In January 2009, just three days after his inauguration, an arrogant President Obama, a “community organizer” and one-term senator from Illinois, proclaimed to then Republican Whip Eric Cantor that “elections have consequences, and at the end of the day, I won.” Unfortunately, he was absolutely right and the consequences of Obama’s election, having already crushed the coal industry, are about to bring the restaurant industry crashing down as well.
To be fair, Obama hasn’t crushed the restaurant industry single-handedly. While Obamacare went a long way toward destroying the industry, it’s demise would not have been certain without a little help from leftist state legislators that have passed a slew of egregious minimum wage hikes in recent years (not that Obama didn’t try and fail twice to accomplish the same thing at the federal level). Add to that a multi-year run of near 0% interest rates that have driven commercial real estate soaring and a dash of “hope” from culinary grads looking to become America’s next famous celebrity chef and it’s easy to see that you’ve had a recipe for disaster simmering on low heat for years.
And while he avoided the political attributions we note above, a recent Thrillist article by Keven Alexander highlights the demise of one independently owned restaurant in San Francisco, AQ, that will be shutting down later this month for all the same reasons.
When it comes to minimum wage, Alexander highlights that just a $1 per hour minimum wage increase can reduce an independent restaurant’s already thin profit margins by $20,000, or 10%. So we imagine the $5 minimum wage hike that California just passed is probably slightly less than optimal for companies like AQ in San Francisco.
I should say before I go any further that all of the restaurant owners and chefs I’ve talked to are compassionate humans who support better coverage and livable wages, and seem on the whole progressive by nature, but restaurant margins are already slim as hell. There are no political agendas here — they’re just genuinely worried about how to afford to pay extra without radically changing the way they do business.
Let’s start with the minimum wage. According to the Bureau of Labor Statistics, of the 2.6 million people earning around the minimum wage in 2015, the highest percentage came from service jobs in the food industry. Though the Obama administration’s attempt to increase the federal minimum wage above $7.25 failed, 21 states and 22 cities have raised the minimum wage starting this year, including Washington, DC ($12.50 an hour), Massachusetts ($11), New York ($9.70), and Arkansas ($8.50).
Considering that hour-wage workers are usually the lowest earners and the increase is essential to ensure they earn an actual living, this is the least controversial of the newer expenses and something almost everyone in the industry supports, in theory, but it doesn’t change the fact that it’s an additional cost that must be factored in. If you have 10 hourly employees working eight-hour shifts, five days a week and you raise the wages a dollar an hour, that comes out to a nearly $20K increase on the year. In AQ’s best year — a phenomenal year by restaurant standards — that would have been nearly 10% of profits.
And while California is certainly the poster child for misinformed liberal policies, as the Wall Street Journal recently pointed out, they’re hardly alone in their implementation of a massive minimum wage hike in 2017.
Meanwhile, when it comes to Obamacare, Alexander notes that AQ was hit with an incremental $72,000 of annual expenses in 2015 that didn’t exist in 2012, which eroded another ~30% of the company’s peak net income.
Then there’s health care. For the better part of its history, the restaurant business was a health care-free zone, which is ironic, given this Bureau of Labor Statistics’ description of the back-of-house work environment: “Kitchens are usually crowded and filled with potential dangers.” With the introduction of Obamacare, most restaurant workers finally got the coverage they’ve needed for years through the employer mandate, but critics often talk about the strain it puts on small-business owners due to a puzzling and controversial element that defines “full time” as 30 hours per week, and not the 40-hour workweek used almost everywhere else (the Save American Workers Act proposes to move this back to 40 hours).
Though this mainly affects bigger restaurants with staffs of 50 or more full-time workers, independent sit-down restaurants still need to provide suitable coverage (meaning it has to be affordable, less than 9.5% of the employee’s income) or face fees of $2K per employee. Consider AQ. Semmelhack told me that in 2012 they paid $14,400 for health care costs. In 2015, they paid $86,400. That’s an increase of $72K MORE per year than 2012, or 29% of their best year’s profit.
Then there are those pesky rental rates which have been driven ever higher by nearly a decade of 0% interest rates that have resulted in artificially high demand for “yieldy” commercial real estate.
In the restaurant world, rent always sucks. Unless you manage to play it perfectly, as a restaurant owner you’re either moving into a sketchy or “emerging” neighborhood where the rent is cheap but few want to go there, or you’re overpaying for an established ‘hood and need to be a runaway success from day one. And even if you do manage to make it in the former type of neighborhood, your success often ends up pricing you out of the ‘hood you helped revitalize.
In Miami, Michelle Bernstein’s Cena by Michy helped rebirth the MiMo historic district but was forced to close this year, after the landlord attempted to triple the rent. And even Danny Meyer had to close and move Union Square Cafe in New York, which, since 1985, had served as one of America’s culinary landmarks, when he couldn’t rationalize paying the huge rent hike the landlord proposed.
For all the reasons above, Alexander notes that “AQ will serve its last meal sometime in January, 2017″…an inconvenient fact that we’re sure the liberal politicians in Sacramento will promptly ignore.
And while the publicly-traded restaurant companies have potentially started to take note of some of the risks above…
…the broader markets, which are also exposed to the same risks albeit to varying degrees, couldn’t seem to care less.
Source: zero hedge