If you have clients who are in the hospitality industry or contemplating investing in it, be forewarned: Times were tough pre-pandemic, but from today’s perspective, those were “the good old days.”
According to the U.S. Bureau of Labor Statistics, prices for food and beverages were 20.2% higher in 2023 compared with 2020. Keep in mind that this has dropped since the peak in 2021-2022.
Labor costs have gone crazy, too, making profits ever more elusive.
Multiple Minimum Wages and Increasing Labor Costs
For example, California’s minimum wage was $11 per hour starting in 2018 and increased to $16 on Jan. 1. But the state has created a fast-food minimum wage of $20 that goes into effect in April. This will force every restaurant near a fast-food operation to raise its wages just to keep employees. Help your clients look into what their state is planning for minimum wage over the next five years.
Many states are raising the tipped minimum wage — a lower hourly wage for servers, bussers and bartenders — or getting rid of it entirely. The reason for the lower wage is clear. Let’s say that a state has a minimum wage of $10 per hour, and the tipped wage is $5 per hour. With tips, an employee could average $18 per hour during a shift, far exceeding the state minimum.
Look very closely at what your state, city, or county plans to do with the tipped minimum wage over the next five years, as this will have a huge effect on your client’s costs and profit. California, for example, has abolished the tipped minimum wage, and restaurant servers now earn $16 per hour plus tips. Denver is raising its tipped minimum wage to $15.27 per hour, provided the employee earns at least $3.02 in tips.
And while the cost of labor will remain high, finding labor will continue to be the industry’s single biggest struggle.
The Cost of Food
As I mentioned earlier, the price of food is now 20.2% higher than just a few years ago. It certainly feels a lot higher, and the reason is that food took an incredible jump between 2019 and 2021.
An example is chicken wings, one of the most popular restaurant items across the country. In 2019, restaurants paid about $45 per case, but within a year that same case jumped to $150, more than three times the original cost. The price of that product and many others has come down from its peak, but we still are feeling the effects of skyrocketing prices during that period.
Wholesale food prices are projected to go up anywhere from 4.9% to 5.2% this year alone. Consider that many restaurants in the past two years have had to raise menu prices by more than 20%. Restaurants will continue to battle rising prices by reducing portion sizes.
Passing Along Fees
Some time ago, restaurants — and many other industries — started to pass along the credit card fee of 3% to the customer. I have seen many of my clients go from a net profit of 10% down to less than 5% over the past few years because of labor and food costs. While many guests think restaurants are being “cheap” or “petty,” they don’t realize that by passing on the credit card charge, a restaurant that does $1 million in sales will save $30,000. In many cases, that is the difference between profit and loss.
Fortunately, in our case, we have had very little pushback from guests. I don’t have one restaurant that started the program and then canceled it because of complaints.
My forecast for this year and years to come is that the restaurant/hospitality industry will continue to try to pass fees and surcharges on to customers. We are already seeing restaurants with “health insurance fees,” “employee well-being fees,” “tap water fee,” and on and on.
Liquor Licenses — a Must-Have
Liquor licenses are becoming increasingly difficult to obtain. For example, in New York state, you can’t get a liquor license if there are three restaurants with liquor licenses within 500 feet of your operation.
I have a client who wants to buy an active restaurant with a liquor license. But when he completes the purchase, it will be treated as a new business and he won’t be able to get a liquor license. That’s because three restaurants within 500 feet already have them. Elsewhere in the country, many new laws are also negatively affecting the ability to get a liquor license.
So why not forget the liquor license and let customers bring their own? Liquor licenses provide more opportunity for substantial profit than BYOB. My clients get 20% to 40% of their sales revenue from alcohol.
The Costs of Expansion
For business owners contemplating expansion, current conditions may seem difficult. However, there really isn’t a bad or good time. Your clients need to do their homework and make sure it is a good financial risk. If the numbers don’t add up, they should pass and wait for the right opportunity.
We have clients who are adding space to an existing operation. This tends to work out well, because while construction is underway, the business continues to operate and bring in income.
Contractor labor costs have gone up substantially in the past two years. One reason is that most contractors are busy and can raise their rates. The other reason is that it is almost impossible to find a top-notch contractor. Rates have gone up so much that we are revising buildout numbers by as much as 20%.
Additional Reading: A Restaurant as a Retirement Venture?
The rates on small business loans are also becoming increasingly prohibitive. They’re high for the experienced restaurateur but can be higher for the first-time operator. A lender recently told me that they will not consider a loan for someone trying to open their first restaurant.
The bottom line? In the very near future, your clients will be bringing some very tough problems, and they will need some very good and innovative advice on how to survive. Bone up on industry knowledge to help them.
Izzy Kharasch is president and founder of Hospitality Works, Inc., a bar and restaurant consulting company. Over the last 30 years, Izzy has helped more than 700 foodservice operations worldwide improve their operations and profits. Izzy is currently focused on increasing profitability for all of his clients. He can be reached at 224-688-3512 and Izzy@hospitalityworks.com.
