Flat Sales, Rising Costs Menace Restaurant Operators


Despite the healthy economy and a public that loves to eat out, sales growth in restaurants is as limp as lettuce.

A new study by analyst TDn2K shows that same-store sales growth, which was negative 0.1% each of the last two years, has improved only slightly this year and the gains are uneven.

Studies by others see a sales trajectory at independent restaurants and small chains that will produce annual increases between 4 percent and 5 percent through 2020, nearly double the forecast for large chains, many of which are losing cache.

The biggest looming challenge is retaining skilled employees at current wage levels. It’s difficult to do when the nation’s economy is in high gear and unemployment is at 3.8%, an 18-year low. The hospitality industry had a record-high 844,000 unfilled positions in April.  The current government immigration crackdown is adding to the industry’s woes.

The way forward is foreboding, especially for independent operators.  All costs are rising simultaneously, says Richard Kave, Executive Managing Director of Lee & Associate on Madison Avenue in New York City.

“You used to be able to point to the landlord, or blame it on higher food and labor costs, utilities or insurance,” he said.

The consumer-price index jumped 2.8% last month year over year, for example. In June the U.S. Council of Supply Chain Management Professionals said 2017’s total spending on transportation and warehousing rose 6.2% over the prior year. A new survey by the National Restaurant Association found wage growth in eating and drinking places in the last three years was substantially higher compared to the private-sector overall.

“Everything is going up almost at the same pace and all at the same time,” Kave said. “There is a confluence of factors that are stacked against independent restaurants, which frankly are just surviving,” said Kave, a former restaurant top executive who has brokered nearly 50 food-service leases in his commercial property career.

“My son is a chef in SoHo, my ex-wife a chocolatier and my daughter owns a bar and bakery in Crown Heights,” he said. “We’re immersed in that world. We all know an increase in the minimum wage, for example, forces up wages for workers at every level. If a dishwasher’s wage goes to $15 an hour, ownership can no longer pay a line cook $15 an hour.  There’s never a family get-together where these things aren’t talked about.”

There are about 1 million restaurant locations in the United States, according to the restaurant association. Sales last year totaled nearly $800 billion and restaurants employed 14.7 million workers.

In New York City, the department of health says there are 26,000 restaurants. Typically, the general percentage of costs for New York City restaurants has been 30 percent for food and beverage, 30 percent for labor and 30 percent for occupancy and operating expenses.

Kave offers this advice to the battered restaurateur:

First, a successful operator must thoroughly understand all aspects of occupancy costs, such as insurance and scheduled rent increases.

Second, he says the operator needs to be certain of his cuisine relative to the locale.

Third is staffing. Kave says that everyone at the front-end of the house needs to know the menu, understand how each dish is prepared and be well trained in the protocol of serving customers.

“What’s the failure rate in restaurants after three years? It’s like 50 percent? That’s just horrifying,” Kave said. “When I do a restaurant deal with somebody, and they don’t make it, I take it very, very personally.”

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