Notwithstanding the latest habitual lies by the Superspreader-in-Chief at his contagion campaign events, Covid-19 is endemic--not going anywhere anytime soon. In the real world, cases and hospitalizations are setting new highs in dozens of states. One in four cases in Wisconsin tested positive recently. Emergency rooms in some states are turning away patients while Trump denies reality like a crazy person. There's not going to be a vaccine before November 3rd or, unfortunately, for some time after. The collateral damage to millions of businesses and to our Main Street (as opposed to Wall Street) economy is mounting in many different sectors.
In the midst of this maelstrom, no American business is more challenging or needs to be more entrepreneurial and resilient to survive than running a restaurant. Few industries have been hit harder. A big part of the current difficulties is obviously the pandemic, but there are also fundamental, structural issues with the business model. Opening a restaurant entails huge upfront investment and then the painful wait to see when and whether a sufficient number of initial customers will appear and later return. Today, the angst is even more complicated because there are serious concerns about attracting any customers.
Much like Covid-19 itself, one of the biggest concerns has to do with lingering behavioral changes in the way Americans will be dining out in the future. For many of us, the idea of a gracious meal is a fading memory, and it may never return. Sadly, today and for quite a while, it's going to be all about eating quickly and getting out in one piece. Two-martini lunches were already on their way to oblivion, but these days, given the budget-busting Covid-19 constraints on size, separation, capacity, and operating hours, even the restaurants themselves are posting signs about how long customers can occupy their booths and tables. It's the worst possible reminder and message. And hardly a way to encourage liquid lunches or multi-drink dinners. As any good operator will tell you, liquor sales are the mother's milk of the trade and represent almost the entire profit margin in most places.
As the weather worsens and the misery mounts, the prospects for the white tablecloth restaurant industry in general (QSR chains being takeout focused) continue to dampen. These businesses operate perpetually at the very edge of profitability and with little in the way of reserves, credit capacity, or rainy-day savings. Restaurants are basically perpetual startups -- at risk each and every week. They're at the mercy of various product availabilities, vendor shortcomings, labor issues, health inspectors, weather, and, of course, viruses. They may have regular customers, but they rarely if ever have regular, recurring, demonstrable revenue. Every day is a new day, and the main goal is to get through it without any major catastrophes.
The various PPP plans and programs have failed to acknowledge that, across the broad spectrum of the economy, the narrower the margins in a given vertical, the greater the need for assistance. As we now all know, the continuing pandemic wasn't just a couple of rainy days run together or even a few weeks; it is a full-blown shitstorm that has yet to end except in the fantasy land of Trumpville. It's entirely likely that, once the dust finally settles and the air finally clears in major cities, we will have lost 30 to 40 percent of our favorite restaurants along with the millions of jobs those businesses used to represent. And many of the survivors will just be limping along.
While many restaurants have shuttered already, the worst is likely yet to come, for a variety of reasons. Most obvious is that it's no fun to sit outside in freezing cold weather in a tent, especially when accompanied by the stench of space heaters. If the particles don't get ya, the propane probably will.
Next up is the major shift to working from home (WFH) rather than in the central and downtown business districts, which means fewer and fewer customers, less catering, infrequent gatherings and events today, and a ton fewer tourists in major cities.
Add in tens of millions of unemployed and underemployed workers who won't be lunching or entertaining one another anytime soon. Then there are the millions of others with far less job and financial security than they enjoyed less than a year ago who won't be spending like sailors anymore. And finally, thousands of college students who are staying home here and abroad who won't be supporting town-and-gown communities. They'll be sorely missed. Not exactly the last supper, but pretty grim.
I asked a Chicago-based real estate expert to offer me any light whatsoever at the end of this tunnel. He suggested that landlords sitting with empty restaurants might partner directly with chefs to reopen these spaces. It makes a ton of sense in that it eliminates the huge upfront construction costs of a kitchen (probably $1 million in upscale joints); there's the prospect of long-term rent relief in exchange for some profit sharing; in many high-end cases, the customers are more followers of the chefs than the owners; and I've never met a true chef who didn't want to run his own place, free of meddling investors or partners.
We're seeing a similar approach in the large, emptying malls where, for example, the Simon Property Group and Brookfield Property Partners are negotiating to buy J.C. Penney's retail operations to give themselves a guaranteed anchor tenant. In fact, like it or not, we're living through one of Schumpeter's evolutionary waves of creative destruction, which will require both continuous innovation and the best entrepreneurs we can find. We're going to need new ideas, great flexibility, support from the various regulatory authorities, and considerable patience to save our restaurants, but the alternative is just too painful to imagine.