Can a Restaurant Operating at 25% Capacity Ever be Profitable? | Wine Enthusiast
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Can a Restaurant Operating at 25% Capacity Ever be Profitable?

Ricardo Molina stocked up on three weeks’ worth of fajita fillings before he reopened Molina’s Cantina last weekend in Houston. It’s an insurance policy against market fluctuations due to the novel coronavirus pandemic.

“If the food supply is going to get tight, those prices will start to creep up, and then we won’t be able to offer the same menu,” explains Molina. His grandfather opened Molina’s Cantina in 1941, and it’s served generations of Houstonians.

Molina is one of countless restaurateurs navigating a rapidly evolving landscape. Last week, Texas governor Greg Abbott rescinded shelter-in-place restrictions across the state. As of May 1, Texas restaurants can serve guests seated at least six feet from one another in dining rooms filled to 25% capacity (50% in certain rural counties).

In doing so, Texas joins Tennessee, Alaska, Georgia and other states reopening consumer-facing businesses like restaurants, gyms and salons. Regulations vary. In Alaska, restaurants can operate at 25% capacity, with tables at least 10 feet apart. Tennessee restaurant dining rooms are at 50% capacity, while Georgia permits 10 diners every 500 square feet. Louisiana has outdoor dining only.

Public health concerns aside, the wave of newly opened, heavily restricted businesses present several economic quandaries. It’s hard to run a profitable restaurant in the best circumstances. Can any restaurant make money if its capacity is significantly reduced?

“If we had to lose 10% of our capacity… we would lose our derriere financially,” says Ti Martin, co-proprietor of Commander’s Palace, an 1893 New Orleans landmark. “The profit margin is so thin in restaurants. At 25% or 50%, it doesn’t work.”

“I can’t imagine any business could successfully and profitably operate under those circumstances,” says Jeff Stockton, SE Market Manager, Spiribam, and a former bar manager in Atlanta. “There will be added challenges to ordering parts and prepping necessities. You’d have to run a skeleton crew to maintain balance on the volume. Seems like a hasty decision with much more risk than reward.”

It’s difficult to answer any question about the U.S. restaurant business in absolute terms because the category itself is so broad. Mom and pop shops sit shoulder to shoulder with corporate behemoths. Factors like access to institutional capital, ownership model, labor market, and lease or mortgage terms vary enormously, and all play enormous roles in a restaurant’s financial health.

Occupancy expenses, such as monthly rent or mortgage payments, are the largest fixed cost for many bars and restaurants, explains Dr. Aaron Adalja, an assistant professor of food and beverage management at Cornell’s School of Hotel Administration. In large cities like New York, it’s not uncommon for 8–10% of restaurant revenue to go directly to occupancy costs.

“That’s just barely viable when a restaurant is operating at full capacity,” says Adalja. “If you’re operating at 25% capacity, 8–10% becomes such a large component of revenue, it doesn’t leave nearly enough money left over for all your other expenses, like labor and food, or any money for profit.”

“I can tell you from direct experience that it’s virtually impossible to make a profit [at 25–50% reduced capacity] without numerous concessions being made,” says Rick Camac, dean of Culinary Management, Institute of Culinary Education. “The best possible solution is to negotiate with everyone everywhere. Negotiate with your vendors, negotiate with your landlord, negotiate with everyone. The conversation has to be, ‘Listen, we’re in this together.’”

Camac suggests restaurateurs make three budgetary projections as they reconsider coronavirus-era expenses: six months, one year and two years. They will have to adapt in real time to changing market conditions.

“I see literally 24 months before we go back to any sort of business resembling pre-Covid… In the next six months, it’s all about what can you do to incrementally increase your sales, which will probably have something to do with takeaway and delivery.”

In a recent Nielsen survey of 1,600 people in New York, California, Illinois and Florida, 23% said they would return to bars and restaurants as soon as they reopen.

But these adaptations come with their own troubles. While income from delivery and takeout can help ameliorate expenses, commission fees from third-party delivery apps might run anywhere from 18–30%. As a result, the benefit of increased delivery volume quickly erodes.

“It’s not a silver bullet. Operators have to be really careful to understand the unit economics of delivery and whether or not that business model actually works for them, or if it’s really just postponing the inevitable,” says Adalja.

While many restaurateurs hoped to find relief in the Paycheck Protection Program (PPP), a series of low-interest federal loans, only 9% of PPP loan approvals have reportedly gone to hospitality businesses so far. Many who did receive PPP loans remain unsure of the forgiveness terms and are hesitant to cash in. Some suggest that PPP requirements to spend 75% of their loan amounts on payroll expenses, excluding independent contractors, are ill-suited to the restaurant business.

“It really is a dilemma. I don’t know if all these states that are opening now have really thought it through,” says Elizabeth Schaible, associate professor/department chair, Hospitality Management, New York City College of Technology.

So why reopen at all? Many restaurateurs feel they owe it to their communities and employees.

Back in Texas, the Original Ninfa’s on Navigation, a landmark restaurant in Houston, relaunched dinner service at the permitted 25% capacity last Friday. Niel Morgan, the owner of Legacy Restaurants, Ninfa’s parent company, doesn’t expect the dining room will make money, but he was eager to get some hourly staffers back on payroll.

“I obviously can’t be profitable at 25% capacity, but a lot of the expenses of having a restaurant continue whether you’re open or not, particularly if you continue to employ people… With the marginal costs of opening the dining room, we should at least break even, and we’ll get some people back to work, which is good,” he says.

Legacy Restaurants retained most of its salaried staff during the shutdown. Occupancy expenses are also manageable because the company owns its building.

Morgan doesn’t expect to have problems filling available seats. “People started calling for reservations before the governor finished speaking last week,” he says.

“People definitely want to be economically active. They want to work, and I want to be able to hire people.”

Despite this enthusiasm, consumer confidence is a moving target. In a recent Nielsen survey of 1,600 people in New York, California, Illinois and Florida, 23% said they would return to bars and restaurants as soon as they reopen. That alters the calculus for restaurants attempting to balance their budgets with reduced capacity.

Even without social distancing restrictions, demand will not immediately return to 100%. Some people long for the sense of normalcy that dining out can offer, but others hesitate to share a dining room with strangers and masked servers.

“The restaurant business, it’s going to be changed,” says Molina. “I don’t know the level of fear our guests are going to have, as well as our staff. Are some of them going to be scared to come in? We haven’t seen that yet, but we don’t know.”

The future of U.S. restaurants is uncertain in every capacity, but governmental policies will have an enormous impact, suggests Dr. Adalja. “If by some stroke of luck, a significant amount of funding is allotted to independent restaurants over the next few months, that could shift everything.

“We all know trying to predict what’s going to happen with federal policy is like shaking a magic eight ball at this point. But I can’t imagine any scenario where things go back to the way they were.”

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