‘Profit Doesn’t Exist Anymore.’ Restaurants That Barely Survived COVID-19 Closures Now Face Labor, Inflation and Supply Chain Crises

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Photo by Saul Granda © | Getty Images

It’s easy to poke fun at terrible restaurants, like the one on Gordon Ramsay’s show Kitchen Nightmares that served a mayonnaise-and-cheese sushi pizza , or the Washington D.C. Popeyes that went viral after a video revealed the franchise was overrun with gargantuan rats. (They were not of the Pixar variety that hide in chef hats and improve recipes, unfortunately). Both eateries have since shuttered permanently. Probably for the best.

But even restaurants with delicious food, competent staff and clean kitchens often must perform a near-acrobatic balancing act to survive. Too large of a menu can prevent chefs from executing every dish well, while too small of a menu can starve guests of options they like; overstaffing drives up labor costs, while understaffing leads to angry customer reviews about slow service; a bad location will thwart guests from coming through the door, but a great location often costs too much to rent. These tightropes mean that, even in normal economic conditions, as many as 61% of independently operated restaurants fail within three years of opening, according to a widely cited 2005 analysis from Ohio State University researchers.

“It’s an incredibly high-cost, low-profit-margin business, that in the best of times only barely works if you have almost a full house for every meal service that you’re selling,” says Sean Kennedy, the executive vice president for public affairs at the National Restaurant Association. “If you can make that happen, you have a good shot of getting a 3% to 5% profit margin.” .

The ongoing Covid-19 pandemic has made those odds infinitely worse. After months-long bans on indoor dining and a slow rebound in consumer confidence, restaurant sales across the country were down $240 billion in 2020 from their expected levels. Roughly 80,000 restaurants have temporarily or permanently closed since the start of the pandemic, according to estimates from the National Restaurant Association, down from 110,000 at the peak of the pandemic.

“It was like we hit a brick wall,” says Sara Sawicki, 48, co-owner of Portland, Oregon’s Fire on the Mountain chicken wing restaurants, recalling the aftermath of March 2020. She was gearing up for a busy month of March Madness and Spring Break; instead she says she saw her profits decline by roughly 40% in the first few months of the 2020 lockdowns.

This past summer, many restaurant proprietors began to get a bit of relief. Small business association loans, paired with vaccine availability, warmer weather and a near-universal sense of pandemic fatigue, led to crowded dining rooms and resurgent profits. But they’re hardly out of the woods. After nearly two years of abysmal profits, restaurant owners are being hit by a cascading series of new challenges: inflationary pressures on key ingredients and paper products are driving up their operating costs; a global supply chain crunch has stymied delivery of everything from cream cheese to chicken wings to portion cups for salad dressing; and the entire hospitality industry is struggling to hire and retain enough employees to operate.

Fully 85% of restaurant operators reported smaller margins than before the pandemic, according to a September field survey from the National Restaurant Association.

“The restaurant industry,” says Kennedy, “can only defy the business laws of gravity for so long.”

MISSING CHICKEN WINGS AND THE NEW COST OF FRY OIL

Customers at Sawicki’s chicken wing joints have come to expect one thing when they visit her three locations: chicken wings. Unfortunately for Sawicki, global supply chain constraints made the product difficult to come by. Her suppliers would tell her, “‘I’m shorting you 10 cases of chicken [wings] on the delivery tomorrow,’” she says, “or the delivery just wouldn’t come.” In order to keep serving her restaurant chain’s staple product, Sawicki’s staff would drive to the warehouses to pick up the wings themselves. Her three restaurants would also communicate with one another, lending each other a few cases when another was close to running out.

“We managed to not run out very often. If we did, it was towards the end of the night,” she says. “But to make that happen, it took a lot of effort.”

The chicken wing shortage can be traced to unseasonal 2021 cold snaps in the American South that killed off hundreds of thousands of chickens . Covid-19 outbreaks at meat production plants further encumbered the supply chain, just as America’s pandemic eating habits—more casual takeout, less fine dining—caused a wing and pizza supply-demand imbalance that still hasn’t reached equilibrium.

Osama Yousef, the owner of two North Carolina eateries, had to temporarily take wings off the menu. But the wings are only one example of shortages. He’s also had to nix fried mushrooms and chicken strips due to sourcing problems, and has struggled to stock enough take-out packaging. More than 90% of restaurant operators experienced supply delays or shortages of key food or beverage items over the three months prior, according to the National Restaurant Association survey.

Meanwhile, the ingredients that restaurants are able to find have become markedly more expensive in recent months. The September survey showed 91% of restaurant operators reported paying more for food. A case of bacon used to cost Yousef $47.96 in 2019, for example. The same product is now priced at $85.58. A crate of onions jumped from $24.95 to $40.72. Yousef now pays 140% more than he used to for fry oil, a central ingredient in many American restaurants. In New Canaan, Connecticut, 48-year-old restaurant owner Nick Martschenko reports the same amount of fry oil now costs him double.

Yousef’s restaurants have added a 15% surcharge on all receipts at his two restaurants—he used to own three, but one closed permanently during the pandemic—in attempts of counteracting the price increases, but the extra tax hasn’t put his businesses back in the green. “The profit doesn’t exist anymore,” Yousef, 51, says. “We worked hard all this year for almost nothing.”

‘MY STANDARDS HAVE LOWERED’

Restaurant owners are also struggling to hire and retain a sufficient number of reliable employees.

Part of the shortage can be explained by the ongoing pandemic, which has presented would-be workers with childcare and safety concerns. The omicron variant—which has already shuttered daycares and caused some schools to resume virtual-only learning—may further exacerbate the Covid-19-induced labor imbalance.

Some experts and restaurant owners also point to strict immigration policies under the Trump administration, which deterred immigrants from migrating to the United States, thus depriving restaurants of individuals willing to work relatively low-paid jobs. A November Insider analysis estimates that as many as two-thirds of the three million shortage of workers right now are immigrants who did not move to the U.S.

The pandemic’s instantaneous elimination of many of restaurant industry jobs—and thus the employees’ livelihoods—back in March 2020, caused many in the sector to reconsider whether they wanted to stay in their relatively low-paid roles or move to more stable, higher paying ones. Employees “don’t want to return to backbreaking or boring, low wage, sh-t jobs,” Robert Reich, former U.S. Secretary of Labor in the Clinton Administration, told TIME in October. “Workers are burned out. They’re fed up. They’re fried. In the wake of so much hardship, and illness and death during the past year, they’re not going to take it anymore.”

More than 4 million people voluntarily quit their jobs in October, according to the Bureau of Labor Statistics. The near-record high was most acutely felt in the food accommodation sector, where the rate of separations was higher than any other industry.

Martschenko has raised wages in the last year to be able to retain enough servers to stay open, but facing negative profit margins—and hundreds of thousands in loans he had to take out during the pandemic and still has to repay—can’t afford to boost them much more. Instead, restaurant owners have had to get creative. Two of Martschenko’s three Connecticut restaurants cut down on lunch service and are open for dinner five days per week instead of seven. He is also introducing QR code systems in two of his restaurants that will allow customers to order and pay through their phones, in order to decrease pressure on his now smaller staffs.

On numerous occasions, Yousef has opted to send all of his employees to staff one restaurant and temporarily close the other because he hasn’t had enough employees to fill both. He admits he’s also had to lower his expectations too. “People just don’t show up to work. You can’t really fire them because you need them,” he says. “There’s so much my standards have lowered.”

WHAT THE INDUSTRY NEEDS NEXT

Restaurants have been offered aid to get through the past two years’ challenges. They were assisted by three rounds of a program called the Paycheck Protection Program, which provided small businesses with forgivable loans to offset payroll or interest on mortgages, rent, and utilities. The March 2021 American Rescue Plan Act provided further relief to restaurants, bars, caterers and other food service providers through the Restaurant Revitalization Fund (RRF), which established $28.6 billion in grant money for the industry.

But it wasn’t enough: Within three weeks of the RRF program opening applications in May, the Small Business Association received more than 360,000 applications seeking more than $75 billion in RRF relief—nearly triple the amount of funding available. Approximately 176,000 eligible applicants are still waiting in the queue for help. Both Yousef and Martschenko blame some of the challenges restaurants are facing on the myriad of government support that went to individuals during the health crisis, including multiple rounds of stimulus checks and expanded unemployment funds, that hurt their ability to hire and prompted delays from their suppliers too. “Instead of giving people money to stay in business,” says Yousef, “stop giving people money to stay at home.”

The National Restaurant Association says one of the most pressing issues is the number of restaurants that were not able to access the RRF funds. A bipartisan bill to replenish the program’s funds with an extra $60 billion is currently stalled in Congress.

Rep. Ro Khanna, a California Democrat who supports the Restaurant Revitalization Fund Replenishment Act (RRFA), says he is also preparing to introduce a bill in early 2022 that would provide tax credits to small brick-and-mortar based businesses, like mom-and-pop restaurants, to help level the playing field against online retail giants that thrived under the U.S. tax code, which essentially allowed them to avoid sales taxes. One of his arguments for supporting the RRFA and introducing this new bill is that the policies would help both the small businesses and their surrounding communities. “Having a vibrant Main Street and cultural center with small stores and restaurants is essential to a community’s health,” he says. “The shutting down of these businesses and restaurants is a harbinger for the decline of a community itself.”

But whatever the solutions are, experts say they need to come fast. “The challenge right now is that Congress is only able to focus on things when they are truly at a cliff’s edge. Our message to Congress right now is the restaurant industry is absolutely at that point,” says Kennedy. “If there isn’t action soon, a number of restaurants will not survive.”

Abby Vesoulis | Contributed

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