It’s absolutely amazing how politicians and the media have the super majority of Americans totally convinced everything is going to be just fine after we get through this Covid-19 mess. Everything is not going to be just fine. Let’s look at the restaurant business as one tip of a multi-tipped iceberg that is very unstable.
There are about one million restaurants in the U.S. They were all ordered by government to close during the Covid-19 virus. A very large percentage will never open their doors again. Why? If you have a professional background in economics, inventory and supply chain management, and business operations, you already know where I’m going with this.
The profit margin for restaurants is one of the tightest of any industry. It’s an extremely competitive business, and the price elasticity of demand plays a bigger role in the limitations of menu pricing than in almost any other business. Restaurants have not been making so much money in the past that they have wheel barrels of cash on hand to ride out this crisis. They don’t have cash reserves to manage months of no income and fixed expenses they cannot afford to pay.
It’s a double edged sword. Restaurants have no income, but they typically have very expensive lease space in high traffic areas, and they have a long list of fixed and variable expenses so long as they exist as a legal entity. Shutting down for a period of months is the death knell for most of these restaurants. Even if they could re-open tomorrow, they won’t have all their regular customers back. They’ll have a trickle of people coming out to restaurants, and that won’t even cover their expenses.
To make matters worse, they are way behind on their leases and their lines of credit, and they won’t have the income to catch up on those debts. It could take one or two years to get back to the income level that would sustain a restaurant, especially with very small profit margins.
Add to this a dramatic change in consumer habits, forced upon Americans for months because of the virus hoax. Having to stay home and prepare their own meals has broken many from the habit of eating out. After changing a habit for at least 30 days, and in this case for many months, many people never go back to the old habit. They develop new habits, new patterns of behavior, and new long term preferences. This is another major reason the forecast for the restaurant business is so gloomy.
Now let’s talk about the supply chain. Imagine a very classy and expensive restaurant in a city like Las Vegas. The restaurant is known for it’s fresh seafood personally selected early each morning by one of the Chefs. (Picture Catherine Zeta-Jones in No Reservations at the fish market at the break of dawn.) Regular customers also boast of the amazing organic vegetables that are brought directly from three contracted local farmers each day. Then there are the deserts that are baked and prepared only hours or minutes before being eaten. Customers marvel that food could be so delectable.
In order to accomplish all that, a fine restaurant must have a supply chain that caters to their daily needs, not just for fish, vegetables, and deserts, but on all the supplies and staple products needed to prepare those amazing meals. The delicate supply chain of all the wholesalers who make that restaurant possible also have their suppliers and their own supply chains, as do those businesses. In other words, the supply chain from a restaurant goes back a long way across the country to many other businesses. And don’t forget, the transportation industry is part of that supply chain, as are fuel suppliers, mechanics, and so on.
The economic shut down across the U.S. has devastated this restaurant supply chain, and it won’t be easy to reset or restart this supply chain. Many businesses in the chain have gone out of business permanently. Many are limping and could not provide sufficient quantities of what their restaurant clients wanted, assuming restaurants opened for business.
Restaurants have their own in-house inventory nightmare. After months of being closed, their freezers have nothing left, and certainly fine restaurants wouldn’t attempt to use freezer burnt fish and beef and pork. Their shelves are nearly empty, and even their spices are no longer fresh. It will be nearly impossible for fine restaurants or any restaurant to just open their doors without a massive investment of money to replace their entire inventory of food and supplies.
To make matters worse, most restaurant owners don’t have the cash or the credit to do so. They are afraid to go to the mailbox, because they are getting eviction notices or threatening letters from landlords for months of over due rent. Their banks are running out of patience on their line of credit. Their own business and personal credits cards are maxed out.
Just to open their doors again, the average restaurant owner would have to come up with $500,000 to $1 million dollars of their own cash to stave off the creditors, replace enough of their inventory for their customers, and unlock the front doors, assuming the government even allows them to open their doors in their city. But restaurant owners are not stupid. They know their restaurant is not going to fill up with customers immediately.
Restauranteurs know that if everything goes well and America gets back on it’s feet, if Washington D.C. doesn’t implode because of the unbelievable political battles that threaten our nation’s survival, if we don’t have a massive economic crash, if there isn’t another round of Covid-19 shut downs, if there isn’t war in the middle east, if China doesn’t collapse and start an International domino effect, and if customers’ habits can be changed to bring them back to eating out publicly again, maybe they could survive. But what restauranteur would take that kind of huge risk for so little potential reward?
And that gets us to the last point. If the restaurant industry collapses permanently, how will that effect the rest of the economy. Since the restaurant business is just one of many industries on the ropes right now, there will be a disastrous chain reaction, and an economic depression worse than 1929 is not out of the question.
If you owned a restaurant in Las Vegas, and you had to think all of this through, would you invest every dollar you ever saved over a lifetime of hard work, risking it all with odds that probably are worse than betting against the house of a Vegas casino? Of course you wouldn’t. Now you see why I think the restaurant industry is in serious trouble, and this is why our nation is in trouble. Whatever you may think about Covid-19, whether you think it is real or a hoax, one thing we must agree on if you are a rational person who understand fundamental math, the economic consequences of the government shut down of American businesses has and will continue to be far more devastating than the virus itself by an order of magnitude.
Lastly, I’m not suggesting there will never be restaurants. Of course there will be. People must eat, and not everyone likes to cook at home all the time. Here’s the likely scenario. New younger restauranteurs will come along and take over the good restaurants, but they will only be able to do so without taking on the lease that is in default. They must start with a clean slate, no debt, and they will only be motivated to take the risk if they are able to buy the restaurant equipment at garage sale prices, 70% to 90% off replacement costs. Much of this will happen as restaurants file bankruptcy and the trustee liquidates all assets. Not a pretty picture, is it? The other challenge that new restaurateurs are going to have is trying to restart a fully functional supply chain for their specific type of restaurant. That will be a bit like a roller coaster that starts and slows down and starts and stops and starts slowly again.
Thank you to our politicians who devastated the restaurant industry.