From inflation and soaring rents to increased labor costs, most businesses were hit by at least one big challenge during 2023. Restaurants were hit by all of them.
“Someone made a good point: They said everybody's a good captain when the waters are smooth. But there’s turmoil, and then the economy goes bad, and you find out how well you're operating,” said Kennan Shah, co-owner of Arpeggio Grill, a Mediterranean restaurant in Austin, Texas.
After a year of that turmoil, Yahoo Finance reached out to several family-owned restaurants to find out how they overcame their biggest obstacles — and what lies ahead.
Inflation
Laurence Tucker, whose family owns Sun Rey Cafe, a restaurant in Chicago, said he had to raise prices four times in the last 18 months. Price increases for potatoes and eggs, among other ingredients, gave him no choice. “If you don’t jump and change that quick, there’s no way you can recoup … Then you're just giving away all of the ingredients,” he said.
The solution, said Greg Azzollini, co-owner of Paul and Jimmy’s, an Italian restaurant in New York City, is small price hikes. “I have some customers that come in three or four times a week. So if I increase the prices too much, I don't want to scare them away. So I just did it a little,” he said.
Some restaurants have managed to deal with inflation by keeping control of costs. For instance, David Bergeron, the founder of The Creole Creamery, an ice cream shop in New Orleans, explained that he makes all his ingredients in-house and has “complete control” over his supply chain.
He added, “Because everybody's prices are going up, costs are going through the roof, and if you can just stay below where everybody else is, you have a competitive advantage.”
Remote work woes
Thanks, COVID.
Azzollini of Paul and Jimmy's said his Manhattan restaurant frequently served groups of up to 10 people. Now? Remote work has reduced his lunch business by around 50%.
“Most of the restaurants in the area aren’t even open for lunch because it doesn't doesn't make sense. But you know, if people do come into the office, it's two or three days a week,” said Azzollini. “It's not five days a week. And yeah, maybe they're just not doing the group lunches anymore, but we really don't get ... the larger groups that we did.”
Pre-remote work, Anis Habib, the owner of Casablanca Moroccan Kitchens in Los Angeles, had parties of 25 to 30 people who would come to eat. “They’re not having lunch. They’re not going out. They're more comfortable at home. So forget the restaurants because they're going to cook at home more,” he said.
Food delivery challenges
Some restaurants have cleaned up by using food delivery, a trend that started during the COVID years. Others? Not so much. Arpeggio Grill co-owner Shah said that third-party delivery apps like Uber Eats (UBER) take up to 30% of take-out sales. Consequently, even as clientele has increased post-pandemic, his restaurant has struggled to make the same profit.
“Half of our business was like Uber Eats and DoorDash and all those, so that one was very helpful," he explained. "But ... lately, they have really increased the fees and their percentage. So that one has been a bit of a challenge.”
To recoup costs, Shah said that the restaurant has upgraded its POS system (software to manage purchases). Now, customers can order through the restaurant website before the order is sent out to a driver through a third-party app like DoorDash (DASH). Subsequently, the app collects the delivery fee, but the restaurant gets all of the proceeds.
Labor costs
Sun Rey's Tucker said he’d like to hire more employees, but wages are now too high, and business is too slow.
“In Chicago, with it being seasonal, the first 100 days after Christmas are usually very tough for restaurants because a lot of the consumers have spent their money for holidays, parties, drinking, and gifts,” he said. “So I already know that I've got to go in there with a lean payroll. And I've got to really watch my numbers. ... I mean, there's no way around that.”
Shah also said that labor costs have gotten significantly steeper. His solutions: being flexible with schedules, avoiding micromanagement, and even cooking for them on occasion.
“So we try to compensate them not just only financially but with freedom, with all their perks of being here,” he said. “Sometimes I feel like I work for them. But we make it like a family environment. So it justifies getting paid less than the market [rate] or at market.”
High rent
Gregorio Rosas co-owns and runs Ludi’s Restaurant in Seattle, but his business’s future was once uncertain. His restaurant, a well-recognized Seattle institution, had closed down in 2019, and he had taken a four-year break from the industry.
Initially, when his daughter floated the possibility of reopening the space, Rosas said it was out of the question, not because reopening the restaurant didn’t appeal to him but because of Seattle’s astronomical rents.
“We have business, but I don't have enough business to give all the business away for the rent and building owners,” said Rosas.
But with the help of a nonprofit that saw Ludi’s as an important business, Rosas was able to secure an affordable location. The restaurant reopened in June of last year.
“We get a lot of support from the public and new customers who really love your business and love this restaurant,” he said. “Lots of positive comments, so it makes my day good — and what makes it good, of course, is like, I know I can pay the rent.”
Looking ahead
Overall, the restaurateurs were optimistic about 2024. Bergeron, in particular, expressed confidence in the strength of his business and of the resilient demand for ice cream.
“I'm not selling a durable good. I'm not selling something that people really view as a luxury. So we're not going to have the sensitivity to individual families’ cash flow.”
Still, the owners haven’t lost sight of the challenges facing their business. In addition to hoping that Americans will come back to work, the restaurateurs hoped interest rates would come down. Casablanca's Habib, in particular, said he thought the future would be bright, provided a decrease in prices.
“The government should do a better job,” he said. If interest rates and inflation are lower, “people [will] feel that they can buy again. It doesn't take much to make the public at ease, and that's what it takes. And I think we're going to reach that goal this year … It's going be a beautiful year, a very productive year for everybody.”
Dylan Croll is a Yahoo Finance reporter.
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