Igor Kumits, CPA
5.21.20 | COVID-19 Industry Insights
The New York City restaurant sector has suffered enough body blows from the COVID-19 crisis to take down the toughest heavyweight contender. However, accepting defeat is not in the nature of the business or the people who run it. As regions throughout the U.S. begin to reopen, companies that have resilience and flexibility will emerge from the crisis and successfully transition to the new normal of today’s COVID-19 world. Like most transitions, challenges will arise that restaurateurs will have to confront as they reopen. On the flip side, the pandemic may also unveil opportunities that drive innovation and lead to long-lasting benefits for restaurants and the hospitality industry as a whole.
Making Rent Payments. Keep in mind that everyone is seeking some form of relief – abatements, deferrals, concessions. So, now more than ever, keep the lines of communication open with landlords. If it is not possible to conclude any of these agreements, try to arrange payments that will enable the landlord to, at the very least, cover costs like real estate taxes and utilities. Potential Solution: In the current down market, landlords are also facing many challenges and they are likely to be willing to work with their tenants to avoid increasing vacancies in their properties. As such, restaurateurs can take this opportunity to negotiate utilizing part, or all, of their security deposit to cover one or two rent payments. Restaurant owners can also discuss the possibility of abating or, at a minimum, deferring rent for a period of time until operations resume fully. Approaching the situation with an open line of communication could help all parties to successfully emerge, and eventually move beyond, the crisis.
Financial Hardship – Weighing Government Programs. The COVID-19 pandemic has resulted in State and Federal authorities to release a number of programs to help businesses survive. While these programs have provided businesses with opportunities for relief, they have also presented several questions and challenges. Nevertheless, the potential solutions that they present are worth examining, they include:
- The current design of the Paycheck Protection Program (PPP) is not ideal for restaurants. It covers most payroll for an eight-week period, which is of little value if the restaurant is closed during that period. There is a 25% maximum applied to non-payroll costs, a big restriction for NYC restaurants. Moreover, the payback period is two years at 1% interest, which will be difficult to meet if restaurants are not permitted to operate at full capacity for an extended period. Regardless of these valid concerns, an owner may want to apply for the PPP since the funds can be paid back if not used, and the rules are not set in stone and keep changing almost on a daily basis.
- Economic Injury Disaster Loans (EIDL) are available through the Small Business Administration (SBA), which while intended for agricultural businesses, may also apply to restaurants. To be eligible, businesses must have collateral if they borrow more than $25,000. The program allows a borrower to receive an advance of up to $10,000 and borrow as much as $2 million. The EDIL payback rate is 3.75% for up to 30 years.
- Shared Work Programs are an alternative to laying off workers during business downturns by allowing them to work a reduced work schedule and collect partial Unemployment Insurance benefits for up to 39 weeks, an increase from 26 weeks. This can help address the issue of restaurant employees not wanting to come back to work because they are making more on unemployment with the addition of $600 a week added from the federal government.
The Economic Feasibility of Opening at Less than 100% Capacity. Operating at less than 100% capacity might result in losing more money than just remaining closed. In particular, bars do not have the ability to social distance tables like restaurants and they depend on liquor sales at the bar rather than food sales. It falls to the individual owner to carefully consider whether opening under full capacity is worth the risk it may potentially create.
Customer Response and Labor Concerns. The looming concern is: Even if restaurants open-up, will customers feel safe to come back? Add this to financial concerns and an expected long-term drop in tourism and in-bound flights makes the future of the hospitality industry, especially restaurants, uncertain. There are also questions as to what degree the COVID-19 crisis will impact corporate spending on breakfasts, lunches, dinners, and events.
Due to the enhanced unemployment benefits (referenced above) some employees may make more money staying at home with the addition of $600 week from federal government. As a result, tipped employees may not want to come back at less than full capacity. This could pressure owners to offer higher wages to tipped employees.
Potential Solution: Owners will need to invest in a safe environment for their staff and customers. This includes supplying employees with hand sanitizers, masks and other Personal Protection Equipment (PPE). A supply of PPE can be made available to offer to customers as well. Other considerations to provide a safer work environment that owners are looking into include investing in frequent cleaning/sanitizing of restaurant furniture and equipment, POS systems, and any other open surfaces. It might also be prudent to make safety training for staff mandatory and initiate provisions for washing linen and uniforms. Other measures that can be implemented to help ease employee and customer concerns, include:
- Servers wear masks and gloves
- No physical contact between employees or customers
- Reservation-only dining
- Practice social distancing by:
- Eliminating waiting areas
- Increasing the distance between tables (change layout for smaller capacity)
- Printable or digital menus
- Discontinue buffet-style dining options
- Disposable utensils
- Introduction of more outdoor and curbside space
- Customer temperature checks at entrance if guidelines allow (At least until the crisis has passed)
Some, if not all, of these suggestions may very well become part of future legislation. Additionally, employers should implement a paid sick leave policy for staff who fall ill with COVID-19 and a family leave policy, should a dependent of the employee fall ill. However, if restaurants choose to proceed, it will be essential to communicate the efforts they have made to their employees and their customers. Doing so may expedite the reopening process and lead to a more successful recovery.
The pandemic has presented a unique moment in the history of restaurants where the opportunity to innovate and reinvent themselves is at hand … and necessary. Here are just a few options to consider:
Promote Order-Direct. With the expected rise in take-out and delivery, restaurants should encourage customers to bypass the customary mobile ordering apps, such as Seamless or Grubhub, and order direct from their websites, bypassing app fees. Successful implementation requires that the site has the proper ordering capabilities and is clean and simple to navigate.
Use More Economic Delivery Platforms. As restaurateurs make efforts to ensure a good customer website ordering experience, they can partner with a mobile food ordering platform that interfaces with restaurant websites, such as Olo and ChowNow. These platforms have proven to be much cheaper than the fees charged by apps and have proven to provide other benefits, including a positive customer experience.
Accent Family-sized Take-Outs/Couponing. Encourage and promote full course family meals for today’s stuck-at-home families. Incorporating and promoting programs like this using social media and other marketing efforts have already proven to be successful during quarantine. To enhance these programs, restaurants can also incentivize customers by offering discounts, coupons or specials.
Explore New Revenue Streams:
- Sell prepackaged items with the restaurant’s brand name – i.e., sauces, cakes, beverages.
- Set up a ghost kitchen facility for the preparation of delivery-only meals. It would have no dining area for walk-in customers.
- Introduce retail merchandise including mugs, tees and hoodies, souvenirs, and seasonal-themed items.
Negotiate Percentage Rent Rather Than Fixed Rent. While some landlords will be reluctant, it may be possible to leverage the popularity of a name or top branded restaurant to help in the negotiations.
Revisit Vendor Arrangements. Restaurants often have long-standing contracts with vendors. At a time when some vendors may be hungry for business, businesses may be in a strong position to renegotiate existing arrangements or try out new vendors who may be willing to offer better terms.
Streamline Operations. This can encompass the entire business, extending from rearranging the customer seating and the workspace in the kitchen to making food preparation more efficient and adopting an improved system to keep better track of inventory and reduce shortages.
Leverage the Latest Technologies. Technology has revolutionized many business sectors and restaurants are no exception. Digital inventory tracking enables employees to directly submit and view inventory counts for greater efficiency and accuracy. An automated purchasing system can link directly to a restaurant’s inventory system to help managers stay on top of stock and alert them to low product levels. Kiosks and tabletop tablets allow customers to browse the menu, create customized orders, and pay for their meal on their own. These are just a few examples of cost-saving technologies that can produce short and long-term benefits.
For more information on this or any other matter related to the COVID-19 pandemic, please contact your Berdon advisor and visit Berdon’s COVID-19 Information Center.
Berdon LLP New York Accountants