The Restaurant Industry Two Years Into COVID

 The restaurant industry continues to navigate the COVID-19 pandemic that is still infecting over 20,000 and killing over 1,000 Americans every day.  While showing proof of vaccination and some of the other most unpopular protections put in place by health agencies have now been lifted, the restaurant industry is met with new challenges.  These challenges include the increase in costs of operations, labor shortages and unpredictable shifts in customer bases.

Increase in Costs

According to The Wall Street Journal, food prices are estimated to rise on average five percent in the first half of 2022, while other sources point to a seven-percent increase by the end of the year.  This estimate will likely be well under the price jump as fuel costs continue to rise.  In California, Proposition 12 banned all sales of breeding pigs, egg-laying chickens and veal calves from farms that fail to meet new confinement standards.  This law went into effect January 1, 2022, but was stayed for six months by a California Supreme Court Judge.  The costs of bacon in California is expected to increase by over one dollar per pound if and when this law goes into effect.

Labor Shortages   

Labor costs were already set to increase on January 1, 2022 in 21 states that passed minimum wage increases.  This was already a cost that restaurants were anticipating, but labor shortages have forced restaurants to increase wages to compete for workers.  Restaurants seeking to retain or hire management or other salaried positions faced much higher salary demands and stiff competition.  This became even more challenging for restaurants during the Omicron spike where numerous positive cases temporarily depleted the worker pool.  Restaurants were forced to limit operations or even shut down during these spikes.

Customer Base

Food deliveries and outdoor dining were very successful for many restaurants located in neighborhood communities.  However, restaurants that were located within financial, business, or manufacturing districts did not see the same success.  Many restaurants that rely on the customer bases from these businesses saw disproportionate losses to those restaurants located even just a few miles outside the city centers and manufacturing districts.  

Further, restaurants that relied on major events such as stadium or conference attendance were forced to pay premium rent for locations that had no customers.  The return to office policies have proven to be a work in progress rather than a true deadline restaurants can rely.  This is especially difficult to predict for restaurants that rely on the tech industry. 

Possible Solutions

Most restaurants that survived COVID-19 took advantage of the programs available through the Restaurant Revitalization Fund (“RRF”) Paycheck Protection Program (“PPP”) and the Economic Impact Disaster Loan (“EIDL”) programs.  The RRF was industry specific while PPP and EIDL were available for other industries.  The restaurants that I advise that were able to utilize the RRF were able to position their restaurants for future growth.  Restaurants that either didn’t qualify for or did not utilize those funds missed out on a great opportunity.  Unfortunately the hope of additional funding for the RRF were dashed when it was dropped from the spending bill.  It looks like, for now, the government assistance has run dry.  There are other actions restaurants can take to survive and thrive during COVID-19 and beyond.

Two successful strategies implemented by restaurants have been to utilize expanded outdoor dining and food delivery services.  Many local governments have dedicated “parklets” that remove curbside parking in order to make space for outdoor dining.  Some communities have even made these spaces permanent.  This solution works well for restaurants in warm climate areas, but even areas like Chicago dedicated millions of dollars in grants for community groups to redesign parking spaces to be utilized by restaurants.  This is very good news for Restaurants because in most circumstances the lease for the restaurant does not charge rent for the patio or outdoor spaces.  

 Food delivery apps and other services worked very well for many restaurants, but some restaurants found the costs eliminated any profit.  In response, many restaurants created new “care package” options on their menus that included family portion sizes to take the guess work out of ordering of a menu that was not on a delivery platform.  For example, in one BBQ restaurant a care package included a rack of ribs, a whole chicken, a pound of pulled pork, quart of beans, slaw and macaroni and cheese, corn bread and a six pack of beer.  These off menu take out only options were very successful in maintaining a customer base because it made it easier to order a care package directly from the restaurant than order off the menu through a delivery app.  More importantly, it allowed a restaurant that couldn’t afford the food delivery app’s services to reach take out only customers.

Some restaurants are joining, or even forming business associations to increase purchasing power and reducing costs through economies of scale.  The local restaurant associations are also utilizing their influence to lobby their local governments to change policies that make operating their restaurants easier.  This involvement in local government as well as statewide business associations expanded to lobbying states to continue offering temporary services such as to-go cocktails.  These organizations will continue to have impact on how future government regulations are implemented within its communities, including the permitting and planning policies.

The restaurant industry will have to continue to adapt to the temporary and long term changes due caused by COVID-19.  The only certainty is the restaurants who expect a return pre-pandemic operations will fail.