Warning the nation’s restaurant recovery is “officially moving in reverse,” the National Restaurant Association has fresh concerns with tax changes on the table in the budget reconciliation bill. “We support many of the goals of the Build Back Better Act, but the legislation is too large and too expensive a check for small businesses to take on,” Sean Kennedy, EVP of public affairs at the Association, said in a statement.

Kennedy’s worry is a two-front point. The lingering effects of the Delta variant are further challenging restaurants as they grapple with rising costs and falling revenue. And this would introduce “costly new obligations,” which will “only prevent progress in turning the tide of recovery,” he said.

The budget reconciliation bill, as outlined, could significantly increase tax obligations. It also could implement “drastic” changes to the enforcement of the National Labor Relations Act.

The Association pointed out a few specifics:

• Any cap on the Section 199A Small Business Tax Deduction, which would deny small businesses earning over $400,000 or $500,000 in annual income the ability to preserve more of their working capital. Nine in 10 restaurants are small businesses, situated as pass-through entities like LLCs, S-Corporations, or partnerships, relying on Sec. 199A to invest in employee growth and expanded operations. This deduction ensures the federal tax code does not have significantly different rates for small businesses and corporations. Capping the Sec. 199A deduction would worsen the ongoing financial struggle of many small and midsize restaurants and inhibit restaurants’ growth in the years to come.
• Repeal of the stepped-up basis, which would make death a taxable event for family-owned businesses. Restaurants carry an average cash-on-hand to cover 16 days of expenses. Taxing a restaurant as it is passed down to the next generation would require cash that simply cannot be produced in the short-term. If implemented, this would lead to a restaurant reducing operations, scaling back employment, and selling off assets or locations—causing more heartbreak in the community it serves.
• Increases in the corporate tax rate, will cost companies—including restaurants—over $540 billion. As the second-largest private sector employer in the nation, restaurants will have fewer opportunities to invest in employee growth and expansion.

 

“Raising taxes during a pandemic imperils restaurants’ prospects for survival, our workforce, and the recovery of the communities we serve. If Congress institutes new taxes, many more restaurants will likely have to close their doors for good,” Kennedy wrote in a letter to Congressional leaders sent Wednesday.

The Association supported its concerns with fresh survey data that paints a deteriorating business environment. Many restaurants aren’t sure they’ll fully recover until well into 2022.

A majority of full-service and limited-service operators said business conditions were worse today than three months ago. And 44 percent believe it will take more than a year before they return to normal. Nineteen percent aren’t sure they ever will.

According to Black Box Intelligence most recent update, the industry’s sales growth three weeks into September remains stronger than it was in August. However, it’s still softer than July. Additionally, the last two weeks have posted the two-highest two-year check growth rates ever recorded by the platform. Of all the metrics measured lately, this might be the most telling.

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It’s backed by government data as well. Restaurant prices in the full-service sector lifted 4.9 percent in August compared to last year, according to the BLS. They hiked 6.9 percent in quick service.

So far, it hasn’t moved the needle much in consumer willingness to spend, as food services and drinking places” collected a touch under $72 billion last month—32 percent higher than the year-ago measure and 10 percent or so above 2019 levels. And importantly, on par with recent months, where sales were $71.9 billion in July and $71 billion in June.

But is it a fragile arrangement?

“People are saying, well, we’re pushing this off [price] and I guess, no one is pushing back. Eventually, it’s going to be pushed back,” Darden CEO Gene Lee said last week.

“I think those who pass through a lot of price, they aren’t really managing their costs effectively,” he added. “I think we’ve got to really think about how we manage our costs going forward, because at some point, your average consumer could get priced out of casual dining if it costs too much.”

The same question, naturally, applies to any brand with a strong value base, from the introductory nature of the lower rung of the barbell, to discounts through digital intended to inspire mobile usage. Coupons and other traditional means as well.

Another angle to consider is the reality many restaurants are charging more to offset inflation and labor (like raising wages) and yet still operating with fewer employees. Is that higher price coming with a better experience? Or the opposite?

Olive Garden has appreciated two-year check growth of only 2.4 percent. The rest of the industry is closer to 5 percent, Lee said.

But not every chain has the scale of Darden or the ability to cede short-term recovery over a long-view approach. Simply, current realities are forcing prices up as a survival tactic more so than an opportunistic one, in most situations.

In the Association’s survey, 91 percent of operators said they’re paying more for food; 84 percent have higher labor costs; and 63 percent are paying higher occupancy costs. Meanwhile, profitability is down—85 percent of operators reported smaller margins than before the pandemic.

Sixty-three percent said sales volumes in August, historically a busy month, was lower than August 2019.

Also, a bevy of chains, including Darden and Texas Roadhouse, have had to secure more product than usual on the spot market as locations exceed expectations and stress supplier’s capacity.

The labor topic isn’t subsiding. Eighty-two percent of operators told Black Box Intelligence they’re offering higher base pay as an incentive compared to 64 percent in 2019. Fifty-four percent are offering sign-on bonuses versus just 21 percent two years ago.

According to a new report from One Fair Wage, over 1,600 restaurants claimed to be paying an average wage of $13.50 plus tips across 41 states. These restaurants previously paid a subminimum wage to tipped workers, but have now lifted wages to provide the full federal minimum wage or higher with tips on top. 

Earlier this year, the vast majority of restaurants polled by One Fair Wage paid a tipped minimum wage of $5 or less. 

Costs are likely to remain elevated. Especially when you consider the No. 1 reason workers have left the industry, in a Black Box poll, was “higher pay in other industries” at 28 percent. No. 2 was “needed consistent schedule/income (23 percent), followed by lack of professional development and promotion opportunities (17 percent), work hours (16 percent), and work environment (15 percent).

In Q2 2021, limited-service crew members were making $11 as a median hourly wage, a 10 percent year-over-year jump—it was $10.50 in Q1 2021 and $10.25 in Q4 2020.

For full-serves, those numbers were $15 (up 6 percent from last year), $14.85, and $14.55, respectively.

Just for GMs, the media base salary plus bonus in Q2 2021 came out to $63,878 in quick service and $90,129 in full service.

Percentage of companies offering benefits:

GM

Flexible schedule

• 2019: 31 percent
• 2021: 50 percent

 

Financial planning

• 2019: 31 percent
• 2021: 36 percent

 

Family/elder care leave

• 2019: 2 percent
• 2021: 32 percent

 

Hourly team

Flexible schedule

• 2019: 35 percent
• 2021: 54 percent

 

Financial planning

• 2019: 17 percent
• 2021: 41 percent

 

Family/elder care leave

• 2019: 2 percent
• 2021: 29 percent

 

Sick days increased 2.5 times for hourly employees and wellness programs jumped from 38 percent of companies offering them to 63 percent.

401Ks are also up from 85 to 93 percent on the manager level and 66 to 80 percent of hourly workers.

And as this unfolds, retention remains the costly and consistent challenge it was before COVID. Perhaps even more so.

Rolling 12-month turnover, per Black Box, is 105.7 percent for full-serves currently, higher than 101.5 percent in 2019. Restaurants claimed to be down, on average, 6.2 employees per unit in the front of the house and 2.8 in the back.

In 2021, the average cost per terminated employee was $14,689 for GMs; $8,119 for non-GM managers; and $1,869 for hourly staff.

In the Association’s survey, 44 percent of operators said their restaurant was not currently open at full capacity for indoor on-premises dining (40 percent for full service, 49 percent quick service).

The flashing point: Among restaurant operators that are not open at the maximum indoor capacity that is currently allowed in their jurisdiction, 71 percent said it was because they do not have enough employees to adequately staff the restaurant.

A lack of adequate staffing was the most common reason given by both full-service (81 percent) and limited-service operators (61 percent) that are not currently open at the maximum capacity allowed.

Others:

• Too soon from a public health perspective: 29 percent
• Uncertainty about future lockdowns or restricts: 26 percent
• Not enough customers to justify reopening: 21 percent

 

The gap between the final measure, which could also be labeled pent-up demand, and the staffing to meet it, is vast.

Despite recent growth, the industry remains about a million jobs short of pre-COVID levels. Seventy-eight percent of operators in the study said their restaurant currently does not have enough employees to support its existing customer demand. For restaurants currently understaffed, 83 percent claimed their restaurant was more than 10 percent below necessary staffing levels. Thirty-nine percent are more than 20 percent below. This breaks out to 37 percent in full service at 20 percent below, and 43 percent for limited service.

As a result, 68 percent of restaurants reduced hours of operation over the last three months. Nearly half (46 percent) cut back on menu items. Forty-five percent closed on days they’d normally be open, while 44 percent reduced seating capacity.

Getting into food supply, which is also a reflection of labor issues in many cases, among operators that experienced supply delays or shortages during the past three months, 75 percent said they made changes to their menu offerings as a result.

Food, labor, and occupancy costs are the largest line items for restaurants, the Association pointed out—combining to account for roughly 70 cents of every dollar of sales during normal times. For the vast majority of restaurant operators, these three categories are making up a larger share of sales than they did before the pandemic.
 

Only 16 percent of operators expect their average sales during the next three months (September–November) to be higher than they were in August 2021.

Ninety-one percent of operators said their total food costs (as a percent of sales) are higher than they were prior to the outbreak. Just 3 percent said their food costs make up a smaller proportion of sales. Eighty-four percent noted total labor costs (as a percent of sales) are higher than they were pre-COVID. Only 7 percent said their labor costs declined as a percent of sales; 63 percent are experiencing total occupancy costs higher than they were before; and 5 percent said their total occupancy costs are lower.

The Delta variant negatively impacted the industry in recent weeks, according to most restaurant operators, the Association added. Overall, 78 percent of operators noted their restaurant experienced a decline in customer demand for indoor on-premises dining in recent weeks, as a result of the increase in coronavirus cases. It was pretty even by sector—81 percent in full service and 75 percent in quick service.

It’s funneling concern into the mid-term view. Sixteen percent of operators said they expect their average sales during the next three months (September–November) to be higher than they were in August 2021. Fifty-five percent think their average sales will be lower, while 29 percent expect sales will be about the same as they were in August 2021.

As it has since the program went dry in July, pushed for Congress to replenish the Restaurant Revitalization fund. Roughly two in three restaurants who applied were left out. Or 177,000 businesses with eligible pandemic losses of over $43 billion even after deducting Paycheck Protection Program loan amounts. “The RRF is a proven way to provide efficient and effective support for restaurants to meet payroll, pay rent, ease debt obligations, and stabilize their operations in the face of the economic uncertainty of COVID-19,” Kennedy wrote. “As winter approaches and outside dining contracts, RRF replenishment is extremely time-sensitive and must not wait for subsequent legislative vehicles. We urge Congress to use any opportunity now available to replenish the RRF to sustain restaurants, workers, and suppliers in every state.”

On the topic of the NLRA, there are currently proposals to allow fines of $50,000–$100,000 for each labor violation. “Under the proposed change, a business that made inadvertent or technical errors could face fines high enough to put them into bankruptcy,” Kennedy wrote. “Workers deserve protections in the workplace and bad actors who violate labor law should be held accountable. But the text as drafted would essentially be using a bludgeon to intimidate and punish businesses that make inadvertent errors or who believe they are acting within their legal rights and in accordance with labor law.”