No Reservations: Restaurants wait out level 4

by Dave Nemeth. One of the hardest hit industries as a result of COVID-19 is the restaurant trade and, sadly, many will not be able to reopen. Like the event, conference and exhibition (MICE) industry, it seems as if it will be a long time before groups larger than 50 people are allowed to be together in a confined area again. It is estimated that one in five restaurants in the United States could permanently close due to the pandemic.

The announcement of level 4 in South Africa meant that food outlets were allowed to reopen their operations to sell take-away food for delivery only. As much as this seemed to offer some relief for the restaurant trade, the reality is that, looking at this from a business point of view, it is a completely unrealistic business model, and this is why.

Rental pressure

Landlords have shown little compassion towards their restaurant tenants, especially if they are independently owned. They have stated that, if any trade occurs on the premises, full rent will be charged. This seems like an exceptionally short-sighted approach to this dire situation. It is not only the independently owned restaurants that have decided to remain closed, but also some of the country’s largest groups such as the Spur Group, Nando’s and Ocean Basket. Another big problem lies in the fact that restaurants rely heavily on alcohol sales as the profit margins are far greater than those on food. Even if the ban on booze were to be lifted, it is still illegal to include it into the deliveries.

Sadly, there is only so much innovation that restauranteurs in this predicament can come up with. Some restaurants overseas, and one or two locally, have been selling meals whereby the raw ingredients are accompanied by menus so that people in lockdown can prepare and cook themselves. Whilst this looks like a great opportunity, there is very little profit margin in it, considering the cost of packaging that has to be factored in. Some larger operations abroad have turned their parking lots into a combination of drive-thrus and roadhouses. Although this is a great initiative, it is not a viable option for most restaurants in this country which are either situated in large malls or smaller strip malls.

Most of the restauranteurs to whom I have spoken too, are deeply concerned about their staff, with some resorting to crowd funding platforms. Others are trying different options, like Gerald Elliott, the co-owner and founder of Ba Pita, who is preparing pitas, tzatziki, raw koftas, etc, in his home kitchen for delivery, with all the profits going to his and business partner, Toerie van der Merwe’s staff.

Financial risk

Tony Rose, a restaurant entrepreneur with 30 years’ experience in the industry, and the franchisor of La Rosa Mexican Grille and Tequileria restaurants, as well as Tony’s Spaghetti Grill, trading for 19 years, said it was financially risky to open.

“It’s financially less risky to remain closed during this period and to unfortunately, not have to entertain salaries and full rentals; whilst trading at what we expect to be less than 10% of our usual trading pattern. During the two week period building up to the lockdown, when we were restricted in seating numbers and not being able to sell alcohol after 6pm, our turnover dropped 70% across all stores. We ran up huge losses in March – over R500k between three of the stores alone – which hurt us badly.

“Landlords would first need to agree on a turnover clause of around 6%-8%, as per the Spur Group and Ocean Basket Group proposals to landlords. This would need to be in place going forward for at least the remainder of this year. Most landlords are understandably not liking this idea, but we would consider using the Force Majeure legal stance and stay closed until lockdown level 1 if no agreement is reached.”

The current level 4 curfew has an impact too on trading conditions, as Rose explains: “Limited and selected staff would be required to return to work, based on the menu offering for the take-away, and these salaries would need to be discussed, and lowered if necessary. This might upset the rest of our staff. We also then run the risk of possible infected staff arriving at work. This would need to be strictly monitored. If word got out that someone in our store was infected, it would destroy our business for many months thereafter.

“Take-away peak trading periods are between 12pm and 2pm; and 5pm and 7.30pm. With curfew being 8pm, we would need to cease trading at 6.30pm to clean the store hygienically, and allow staff to go home so they can make the 8pm curfew.”

Take-away

Most importantly, Rose said, was that third party delivery companies charge “exorbitant fees” – between 18%-25% of the bill, depending on the store, or franchise. “Restaurants are then going to have to load their menu pricing to try to accommodate these charges. We only work on small margins, profit of between 0-15% depending on how lucky/good/busy the restaurant is. We basically make no profit off those orders when using these delivery companies; and we see it as more of a goodwill marketing exercise than anything else. It really doesn’t pay us to do take-away, especially off such a low base, and the risk of the food being spoilt by the 3rd party is always imminent.”

Rose said he was watching from the sidelines to see how busy other stores were over the next month and would make a judgment call based on the level of trade they experienced over this period.

With little relief in sight, the question is, how will this industry ever recover and what does the future of restaurants look like? And even when they can reopen fully, how will consumers feel about crowded spaces and being in close proximity to other customers?

Retailing Africa retail analyst and columnist, Dave Nemeth is a trend forecaster and business consultant at Trend Forward, and a design thinker, innovator, business re-designer, trend analyst, keynote speaker and writer.

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