Independent restaurants are facing significant financial challenges, caught in a squeeze between rising payroll costs and diners’ reluctance to pay higher prices. This dilemma has been exacerbated by increases in the minimum wage across 22 states in January, adding to the strain on restaurant owners.
At Chef Zorba’s Restaurant in Denver, owner Karen LuKanic has been forced to make adjustments to cope with these financial pressures. Changes include substituting cheaper ingredients and adjusting menu prices. Despite these efforts, maintaining profitability remains elusive. With Denver’s minimum wage reaching $18.29 an hour and additional employee benefit requirements imposed by Colorado, nearly half of the restaurant’s sales are now allocated to payroll and related costs.
For Chef Zorba’s, a bacon cheeseburger now priced at $15.75, up $5 from 2018, is still not sufficient for profitability. LuKanic expressed that without the security of her Small Business Administration loan, guaranteed by her home, she would consider closing the restaurant. This situation reflects the broader challenges faced by independent restaurants across the country, struggling to navigate a landscape of rising costs and evolving consumer preferences.
The aftermath of the Covid-19 pandemic has reshaped the economic landscape for American restaurants, presenting unprecedented challenges. Despite navigating through lockdowns and supply chain disruptions, restaurant operators now face a new set of hurdles. While food costs and supply chain shortages have stabilized, menu prices have surged, with January data from the Labor Department indicating a 30% increase in prices for food consumed away from home compared to 2019.
Although the surge in food costs has subsided, payroll expenses continue to rise, posing a significant challenge for restaurant owners. According to a survey by Vistage Worldwide, a majority of small-business owners cited escalating labor costs as their primary source of inflation.
Compounding these challenges are shifting consumer habits in the post-pandemic era. Restaurants like Johnny Roger’s BBQ & Burgers in Concord, N.C., face fluctuating dinner traffic, leading to the dilemma of paying idle employees during slow periods. Owner and chef Barrett Dabbs highlights the importance of maintaining customer-facing roles despite cost-saving measures, emphasizing the critical role of these positions in ensuring a positive dining experience.
The dynamics of Johnny Roger’s BBQ & Burgers reflect the shifting landscape of the restaurant industry, where takeout orders have surged to represent a significant portion of dinner business, rising from 20% to 80% since the pandemic. However, the convenience of takeout comes with added costs, with owner Barrett Dabbs estimating an extra $1 per customer due to packaging expenses. To mitigate these costs, Dabbs has implemented price increases and adopted a more streamlined approach, offering utensils and condiments only upon request.
Despite these adjustments, Dabbs is cautious about further price hikes, recognizing the sensitivity of customers to increasing costs. Maintaining affordability is key to retaining foot traffic, with Dabbs aiming to strike a balance between covering expenses and keeping prices competitive. Offering daily lunch specials at a discounted rate serves as a strategic move to attract customers, even if it means operating at a loss in the short term.
While the restaurant industry as a whole is experiencing robust growth, driven in part by takeaway-oriented chains like McDonald’s and Chipotle, full-service dining establishments face ongoing challenges. Labor Department data indicates that fast-food restaurants have fully restored their pre-pandemic workforce, while sit-down restaurants lag behind. Additionally, the surge in wages for restaurant and bar workers since 2021, following years of modest increases, presents a significant hurdle for independent restaurants, especially those that prioritize scratch-made food.
Evan Kelamis, owner of Savoy in Tulsa, has experienced a significant increase in labor costs, despite the city’s minimum wage remaining at $7.25 per hour. This surge, exceeding 16% in 2023 alone, reflects the intense competition for workers, driven in part by opportunities in the gig economy offered by companies like Amazon, Uber, and Instacart. To attract and retain talent, Kelamis anticipates further price increases this year, necessitated by the handmade nature of many of Savoy’s menu items, such as shareable half-pound cinnamon rolls. Traditional pricing methods, where food costs make up around 28% of the customer’s bill, are no longer sustainable, prompting Kelamis to explore alternative pricing strategies.
Meanwhile, at Johnny Roger’s BBQ & Burgers, owner Barrett Dabbs is meticulously scrutinizing every expense to offset rising costs. He made cost-saving adjustments like removing the restaurant’s television to eliminate a monthly cable bill and sourcing cheaper dishwashing chemicals. Dabbs also optimized inventory management by storing excess supplies in his garage until transitioning to a more cost-effective storage solution. Additionally, he leveraged co-marketing events and provided complimentary meals to reduce the expense of the storage space. Despite these efforts, Dabbs highlights the thin profit margins in the restaurant industry, where even small savings can have a significant impact on the bottom line.
Barrett Dabbs, with prior experience as a food and beverage director for local businesses, has implemented various cost-saving measures at Johnny Roger’s BBQ & Burgers. To counter the soaring prices of precut chicken tenders, he now purchases jumbo tenders and splits them in-house. Additionally, he switched to a more affordable brand of ketchup packets and introduced a food truck last year to boost sales without significantly increasing overhead costs. Despite being known for its signature barbecue rub and homemade sauces, the restaurant had to adapt its dessert offerings during the pandemic, replacing labor-intensive soft-serve ice cream with items like banana pudding and chocolate mud pie pudding that can be prepared in bulk. Dabbs also removed homemade onion rings from the menu to streamline kitchen operations and reduce staffing needs.
Labor costs at Johnny Roger’s have surged by approximately 25% since 2019, according to Dabbs, yet many employees still struggle financially. Alex Wagner, the restaurant’s operations manager, has seen his hourly wage increase from $9.25 to $17.35 over six years. However, he contends that expenses have outpaced wage growth, making it challenging to save money. Despite his higher salary, Wagner continues to live paycheck to paycheck and faces obstacles in achieving financial goals such as purchasing a car and improving his credit score. Dabbs has supported Wagner by cosigning the lease for his family’s home, highlighting the financial strain experienced by restaurant workers despite their roles and responsibilities.
Restaurants, as a percentage of sales, allocate more resources to labor compared to other retail sectors, making the increase in wages particularly burdensome on profits. Analysis by the National Restaurant Association reveals that it takes 12 employees to generate every $1 million in restaurant sales, whereas grocery, general merchandise, and clothing stores require only about three employees per $1 million in sales. Independent restaurants face additional challenges in managing costs, as they lack the bargaining power and scale advantages enjoyed by chain restaurants. Labor costs have been rising more rapidly and persistently at independent establishments, especially full-service restaurants, according to data from Gusto, a small-business payroll and benefits provider.
Ed Doherty, a franchisee for Applebee’s and Panera Bread, highlights the advantage of chain restaurants in negotiating prices and managing costs compared to independent establishments. He notes that independent restaurants face greater difficulty in achieving healthy profit margins due to their limited bargaining power and higher administrative expenses. Data from food-industry market-research firm Datassential shows that thousands more independent restaurants closed than opened last year through November, indicating the significant challenges faced by this segment of the industry.
Karen LuKanic, owner of Chef Zorba’s Restaurant in Denver, illustrates the struggles independent restaurants encounter amid rising costs and competitive pressures. Since acquiring the restaurant in 2018, LuKanic has faced numerous challenges, including escalating real estate taxes, energy costs, and incidents of theft. Additionally, compliance with minimum-wage increases and employee benefit requirements has added to her financial burden. Despite raising menu prices by 8% since 2019, LuKanic worries about the impact on customer loyalty and the restaurant’s viability. Personal sacrifices, such as leveraging her house as collateral for financing and forgoing retirement savings, underscore the precarious financial situation faced by many independent restaurant owners.