Being Proactive to Protect Your Restaurant and Bar

The impact of tariffs are top of mind for many restaurant operators and a cause for anxiety. According to The Distilled Spirits of the United States (DISCUS), the most recent timeline regarding alcohol products calls for:

• April 2: The U.S. could impose 25 percent tariffs on tequila, mezcal and Canadian whisky, when the current suspension expires,
• April 2: The U.S. could impose tariffs on wines and spirits from a range of countries, including a 200-percent tariff on European Union (EU) alcohol products.
• April 13: The EU’s previously imposed 25-percent tariff on American whiskeys is currently suspended. However, if there is no agreement on steel and aluminum, tariffs are scheduled to be reinstated at 50 percent. The EU could also impose tariffs on additional categories of U.S. spirits and wines.

DISCUS recently issued a call to action in partnership with the Toasts Not Tariffs Coalition, a group of 54 associations representing the entire three-tier chain of the U.S. alcohol industry and related industries. The new campaign urges the administration to secure fair and reciprocal tariff-free trade with key trading partners.

For  background,  DISCUS says nearly 86 percent of U.S. spirits exports go to countries that have eliminated tariffs on all U.S. spirits, and approximately 98 percent of spirits imports originate from countries that have eliminated tariffs on U.S. spirits. and U.S. spirits have achieved duty-free (zero-for-zero) access with 51 trading partners. Additionally, most U.S. wine exports go to countries with low or zero import duties.

To gain a legal perspectve on the potential significance of these tariffs, Modern Restaurant Management (MRM) magazine reached out to Brad Berkman, attorney in the Hospitality, Alcohol and Leisure Industry Group at Greenspoon Marder.

In what ways do you anticipate potential tariffs impacting the restaurant industry in the short and long term?

The unfortunate answer is price increases in general for both food and drink and narrower margins than already experienced by restauranteurs. Food costs for many products including ingredients and the even costs of containers that many products come in will increase. Most of these increases in costs will be passed on to the consumer by higher menu prices. 

If the 200-percent tariff increase goes into effect for European wines, those items will be virtually priced off the menu and will be unaffordable for the average restaurant guest. Tariffs on agave products from Mexico could see significant prices increases. Price increases of Tequila based cocktails at bars across the United States are likely.

The point to realize is that the effects of tariffs will be felt across the distribution chain, including importers, distributors, restaurants and consumers.

The point to realize is that the effects of tariffs will be felt across the distribution chain, including importers, distributors, restaurants and consumers. All levels will be paying more for goods, margins will decrease, costs will go up and consumers will pay more as long as tariffs on food and drink remain in effect.

In February, the National Restaurant Association sent the White House a letter stating that a 25-percent tariff imposition could cost the industry a 30-percent loss in profits for the independent operator. The same letter urged that food and drink is not included in any tariff regime imposed, but at this juncture, that exclusion appears unlikely.

How can restaurant operators be proactive with the news on tariffs being confusing and seemingly changing all the time?

I suppose one proactive measure is to prepare, psychologically, for a period of confusion and flux. Some tangible proactive measures could be:

• Changing menu items to replace items effected by tariffs. 
• A slow reduction in portions sizes, while maintaining or increasing prices.
• Feature dishes and menu items w/ already high margins.
• Feature alcoholic drinks items made w/beverage alcohol not effected by tariffs.
• Purchase in bulk, if possible. Items affected by tariffs, prior to the imposition of tariffs.
• Reduce operational costs, when possible, to mitigate the effects of decreased margins and potential decrease in revenues resulting from changes in consumer spending habits.

What impact could proposed tariffs on alcohol have on bars and nightlife establishments that rely on alcohol sales?

Drinks costs will go up and bars and nightclubs will have no choice but to increase prices to maintain existing margins or absorb the costs of price increases to beverage alcohol. 

It’s a tricky situation, in that these venues need to ensure that loyal customers keep coming back. However, consumer habits are likely to change, with decreased limited disposable income being spent at bars and nightlife venues. Drops in guest attendance seem likely accompanied by decreases in revenue for venues and higher prices experienced by consumers who continue to patron their favorite bar or nightclub.

As noted above, the point to realize is that the effects of tariffs will be felt across the distribution chain, including importers, distributors, and consumers. Decreased margins, drops in revenue and higher prices to consumers all seem likely in this industry segment as well.