Chef AJ Swanda’s ramen restaurant happened almost by accident. He suggested doing a ramen pop up at a local coffee shop, then threw up a flyer in the window. The first event sold out. So did the second one. Pretty soon, Ugly Duck Ramen was roving all over Omaha.
Swanda began putting together a business plan for a brick-and-mortar location. He needed to stake out the right location, and quickly realized that would be really tough without a business partner. Then he had to justify menu prices for a market where ramen isn’t as prolific as in New York City. He still worries about paying his staff enough money, how he can offer healthcare, worries about a looming restaurant bubble.
In other words, Swanda became a restaurateur.
The restaurant world doesn’t leave room for coddling. The industry literally bruises, bends, and burns. While the myths of crushing failure rates are vastly overstated. (A Cornell Hospitality Quarterly study dispels the 90% myth.) But that doesn’t mean times aren’t tough.
Yet, as the woes grow, so does the creativity. The rent isn’t cheap, either. Still, both new and veteran restaurateurs are struggling to swallow a very bitter pill: things are bad, and likely to get worse.
“This is the only industry on the planet where literally everyone demands what you’re producing and they demand it three times a day,” said Bobby Fry, a co-owner or founder of several Pittsburgh restaurants. “So for the failure rate to be that high, it automatically gives you a bit of permission to reexamine the business practices or whatever you would take as a given in that industry.”
Restaurants fall into dire economic straits for a number of reasons that aren’t exactly new, and aren’t going away anytime soon. Minimum wage standards keep changing, along with the healthcare laws. Lease rates continue to rise, just as diner trends continue to oscillate. The restaurants that survive will reinvent their business models to meet these challenges — and several already have.
Dimitri Vlahakis, owner of Esperanto in NYC gives his perspective on the impact of minimum wage increases.
Some have overhauled their wages. Others have eschewed traditional street-level restaurant space for second-floor locations, and even shipping containers. Still more have focused on quick-service and delivery options to appeal to diners who’d prefer to eat in than sit down for a full-course meal. We spoke with several restaurateurs about the creative solutions they’ve implemented to keep their doors open and their employees happy. And since the happiest employees tend to be well-paid, let’s start with one proposed solution to employee wage issues: no tipping.
To Tip or Not to Tip?
The no tipping movement isn’t new, but it’s struggled to take off. The approach hit the limelight in 2015 when Danny Meyer, the man who invented Shake Shack, announced he would abolish tipping at all 13 New York restaurants in his Union Square Hospitality Group. National chain Joe’s Crab Shack quickly followed, though it’s fast abandonment of the model presaged the movement’s current struggles. Either way, the concept had spread far beyond the priciest corners of Manhattan eateries.
Proponents of no tipping say it’s a way to close the pay gap between the front of the house staff, which collects tips, and the back of the house staff, which does not. But it’s also seen as a potential response to minimum wage hikes. As states across the country mandate increases in compensation, many restaurateurs are rethinking how they pay their employees.
Fry was an early adopter of the no tipping model. He actually preempted Meyer by abolishing gratuity at Bar Marco in January of 2015. Every single employee — whether front of the house or back of the house — would receive a salary and healthcare instead. That’s quite the step up from the $2.83 minimum wage Pennsylvania currently offers workers who received tips. It also sounded a little crazy to restaurateurs struggling to expand their slim profit margins. But Fry insists it’s just a matter of math.
“No one has really taken the time to look at the math behind it,” he said. “We came to the no gratuity strategy from a much different angle than I think most restaurants that I’ve studied come to it. Ours was kind of the solution to proactively planning the trajectory of our business.”
It all started after Fry noticed a part-time server stumbling through the Saturday brunch wine list. He wondered how many people he’d need to create a “perfect team” — one that offered flawless service each day of the week. Then he wondered what kind of schedule he’d need to make sure his dream team didn’t burn out by Wednesday afternoon. Finally, he wondered what he’d need to pay to keep them all onboard.
He assigned a salary to each person that was 20% more than what his best servers were currently making with tips. After factoring in taxes, he had a number: his employee pay for the year. “Normal restaurant math is your employee pay should be about 30% of all your revenue for the year,” he explained. “So I said, okay, there’s our employee pay, so what does that mean that our revenue needs to be, if that employee pay is 30%? And it came out to be $180,000 less than what we brought in the year before. And that’s when we had the big aha moment.”
Fry shrunk his staff slightly, eliminating what he calls “filler positions” like barbacks. Everyone who remained became a full-time employee with benefits. The tip line on credit card receipts was removed, and profits nearly tripled in two months.
Fry, who has a book on his unique restaurant math in the works, insists this model is feasible for all restaurant owners — as long as their business operations are already running efficiently. But he doesn’t see his ideas becoming the norm just yet. After all, many restaurateurs still view any no tipping system with skepticism; a 2016 survey found that 27% of responding restaurant owners had no plans to adopt a no-gratuity model, and 17% would only consider it if competitors tried first.
Then there’s the servers’ own skepticism. In a survey conducted by Upserve, 24% restaurant staff that received tips in states where the minimum wage was recently raised said their tips actually decreased as a result. But 69% of tipped workers said they wouldn’t accept a substantial increase in their hourly pay if tipping was removed, suggesting restaurant owners are between a rock and a hard place when it comes to addressing mandated higher wages.
Tom Douglas has seen that skepticism firsthand. Douglas owns the largest upscale restaurant group in Seattle. A year ago, he eliminated tipping at Tom Douglas Restaurants. The decision came as the city hiked its minimum wage up to $15 an hour. Douglas, who was forced to adopt the increase earlier than smaller restaurant groups in town, decided to replace gratuity with a 20% service charge, which would be redistributed among employees. This figure, Douglas explains, matched the average tips he had seen at his restaurants in previous years. Under the system, servers who used to collect tips wouldn’t see a cut in their pay, but back of the house staff would be welcomed onto a more level playing field.
“I’m big on reasonable capitalism and thoughtful capitalism, because that’s the system we’re in,” he said. “But you can’t throw socialism in the middle of a capitalist society. So somewhere in the middle, I think we have to find common ground.”
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Restaurateurs Alethia and Max Mariotta, believe it’s important to recognize everyone on their staff that helped deliver their meal. That’s why they decided to eliminate tipping in their restaurants- Vinya and Rosmarin.
While Douglas was willing to take on the financial risk associated with a no tipping system, he says he’s still waiting on the marketplace to catch up. “The issue that’s coming down in Seattle is all these things [increased minimum wage, healthcare, family leave] are good, but they’re all happening at the same time so it’s quite a shock to the system,” he said. “The unlevel playing field makes it very difficult to be competitive sometimes. So that’s kind of what I’m holding out for, is for when everything gets more even. I would say in another four years maybe, unless the city council does more things based on the size of the employer. I would say that it’s going to take that long to even things up.”
Finding a New Way to “Contain” Rising Rents
Pay hikes isn’t the only challenge restaurant owners must contend with. Rent is another perennial hurdle most need to leap, especially restaurateurs just starting out.
“The major concern we’re seeing out there right now is that lease rates are pretty high,” said Todd Smith, president of the Boston-based restaurant brokerage firm Corbett Restaurant Group. “I think we’re reaching the top of the commercial real estate cycle right now. It kind of ebbs and flows, and at the moment, prices are extremely high, particularly in the larger cities like Boston.”
The creative workaround for a rising number of restaurateurs, says Smith, is seeking out unconventional spaces as a way to cut down on rent. That’s pretty typical in markets across America. As Crain’s reported in 2015, some New York restaurant owners are now gambling on second-floor spaces, foregoing prized street level entrances in the process. (The seafood restaurant Catch, for instance, sits above a Sephora in downtown Manhattan.)
But Smith says he’s seen owners take it a step further with repurposed shipping containers.
Shipping container restaurants may be an aesthetically bold choice, but they have obvious appeal for cash-strapped restaurateurs. For $2,000 to $3,000, they can own the actual “building” and simply pay rent on land. If that rent goes up, they can pick up their entire restaurant and move it to a new location. There’s also an eco-friendly element to recycling a shipping container that would otherwise stack up somewhere gathering dust.
“Shipping containers are obviously designed to be moved around the world,” said Kirk Lance, who owns the Aprisa Mexican Cuisine chain in Portland. “When your world changes, and it always does, you’ve got an option of moving it. You’ve got a way to recoup your expenses.”
Lance has built four shipping container restaurants so far. Three belong to the Aprisa Mexican Cuisine family and another has been sold. Lance plans to continue converting containers into turnkey restaurants, which he can sell to other aspiring restaurateurs. These turnkey restaurants come with more than a few renovations, too. Lance gets all the building permits cleared through the state ahead of time, so his clients won’t have to “go through that struggle of working with the local contractors, working with your local building codes division, working with your engineers and your architects.”
Shipping container restaurants have also found success in cities like Washington, DC and Atlanta. But the biggest problem they pose is the same one any restaurant in an “unconventional space” poses: will guests go there?
It depends. Swanda knew the answer was no when he was searching for his first brick-and-mortar location in Omaha. Nine months into his Ugly Duck Ramen pop-up experiment, he wanted to transition into a more permanent situation. But he couldn’t risk it on an out-of-the-box space.
“We were looking at basements, we were looking at undeveloped districts, but they were in Omaha,” said Swanda. “This isn’t New York City or San Francisco. People don’t like going to shady parts of town to try new food. They want street level parking and easy access in a safe location.”
Swanda ended up in a more traditional location, which falls in line with what Smith typically sees from his first-time clients. “If you’ve already established yourself in a particular area, you can go with a less obvious [site] for your second or third location,” he said. “Something that probably wouldn’t score as high on your site acquisition charts, if you would. You can risk a little bit more. But you don’t want your first location to be in a C or C- location, because that could really hurt you.”
Changing Plates for Changing Tastes
So let’s say you’ve figured out the perfect way to compensate your employees and pay your landlord on time. There’s still another major stressor restaurateurs have to battle, and it’s the most fickle of them all: consumer trends.
Nothing hip stays that way for very long. Fondue was once in, now it’s out. Cronuts were popular, now they’re passe. But diners aren’t just changing their minds about the type of food they want; they’re also changing their minds on how they want to eat it.
Increasingly, those diners want to eat in, without forgoing restaurant-quality food. So they turn to Seamless, Postmates, DoorDash, or one of the other 39 US-based companies with at least $5 million in funding that specializes in meal (or meal kit) delivery. The competitive delivery scene has led to turf wars in cities like Nashville. It also eats into restaurant profits. These services usually pocket 15-20% in delivery sales, but some (like UberEATS) can demand up to 30%. According to Quartz, delivery apps can charge restaurants even more money for better search results. These might seem like exorbitant costs for small restaurants, but offering delivery is a big part of staying competitive. So owners are balancing the added fees in their budgets.
Snacking has also been on the rise for a while now — and it’s not just happening in office break rooms or kitchens. It’s come to restaurants. Time was reporting on the snack menu trend in 2012, and it hasn’t gone away in the five years since. This February, the NPD Group found that visits to restaurants for “snack occasions” increased 3 percent in the year ending last September. In response, Pita Pit began offering mini sandwiches at its quick-service restaurants in 2017. The California-based casual restaurant Mighty Kitchen is also poised to reap the benefits of this trend, thanks to its small bites concept of “colossally good sliders, noshes, and brews.”
Douglas likes to use his millennial daughter to explain how habits have shifted.
“When I was growing up, my parents never ate out in restaurants like I did,” he said. “I spent every penny I had in restaurants, buying the nicest wines and all that kind of stuff. That group of diners is changing now. I’m older, I still eat that way, but I can see how my daughter lives. She’s an attorney making $150 grand a year and she doesn’t eat out the way I did. She’s still interested in quality food, but in a much more casual setting.”
Douglas thinks this focus on casual eating has been in the works for a long time. Business lunch culture, he says, has been declining since the “two-martini lunch” died out decades ago. But really, lunch itself is increasingly under attack. According to research from the marketing firm NPD Group, lunch visits to restaurants have been on a steady decline due to the rise of the sad desk lunch, telecommuting, and even online shopping. That’s why Douglas has been increasingly pushing for quick-service or grab-and-go concepts on his consulting gigs. If customers won’t sit down for lunch, restaurants can still get them in, then quickly out, the door with ready-made menu items.
There are still more challenges lying in wait for restaurateurs in the coming years. Douglas points to the Amazon Go store that just opened across from one of his restaurants — shoppers can pick up a salad and sandwich and leave without ever swiping a credit card. But there will always be restaurant owners with wild ideas on how to innovate, and they’re probably willing to help if you just ask.
“I think a lot of the restaurants that are trying to figure out how to be what they want to be [don’t realize] it’s pretty easy to just reach out to people,” said Fry. “People respond. It’s all the same things you would use in other businesses. Just apply it to food. It’s still a business.”