The restaurant-omics of a pandemic

By on June 12, 2020

Why COVID-19 has upended many business models

For many restaurants, take-out has become part of the mix during the pandemic.

As we entered into Phase Two of statewide the statewide COVID reopening scheme, local restaurants were able to take advantage of new policies that opened the doors to indoor dining, albeit at a reduced capacity of 50% of their legal occupancy allowance. In addition, some local government passed temporary ordinances that allowed establishments to add outdoor seating in parking lots and other areas for full-service dining until full occupancy is re-established as the state moves into Phase Three later this year.

As restaurants moved into Phase Two, some practices implemented during Phase One, such as delivery and curbside pickup, have been eliminated or curtailed, raising concerns among patrons who are still wary of dining on-site during the COVID-19 pandemic.

We sat down with Dan Lewis, president of the Outer Banks Restaurant Association and co-owner of Coastal Cravings restaurant and the owner of the Tap Shack in Duck. We also interviewed Chris Vlahos, the owner of Barefoot Bernie’s, to gain some perspective on how restaurants are faring under Phase Two and why some establishments have changed their modes of operation under the new guidelines.

Lewis explained that several issues are driving decisions on how to operate under Phase Two, and how individual restaurants have made their decisions under the new guidelines.

Those decisions hinge on a number of factors — economics, labor, safety concerns for employees and patrons as well as the type of menu and past practices of restaurants within their business model.

At the core of each individual decision are the economics.

When a restaurant launches, one of the primary decisions that drive their business models is balancing their menu with seating. In short, the larger the space, the higher the fixed costs—expenses that must be paid whether the restaurant is open or closed. And the higher the fixed costs, the harder it becomes to operate at 50% capacity or move to a carryout model. Fixed costs include rent or mortgage payments, utilities, insurance costs that are incurred even during seasonal closures.

Many local restaurants are predominately takeout and during the COVID-19 crisis, these establishments have not had to change their models. The spaces they lease or own are less costly and the model was built upon a takeout basis. During COVID-19 crisis, it was business as usual for these restaurants and with the closure of indoor dining during Phase One, these businesses likely experienced an increase in sales as other consumer options were closed.

Local drive-in spots such as John’s Drive In, the Snowbird Burgers and Cones or restaurants such as Pok’s Art or the South Beach Grill come to mind.

A second group of restaurants have primarily built their models on a hybrid system of full service dining while cultivating a long-standing takeout option for consumers.  These include local favorites such the Thai Room, Country Deli, New China and others.

The rest of the local eateries are primarily designed for dining in, and while some also offer takeout, that aspect of the business has typically been limited and often eliminated when full-service volume is high and the kitchen is doing all it can to keep up with the on-site orders.

Fixed cost plays a role here.

“As each restaurant is different in terms of size, layout and menu some are more adept at accommodating takeout than others,” Lewis said. Cravings, operated by Lewis and his partner Scott Foster, is a prime example. While full-service indoor seating is available, the restaurant is the only establishment in Duck with drive-through service, grandfathered in by its prior existence as a Burger King before Duck banned drive-throughs to discourage fast food establishments from locating in their town.

Lewis and Foster have decided to keep his dining room closed for now since takeout has always been a significant portion of his business. But for others, “Doing takeout is a different set of requirements than serving food inside where your plating food directly to the people sitting at tables. For takeout you may have twenty, thirty, sixty orders come in at once and people don’t always pick up when the food is ready. So where do you put all of that food?”

He said most restaurants have always done takeout, but have reserved the right to cut it off when call-in orders make it impossible to serve the diners on site. Under Phase One and even during Phase Two, since seating is limited, most restaurants can still achieve that balance but for some, that option may be less desirable.

Going back to fixed costs, when owners decide on how their operation would be modeled, seating capacity played a major role in determining how much space to lease and what menu items would be offered.

Owners back into their numbers before deciding to pull the trigger on operating a restaurant. They look at the cost of the space and the price points of the menu items, including projected profits.

An owner of a restaurant with an occupancy capacity of 200 people requires a minimal number of those seats to be occupied to make money and relies on the turnover of those seats during each meal period (breakfast, lunch, dinner) and the average ticket — how much each customer will spend on average for a meal.

Any reduction in volume spells trouble for most restaurants that rely on indoor dining. During Phase One, full-service restaurants were not able to generate anywhere near the revenue needed to make money — in fact, most lost money. At best, takeout may have reduced the losses, but profits or even break-even were out of the question. More significantly higher end restaurants couldn’t sell the more profitable items for takeout — few consumers are going to want to use curbside pickup for a $35 seafood platter boxed to go.

Even during Phase Two, with 50% capacity, paying the bills is difficult.

And while some restaurants have stated the combination of take-out and 50% inside dining has led to revenues equal to or greater than same period revenues last year, Chris Vlahos says revenues and profits are two different things.

“Takeout service helps but it can never sustain our business model. Butts in seats – that’s what every dine-in restauranteur talks about. How to fill seats and how to maintain the volume,” he explains.

Here is where revenues and profits come in.

“Dining in allows our servers the opportunity to upsell — that amazing appetizer, dessert, and drinks — soft drinks as well as wine, beer and cocktails, “ he notes.

And those are high profit items as entrees typically carry much smaller margins.

To-go service also ups labor costs as employees and the kitchen are diverted to taking call in orders, expediting the orders, preparing the food in the kitchen, boxing the food, storing it and bringing it outside to the cars in the parking lot.

“I have two employees answering the phone, one to finish to go entrees, one to help organize the orders and another to deliver the food. That’s four or five extra employees to serve less profitable menu items,” Vlahos said.

And the lack of alcohol sales is a major issue for dine-in restaurants. Vlahos supplied some telling data for readers to digest.

In a typical year food sale comprise 73-75% of Barefoot Bernie’s revenues while beverage sales total between 25-27% and even higher during some periods of the year. This year beer sales are 6% of revenues, wine 0.89% and liquor 6.6% while food sales have been 4% lower. Across the board, that’s a major hit to the bottom line.

Add to all of the above the labor shortage, already a pre-COVID-19 problem due to housing costs locally and exacerbated this year by the fact the area is missing some 3,000 international students who will be needed if full-service dining returns this summer. Add in the fact that many restaurants found liability insurance too expensive to add delivery options and 2020 will remain a challenging year for restaurants as they struggle to break-even and for many, merely survive 2020 and the ramifications of COVID over the intermediate and long term.

All restaurant owners can do as they adapt is to hope their customers understand each restaurant’s individual circumstances and adapt with them while exercising patience and understanding.


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See what people are saying:

  • kdh back seat observer

    Hey, smaller menu, less products to prep means less labor dollars.

    Labor dollars are the number 1 cost eater.

    If you were running a 8 to 12 percent back of house labor cost before, it should be 4 to 6. Half the capacity means half the previous volume, in theory of course. So therefore cut your labor force in half. DUH?!?!! Rearrange your hours of operation, cut the fat, the fluff, the attitude of we have to open at this time and close at that time.

    2 people answering the phones? Dude, that’s a problem if the money coming in the door does not positively substantiate the volume of business.

    If to go food is upping your labor costs, you don’t know what you are doing. That is truly idiotic way of thinking. You already have people on staff. If you have to hire more for carry out, that is just plain dumb. Change your menu or the items available for carry out.

    Good Lord!!!

    I have been working in this industry for 42 years. Those 42 years are gone. This is the new industry. You can not hold on to the old adage’s anymore. Create a new path, some will get left behind, sorry, that’s how life goes sometimes.

    Saturday, Jun 20 @ 8:22 am