Don't Reopen Your Restaurant Until You Read This
The restaurant business has never been more challenging. For our F&W Pro Guide to Reopening Restaurants, we've been collecting wisdom and best practices from leaders in the hospitality industry to help you navigate this unprecedented time
It feels like a lifetime ago that restaurant lawyer Jasmine Moy and I sat down together—in person—for a conversation about what people need to know before they open a restaurant. Public life has changed in almost unfathomable ways since that podcast in May, 2019, with the spread of COVID-19 and the overdue national reckoning on police brutality and systemic racism that was sparked by the murder of George Floyd. Restaurants owners and their employees have weathered a catastrophic loss of income, convoluted governmental support systems, a broad spectrum of behavior from diners when it comes to wearing masks, ever-changing guidance from state and federal officials, increased hygiene protocols for the protection of both staff and customers, and a host of other complications.
As restaurants around the country began to reopen in fits and starts, I called on Moy once again to share insights from what her clients are facing, and where she sees opportunities for a better future.
Note: This conversation took place on June 19, 2020. It has been condensed and edited for clarity. Find Jasmine Moy at restaurantlawyer.nyc.
Rent makes the biggest dent
I have several dozen clients for whom I'm trying to renegotiate leases or alternative rent deals for the next 12 to 24 months. I was, at the beginning, very hopeful that we would all be able to work something reasonable, that landlords would want to keep a tenant inside the space. It has been an uphill battle for a good 80% of my clients. I have a few clients who are with very large institutional landlords who see the writing on the wall and are offering quite good deals on rent. These are major property developers with many billions of dollars worth of assets across the United States. Because they are so well-positioned, flush with cash or have so much sway with their banks, they are able to offer things like full rent abatements through the end of the year with severe rent discounts through 2021. That is wonderful.
But I have a lot of clients who have smaller landlords. If the landlord has a mortgage on their property or if the property is leveraged or there's debt on the property, they cannot agree to an alternative rent structure without the approval of their bank. So the bank is the one who has the authority, and sometimes it's not the landlord.
I don't want to give landlords too much credit, though, because I have several clients in small family-owned buildings, whose landlords do not have mortgages on the property. Everything they're making is pure profit beyond what they're spending on real estate taxes. The line that I'm hearing is, "You should have gotten all of this loan money so you should be paying the full rent with the loan."
Restaurants operate under slim margins and taking on a loan is hard for most of them in the first place. Most of them are using it to pay for a buildout. Taking on a loan to pay for past rent due during months in which you have no income is hard to justify. I've been telling people to put together a couple of pro formas, get their Excel spreadsheets out and map what the various revenue situations might look like when they're able to open. Let's presume they're only able to open at 50% capacity or even 25% capacity. Maybe you can get a couple of tables on the sidewalk. What does that look like? What do you think the business can afford? Putting that on paper and delivering that to the landlord as "This is the best that I can do. Here's me explaining why this is the best I can do," and trying to get a response.
I'm having clients put together extremely impassioned defenses for their proposals, and some landlords have basically laughed them off. These are the folks who have done the work, see what their business can and cannot afford to do. Their landlords are saying, "We're not going to get anywhere close to that." They are seriously thinking about closing down. I don't have a lot of people yet who have made the choice to close, but I have many, many folks who are running the numbers, realizing the numbers don't really make sense, and are quite close to the painful decision that reopening does not make sense to them.
Carry out, carry on
I certainly have a number of clients who are desperately trying to see if they can make a carry-out or catering model or a large format family meal to take home—frozen, bottled cocktails and things like that. They're trying to see what kind of revenues they can have and maximize that so that they can offer their landlord as much as possible. But there are some folks who had places that fundamentally do not adapt to takeout. Front of house service was a very important part of their concept and that's a really hard thing to translate to carry-out. They're looking at this and saying, "This is not what I set out to build. This is not the dream that I had."
I've got others who are saying, "I know I'm in a toe-to-toe battle with my landlord every single day. I'm going to open. I'm going to see what kind of money I can scrounge up. If in three months we can't come to an agreement, I'll close then. But why don't I try to open now and see what kind of scraps, what kind of crumbs I can collect right now?"
Some folks received loan money, and there were very specific ways that you are supposed to be spending that money. So they're all sitting down with their bookkeepers and accountants, trying to figure out if they can make it work, how much of the loan they can maybe keep and how much loan they can get forgiven.
It's a lot of dominoes falling. If they can get the loan to work in a certain way, maybe they can incentivize the landlord to make a deal with them because they're able to give the landlord a lump sum of money, and then they can reopen. It's hard because everything is so tightly connected that it's very hard to make one decision without at the very least an agreement with your landlord. Things are in a bit of a standstill while they try to figure out again how to use loan money, what kind of money they think they'll be able to earn.
Crunch the numbers
Folks in New York are trying to get outdoor dining dialed in. We don't know which streets are going to be open, which streets are going to be closed. Every little thing changes every day. I'm getting 40 email blasts every day from the Hospitality Alliance and Independent Restaurant Coalition, from city council members, from law firms. Hopefully over the next month or two enough pieces will fall into place where people will be able to decide one way or the other.
But you look at Portland, at somebody like Andy Ricker who had, what, seven restaurants or something, and is deciding to only open one of them. I found that shocking, but maybe I shouldn't have. I think that may be the canary in the coal mine here.
Very anecdotally, I've gotten a lot of cold call emails from people who have said, "I've only got one or two years left on my lease, I'm not going to reopen because I don't want to raise that money or borrow that money because I'm not going to have time to pay it back."
It's going to cost money to reopen. It costs money to install your plastic dividers. It costs money to order enough PPE, it costs money to order carry out containers, to reset your restaurant. It costs money to buy tables and chairs that you can put on the sidewalk. So even folks who might think that they can reopen maybe don't have access to the 30, 40, $50,000 that it might take for them to get ready to reopen, to restock the shelves. I think that the number of closures at the end of this will be quite large.
Pivot, stretch, spin
Diversifying revenue streams should have been a thing that people were thinking about because it just makes good business sense. But also if we're looking at what is happening in Asia or pandemics in a historical sense, we may have one or two more rounds of closures after this. If there is a way that you can find a way to keep your business sustainable by integrating things that are great for the community, your local farmers, local makers and artisans, that's amazing.
One of the most delightful changes, at least for me as a consumer, has been when local restaurants started putting produce boxes together. It was wonderful to be able to have a look at local produce from local farmers. It felt good supporting people in our neighborhood. We were only going to places that we could walk to within 20 minutes of our home. I hope that that sticks, being able to get these gorgeous radishes and greens, amazing butter and oils and whatnot.
All of that said, none of these things are inexpensive. I am exceptionally privileged to be able to spend the kind of money that you need to spend on these sorts of boxes to get the beautiful lettuce. It's not without cost. We need to learn to spend more on cocktails, on burgers, on whatever it is. If we're getting it from somewhere else, we need to learn to be paying more for it or the idea of larger format meals. We've had a couple of those delivered. Fany Gerson has been doing this for the last couple of months—pozoles and stewed meats with a whole pile of tortillas get dropped off at your door, and then you get these gorgeous tortillas, gorgeous soups, tortilla soups. It's been really delicious, but this only works if you could find a way to sell the things for prices that people will pay, and make sure that you're keeping costs low enough such that it makes business sense for you to be putting in the work to be creating it.
But I think it's hard for the folks who built their model in a certain way. You find a space and decide how much rent you can pay after you've already put a business model and concept together. You decide whether you're going to be sort of more casual or whether you're more fine dining. How many times are you going to turn those tables? Okay, about what price are you pricing your food at? Okay, so then we think the price per head, this is how many people we might serve per night. This is how much we think we're going to make. That means we can spend this amount of money on rent.
You base your rent upon what you think you're going to be making. For folks who are going to be at 50% capacity or 50% of revenues for the next year and a half, it makes the window rent untenable. I think if there's a silver lining here, it's that anybody who was thinking about opening a business can now retool their plan. They can add these other revenue streams or the diversification of income via various avenues.
If there's one thing we can all agree on, it's that Seamless and Grubhub are really predatory. Those 30% fees, 40% fees were disgusting and so counterproductive. So I think we're maybe a little more enlightened. There are other delivery options now. I think Tock charges like a half or a third of what Grubhub and Seamless were charging. Folks who are thinking about starting a business in the future can account for the fact that maybe their rent needs to be a lot lower than what people might have signed on for. They're taking into account these other revenues, doing things like being able to have access to a delivery provider that is not trying to bleed them dry.
I think the market rate on rents is going to drop, so somebody coming into the business after this will have different and better opportunities. It's just very difficult for the folks who have already locked themselves into things. I bow down to all of the people who've found ways to make this work in a way that makes sense. But it's a hustle. I even think that the clients I have who are trying to do this are probably still only breaking even. I don't know that they're making a ton of money selling boxes. They're getting by, but that's not enough.
The tipping point
Khushbu Shah's list of Best New Restaurants had food stalls on it. Realistically speaking, that is where a lot of folks get their start because the barrier to entry is much lower. Many food halls work on what we call a percentage rent, which is paying rent based upon how much you sell, which makes then the food hall and the vendor partners in a sense. Whereas in a traditional brick and mortar, your landlord doesn't care how well you do. All they care about is that they get this fixed rent number from you.
I don't think that in any world should we exclude these vendors who are making it work in these larger format settings. That said, they don't have a lot of that labor which is the more expensive part of operating a restaurant. Labor costs in restaurants are like 40% of your sales ideally. You can keep it at 40% or less. 35% would be great.
A lot of people have said this and I'm happy to add to the chorus: tipping is racist. There has been study after study showing that tipping is done sort of indiscriminately, it doesn't have a lot to do with the service that you received. It has to do with a lot of internal biases, and whether you think you have those or not, they exist. This exists. Making people's pay be determined upon the internal bias of your customer is not right. This is a good time to see whether you can survive on a model that pays everybody a fair wage to work it out, to see if this is a good chance to reset.
It would be more helpful if everybody was forced to do it. When Danny Meyer's Union Square Hospitality Group tried to move to a model that removed tipping because not everybody in the restaurant was on the same playing field, some people were mad about it. Now the prices have to be raised for a whole host of reasons. Maybe the rent is a larger portion of your sales like you meant it to be. You're doing different levels of service like carry out and larger format, or selling frozen dumplings or whatever it is that you're pivoting to.
It's a great time to see if we can make the model work again. People are going to have to pay more for this and they should have been paying more all along. Maybe this is a good thing, a good opportunity to reset. But it's hard to stand firm on some of these issues when they cost more, when your livelihood is at stake, if you've put some of your life savings into building a restaurant. It's not an easy thing to do, but I do think it's the right thing to do. If you can't make the model work, maybe that says something about your concept and your model not being the right one for this time. People are having to answer really tough questions.
I'm originally from a suburb of Chicago where most of the folks who were back at the house in all the restaurants I worked at were from Mexico. They had these tight knit communities where they were living with 10 people in an apartment. They couldn't open bank accounts because they didn't have social security numbers. They would have what they call a tanda, which was all of them voluntarily contributing funds to a pool. Each like a month a different person would receive those funds. So they basically had to create their own internal banking systems because they were under-banked, they were outside the system.
They would work a full shift at a restaurant and then they would work through the middle of the night, acting as couriers or delivering flowers and getting three hours of sleep, and then coming back to work at the restaurant. The fact that working full time at a restaurant still forces you to have to take these other jobs, essentially other full-time jobs at the same time—maybe it shouldn't be shocking, but in many ways it is. There's never been a better time to reset and re-envision what restaurants are.
In New York and in many other states, there's the whole tip credit—the idea that an employer can pay their staff $2 to $3 an hour, and tips are meant to make up the remainder of what the base minimum hourly wages for a worker. It is obscene.
So we need changes, but restaurateurs can't bear all of the responsibility. We certainly need change on a legislative level within the government. People are lobbying for this. We're trying hard and there is a lot of attention now on the restaurant industry, and the things that the restaurant industry needs to survive. I do think people are listening. I have hope that over the next couple of years, we will see the kind of shift that we need. There is a lot more attention now on the weaknesses that we have been overlooking.
If you're looking at restaurants whose customers are misbehaving, the restaurant is probably operating on thin margins to begin with. Who knows how many staff they have? But they certainly probably don't have enough money to hire a staff person to be a bouncer for the public. So where to make up the difference? Right now, the last thing you want to do is be calling the police. There's no trust right now, particularly in New York, of them being able to handle things in a responsible manner.
So how can a restaurateur get help with folks who are trying to keep the public in their lane? I was on a call with a state senator, and somebody said the Department of Health has staff, and all they do is go from restaurant to restaurant checking up people's kitchens. Is there a realm in which the DOH can have some staff going to particular open streets, and doing some policing or helping with some of the policing? What are our options? I do think it's going to take some creativity, but I think people in hospitality, people who open restaurants, people who are chefs are some of the most innovative, resilient people that I have ever known.
If there are people who can find a way to make this work and settle some of these outstanding points of friction, I have faith that it's the hospitality community.
3 things to take away
The wellbeing of their staff from both a mental health and safety perspective is going to be really difficult. But the most important part of this is that people will go out to eat again. But can we do it in a way that is healthy for the people who are coming in every day to serve you? That's certainly the most important.
Second is finding ways to really maximize your revenue streams, while finding ways to support your community at the same time. Whether that is helping artisans or local makers sell their wares, or giving your local farmer or food provider other ways that you can support them. I am trying to go out of my way to support minority-owned businesses. I'm paying a lot more attention to where I'm getting things from and how I'm getting things from. I think that for the folks who have extra income, who have the money to spend, they should be really, really thoughtful about where to spend that money. I'm hoping that partners, partnerships with bail bonds funds, partnerships with other nonprofits, become a mainstay. The restaurant industry doesn't survive without people of color, and making sure that connection and necessity are in mind every single day and with every single dollar that we spend, I think that that would be incredible.
Thirdly, talk to experts—even though we're also trying to figure it out. The laws are in place and there are certain regulations. I don't have all the answers because the law is vague and the language doesn't make sense. They're going to have to issue clarification. Even I have had moments of feeling true hopelessness. I'm trying to work my way through them. I'm just a sponge, trying to absorb much information from everywhere I can. Sometimes you feel completely confused, you feel overwhelmed, you're not sure what to make of some of this. Just know I'm a professional and I'm also feeling this way, so it's just not you. We are all doing our best.