means restaurants may have to pay much higher wages than in the pre-virus market level to staff up."
Sen's piece was written before meat shortages were on the horizon. If you've gotten this far in this story, I presume you've also read about large meat plants being shut down as workers test positive for coronavirus. Grocery stores like Kroger and Costco are starting to set caps on meat purchases. Wendy's, which has the word beef in its slogan, is preparing to stop serving beef temporarily at some of its locations as supply has faltered and costs have risen.
The restaurants that we love are all going to be fighting for survival, at least for this year, in an industry that was already profoundly difficult to make it in. Hopefully the inevitability of our having to pay more to eat at them will at least help keep them in business.