I'm a San Francisco restaurant owner who will probably return my government relief loan. Here's why — and what really needs to happen to save our industry.
- David Nayfeld is the co-owner and executive chef of San Francisco
restaurantsChe Fico and Che Fico Alimentari, which he was forced to close in March due to the spread of COVID-19.
- Nayfeld says that government relief loans won't help dying restaurants survive long-term and that he'll probably end up returning his.
- Among his proposed solutions for how to help the industry: Landlords should offer a lower base rent to restaurants, cities should lower property taxes for landlords who keep their buildings full, and restaurant owners should be allowed to pay a lower minimum wage to tipped staff.
- Nayfeld also says that, realistically, food prices will need to be higher.
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My partner and I closed our two San Francisco restaurants, Che Fico and Che Fico Alimentari, on March 15, without knowing when or how we would reopen.
Nearly two months later, I now have a sense of when our restaurants will reopen — but no idea how.
Since our opening back in 2018, we've been considered one of the hottest new restaurants in the country. Reservations were impossible to get. Although we would set aside half of our tables for walk-in business, we often ran a three-hour waitlist. After two years of being jam-packed every night, our accounting firm told us that we are in the top percentile of profitability.
What's sad is that this translated to our earning a pittance — single-digit profit margins.
Pre-coronavirus, we were doing incredible business but barely making ends meet. Post-coronavirus, we must consider how to open our doors again alongside lengthy restrictions that will hamper our ability to generate revenue. It's a scary prospect.
The US restaurant industry has been on life support for the last 10 years.
If it wasn't a global pandemic, it would have been something else spelling our demise. And unfortunately, the $2 trillion CARES Act (
What we need is more time.
The eight-week timeline prescribed by the Small Business Association (SBA) for businesses to spend on labor is disjointed with the reality of what most cities are expecting. As re-openings occur — depending on local governments weighing risk, density, and healthcare — there is little to no guidance on what the new guidelines will be.
For my partner and I, we would need to accrue 1,200 hours a week of labor for the loan to be forgiven. This is incongruent with local shelter-in-place regulations, which mandate that essential businesses must provide six feet of distance between each employee's work area. With that distance we would barely fit 15% of our staff. Che Fico will more than likely return our loan because we won't be able to fully staff up in the time allotted.
The current CARES Act sets us up to fail, and I don't see anyone in our government who understands what we need.
When people ask me when I began to get nervous about the outcomes of the countrywide coronavirus closures, I almost want to laugh. "I've been nervous since before we opened our restaurant. I'm always nervous."
It costs between $1.5 to $2M dollars to build and open a restaurant in San Francisco. If we're earning an 8% margin (after expenses), it comes out to about $320K a year in profits. However, most successful restaurants operate on an average of 2 to 6% margin. I know chefs that somehow manage at zero percent.
According to the National Restaurant Association, our industry has lost more than 8 million restaurant employees (from layoffs or furlough), and it will have lost $80 billion in sales by the end of April. Roughly 50% of operators anticipate more layoffs this month. The CARES Act will help many employees who are in desperate need of assistance, but it won't help those that are undocumented who pay taxes on their checks into fake social security numbers. Business operators won't see much relief in the form of no-strings-attached cash.
Despite its flaws, the SBA was crushed with demand. The website crashed, calls couldn't go through, and possibly the worst offense was that large chains like Ruth's Chris, Potbelly Sandwich Shop, and Shake Shack all received big chunks of our small business funds. But not everyone is like Danny Meyer, who gave back Shake Shack's $10 million dollar loan.
While this wildly broken system is sorted out, businesses have and will continue to disappear, never to be heard from again.
The cost of doing business in America is too high, and there isn't enough money going to the bottom line. Now's the time to look collectively at the industry — from fast food to fine dining — and make major changes so that our country can enjoy our dining rooms and drive-thrus for years to come.
Let's start with rent.
The golden rule in the restaurant business is to keep occupancy costs under 6% of total revenue. In San Francisco, the average lease offered to first time operators is a 10-year lease with a 5-year option at market value. This means that after 10 years the landlord can raise my rent to "fair market value." In SF, where nothing is fair market value, commercial rents have gone up roughly 120% since 2010. If my rent doubles at the end of my 10-year lease, my 8% margin (I should be so lucky) just went to 2% overnight.
Landlords need to have skin in the game. If we're running a tight ship with good numbers in other areas of the P&L, landlords should renegotiate in good faith. Explain that keeping occupancy costs at 5% or lower will benefit us both, and add longevity to the relationship. Demand pre-negotiated escalations. Include a lease assignment clause that allows you to sign your lease over to someone else if your business fails or you need to move. Offer up a lower base rent that includes a predetermined percentage of gross sales at an agreed-upon trigger. This means they prosper with you, not in spite of you. We're partners now with our landlord, and he's happy to help us get through this time because our goals are aligned. To further entice property owners, cities should offer lowered property taxes based on signed contracts. No one benefits from vacant storefronts.
This brings me to wages.
In the past 10 years, I've seen minimum wage go from $11.54 to $15.59. One problem is that not every state (including California) allows businesses to factor in a "tip credit," which allows businesses to pay a lower minimum wage to tipped employees. While controversial, most tipped employees at moderately-priced restaurants and bars make well over minimum wage, yet we must continue to pay them more.
In California, it's nearly impossible to pay everyone a fair wage. When a server makes nearly $400 a night (as they do in my restaurant), I should be able to pay them $5 an hour. This would allow me to pay my cooks $25 an hour, and my dishwashers $22. At wages like these, more staff could afford to live near their place of work and spend more money in the local economy.
For states that do offer tip credits, but the restaurants still struggle, let's bring back the concept of the apprenticeship. When I was a cook you had to learn to be a butcher and a sauce maker before you could dream of becoming a sous chef or landing a management position.
We need legal apprenticeship programs that allow people to learn for less money. To cover their education, let's offer government subsidies to pay a portion of their salary. This will give skills and upward mobility to people rather than career stagnation. Business owners could instead teach and mentor unencumbered by the burden of costs.
Finally, let's not put limits on how many people can be on salary. If every employee could receive a minimum salary, they would have a higher likelihood of earning a livable wage with one job, and the operator would save money on overtime and other fees, which don't always go to the employee.
This next one is going to be a bitter pill: Food prices need to be higher.
The public needs to know that a burger, fries, drink, labor, packaging, and occupancy should never cost $5.99. We need to demand that the price of food be higher, which in turn will lead to better wages. Until the day that robots are whipping up dinner, labor and food costs will be universally linked. The solutions here are uncomfortable. How do we convince people, especially those that are being underpaid, to pay more for food? How do we convince the largest companies to charge more and pay more?
One idea: Let's tax businesses that have a significant amount of their workforce on welfare programs. Let's get ahead of automation, which is happening already (have you seen the robot dishwasher?), and put a tax on any job taken by a machine. These taxes can go directly to a Universal Basic Income or some form of welfare. For businesses that are already doing it right, let's give them a tax break.
Finally, let's reward those who are leading the way.
Let's give grants to local farms that support biodiversity, which betters the environment; trade schools that improve our workforce; companies that would be inclined to grow and will hire more staff. And most importantly, we need a true and honest path to citizenship for the people that are the backbone of our food and beverage industry. They pay taxes, they work hard, they do jobs that most Americans won't.
Without real systematic changes, our favorite restaurants will not be resuscitated.
The restaurant industry's survival is good for everyone: Our survival and success impacts tens of millions of jobs in parallel industries, and to get there we need comprehensive, bipartisan solutions that completely shift the paradigm.
As we navigate this "new normal," my partner and I stand committed to making things work for our team, and our families. This could mean higher pricing, additional fees to generate cash flow and make up for past losses, and switching compensation away from tipping and towards a more inclusive model. After two months of being apart, we hope that if we make these changes our customers will understand and support us. Maybe there's a silver lining here for chefs like me. I sure hope so.
David Nayfeld is a Bay Area-native who boasts a venerable restaurant pedigree, having gained culinary experience working alongside some of the most esteemed names in the industry. He is the co-owner and executive chef of Che Fico and Che Fico Alimentari in San Francisco's Nopa neighborhood.Read the original article on Business Insider
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