Skip to “Actual DD” if you want to short story. Position at the bottom.
Many moons ago I gave up trying to find a real job. After 20+ years in the restaurant industry I have come to realize that (at least in my local eyesight) that we are in for a big hurt. I have been a district GM in the past but my current role as GM of a 10 million dollar in annual revenue location in Toronto is leaving me with unease heading into 2021.
My restaurant and many others have been running skeleton crews for years now. Profits are tough to come by for most and most costs are already cut. My management staff is literally just me, two managers, a shift supervisor, and head office. Head office is mostly a numbers game though. They distribute payroll, set guidelines, set my ratios (labour %, food cost %, etc.), and they make me pay them to do this. After we payout head office, my location has a roughly 5-8% profit margin based on the past 5 years. This is awesome. We have a killer location and great staff.
FYI – We pay head office a fixed percentage every year as they supply us with management staff and consolidate numbers for us. I am paid by head office, but the staff under me are not. “Head office” does this for dozens of restaurants as it is more efficient to scale up that aspect of the industry. This is why we pay them. It is a love/hate relationship.
Anyways, here is the issue. Myself and a bunch of industry veterans in the area meet once a year at a bar to have a good time and share ideas on how to grow our businesses. Running a restaurant is a fairly political game with the local customers but we are all trying to make a living so we do work together. It is more common that you think.
Actual DD – We were supposed to meet in October/November when business started to dry up after summer, but before christmas season. We held an emergency meeting last week as most of us are just sitting at our restaurants alone in the dark finishing off the kegs with nothing else to do. Outlook is positive, but there is a very large hiccup coming that we are unsure what to do with. The bar industry (think clubs, divebars, cocktail bars) is a little more year round. But patio season for food-focused locations (think steakhouses, gastropubs, Applebees, etc) is the 3-5 months of the year where you actually crush your weekly breakeven targets and literally float the rest of the year. A breakeven target is what you need to make in a week, on average, to make money that week as long as you also hit your labour/food&drink targets. Some places that number is 20k, some it is 300k. Mine is around 160k.
We budget to lose money in October, November, January, February, March, April, and sometimes May/September depending when summer starts or ends. December and June/July/August are what takes my location from -40% a year to +8%. That -40% is a rough guess by the way because I have never actually just not opened for summer because I like to feed my kids. Anyways, once we do open for summer – we are assuming there will be a cap on guests in the building and/or seating every other table and we will only be partially back to normal. The issue is I need my restaurant to be full from right now to the end of August to be profitable for the year. There is absolutely no way this will happen.
Myself and my restaurant will be okay. Our lease is extremely high, but we can make it through to 2021. This is the problem though – we clear 5-8% profit after paying out head office. Most restaurants would kill for 2% – especially the smaller ones. I know dozens of small location owners as well as large location GMs who will not make it through 2021 to 2022. But it wont be realized until after summer. Most will scrape by on weak sales through summer. But trying to come back from literally 0 sales for a few months, then half those sales during the time of year that is supposed to make up for your lack of sales just wont happen, unfortunately. And this is the issue that will arise. The industry will be in a gridlock in 2021 financially, even if we are back to pre-pandemic levels of business and with no restrictions. There is a hole that is being dug and to come out of it, we will need to strip costs even further. I have a little room for this fortunately, but the vast majority do not. We already do food/bev costs down to the second decimal and this is common practice for most locations. That means when Karen thinks her well-done steak is too tough – the comp on that may actually be the whole days profit lost on a slow day in the winter. 100$ a day can truly be make or break in the slower months.
Side note – takeout means nothing for a sit-down restaurant. I have listened to so many podcasts and experts share their thoughts about what will happen with restaurants. They are all so far off the mark – especially considering some people actually think we can still turn a profit on just takeout alone. We can even sell beer with takeout in Ontario. But, when I am doing 20x my usual takeout orders on a Friday night. I am still not even coming close to the 40k in sales I need for that day. Pre-pandemic, takeout might do 150$ in sales on a Friday night. Now, it is 2-3k (this is more than expected by the way). But my lease is over 30k a month. I was already running a skeleton crew beforehand and we shaved down to literally just me, the chef, and one server who just wants the hours so he is deep cleaning the entire restaurant (money well spent imo).
These thoughts and numbers are mine, but they are shared among 30 other restaurant owners and operators and we are the majority of the restaurant/bar scene in Toronto. This long post barely scratches the surface of the issues that nobody really knows outside of the restaurant industry. The industry will not die. But many locations will turnover in 2021. Here is the kicker though – for the supply chains associated, this may actually be a positive thing. The food suppliers would love to have a new basket of people to sell goods too. People who dont have their menus optimized yet, and over-order to prevent shortages in the short term. Also to gain favor with the suppliers, they will be willing to spend money. This is provided there is enough liquid capital and people willing to jump into the industry to fill those gaps once the turnovers begin to happen.
TLDR; Long SYY / Long dated puts on DIN,RUTH,QSR (Dec/Nov 2020 is not far enough, may need to wait).
CMG, SBUX, PZZA or whatever other fast/fast-casual places are NOT to be included in this DD.
EDIT: if you have questions about the industry, how it actually works, or what I think the future will be. Feel free to ask
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.