French fries and beer may help calm ‘perfect storm’ at favorite restaurants
Head of state restaurant association says more surprise closings and sales expected in 2023
There will likely be more surprise closings or sales of restaurants this year as the industry copes with a “perfect storm” of economic conditions, the president and CEO of the Iowa Restaurant Association said.
I spoke with Jessica Dunker as part of my reporting into the sudden closure of Spaghetti Works on Court Avenue.
My reporting for that story evolved and changed as I learned more behind the reason the popular, longtime restaurant decided to close on March 27. What I learned from Dunker wasn’t directly relevant to the new direction that the Spaghetti Works story was taking, but there is a lot to unpack in her comments and her suggestions for how people can best help their favorite restaurants muddle through the storm.
Here is some of what I learned from Dunker, who did not have direct knowledge of the circumstances surrounding the Spaghetti Works decision. Her comments have been lightly edited for length and clarity.
Why do you think more restaurants will close or be sold in 2023?
There’s a couple of things going on. We have been projecting that 2023 is the year we will see a larger portion of COVID-related closures and sales, and there’s a couple of factors weighing into that. For the first time in our history we are facing a simultaneous average 15% increase in cost of goods and cost of labor. All that coupled with consumer inflation that has been hovering at around 8%. We are hitting the threshold for what we can put out as a menu price for what people will pay. We’re not in a position to raise menu prices much higher. People were really tolerant during COVID and understanding as we did that, but now people are feeling stretched themselves and we’re hitting those limits.
How is that affecting a restaurant’s operation?
If you look at table checks, if you look at gross revenue, that looks high but the profitability is down. In a world where 5% net profits pre-COVID was considered a pretty viable restaurant business, the idea that profit is down is a recipe for not being able to sustain yourself. We’re seeing a change in consumer patterns. People are still going out but we’re seeing a higher number of people sharing an entree, or people just ordering water. They’re skipping desserts and appetizers. They’re ordering differently but you still have to pay people to be there to serve customers. You have to pay people to cook and maintain the business, but customers are ordering differently. It looks busy and that money is coming in, but the profitability isn’t there.
How are restaurants dealing with the federal disaster loans they may have received during the pandemic? Is that an issue in what you’re seeing today?
It allowed them to get an infusion of cash when they needed it and payments were delayed for 30 months. Well, 30 months has arrived. Now what we’re seeing is that people are suddenly taking on a huge debt load and they’re suddenly figuring out how to add one more bill in a reality where they’re already not turning a profit. There was a memorandum as part of an SBA hearing projecting that 30% to 50% of the loans that were $100,000 would default, and when you look at the size of a lot of restaurants, many of them would fall under that, so that’s really worrisome. Only 800 restaurants in Iowa ever got that funding. It’s a tsunami of factors that have all come together at the same time. And in our last survey of operators, we had 62% of operators say business conditions for their restaurant were worse than it was three months ago; 63% had accumulated debt; 64% had fallen behind on expenses; and 77% said they were less profitable than they were before COVID.
What can be done to help restaurants?
One of the things is actually at the federal level and related to those loans. If you’re worried that 30% to 50% of those loans are going to default, forgive them. Invest in small businesses and just forgive them. One of the things the National Restaurant Association is working on in D.C. is trying to get Congress to forgive the 30 months of accrued interest that people have had. So that is some federal relief that is possible. Then people just need to patronize restaurants, and restaurants need to operationally respond, and we’re beginning to see that. You can see pared-back menus, which is a good example of that. You’re seeing more restaurants that are paring back their menus and looking at how to leverage ingredients to be more profitable. We have a lot we can learn from Mexican restaurants where they can do a full menu with a small list of ingredients and really do an economy of scale.
What can customers do?
What you can do is order the most profitable items on a menu. That doesn’t mean the most expensive items. The most profitable items are french fries and beer, or a cocktail and a potato-based appetizer, and those turn a lot of profit for your favorite restaurant.
Michael Crumb is a senior staff writer at Business Record. He covers economic development, transportation, energy & environment, culture, sales & marketing.