High Costs, Slow Economy Take Restaurant Owners for a Ride

Thought the industry has always been volatile, different factors are driving the moving and shaking these days.

In December 2008, Gavin Loyer was featured in a WBIR segment titled, "New pizza parlor defies recession." A New York transplant, he'd just opened Dazzo's Italian Castle, a pizzeria on Gay Street, and was optimistic he could succeed in a slowing economy.

Three months into it, even with critical acclaim from loyal diners, he's not so sure. "It was good for a little while, now it's slow," says Loyer.

Slow enough to make him pack it in? "I have no idea," he says. "We'll see what happens. I can't predict the future, so we'll just have to see."

For other bars and eateries in the area, the suspense is over. Kick Shots on Chapman Highway, for example, will stop serving Monday and end its years of beer, pool, and bar food at an absolute auction March 26. At the other end of the dining spectrum is the exquisite Orangery, named for Marie Antoinette's greenhouse at Versailles and opened by Kristopher Kendrick and Frank Gardner 38 years ago. Karen Kendrick, who took over the operation in the mid-'70s, announced last week she would sell or lease the place—and that operations would be temporarily suspended if a deal wasn't closed by March 30.

And while such doubts, ownership shifts, and closings are nothing new in the ever-volatile restaurant business, a different set of factors is driving such moving and shaking these days. "I'm 57, and I've been in this business 37 years, and I have never seen a market like this," says Walt Baker, CEO of the industry watchdog and lobbyist group Tennessee Hospitality Association, based in Nashville. "In good times, one of three small businesses doesn't last two years, and you expect that. But if you went under in good times, you probably had a bad location, or a bad idea. In these bad times, I think the typical behavior by a consumer is to consider dining out a discretionary activity. People tend to eat at the high-end restaurants less frequently during these times. You tend to see the fallout in niche markets, high-end spots."

Nor are the lower-end restaurants immune to the pressure. "With our state unemployment at 8 percent, my sense is that while some diners may be shifting down, eating out as frequently but at lower-cost restaurants, even the lesser restaurants are losing people," says Baker. "You're not going to eat out when you don't know where your next paycheck is coming from."

Mike Donohue, a spokesperson for the National Restaurant Association, says there is a bit of difference between segments of the restaurant industry, "but I think all restaurants are being challenged in this economy. We do a monthly survey of our operators, and now the number one challenge they cite is the economy."

To those outside the industry, the numbers do not look particularly alarming. Last year, the national restaurant sales dollar growth rate was 2.5 percent, which, adjusted for inflation, created a 1 percent decline. For Tennessee specifically, the Restaurant Association forecasts a similar decline in 2009—$8,835,916 in sales, up from $8,630,367 in 2008, probably about a 1 percent decline after adjusting for inflation.

In an industry much more used to double-digit growth over much of this decade, though, the figures are cause for anxiety. "The growth rate has definitely slowed down, particularly after a two-year period of very significant food price inflation—7.6 percent in 2007 and 8 percent in 2008," says Donohue. "For restaurants, food costs account for one-third of every sales dollar, so that 8 percent increase creates significant pressure. And the price of some individual commodities increased more than that—wheat, for example."

This year, though, food and energy prices are coming down some, relieving a bit of pressure—just in time for the impact of the slowing economy to hit. "People on tighter budgets tend to go out less," says Donohue. "It's not just a straight people stop going out—eating out is not just another service, it's an essential part of everyday life, it's where people go with their families and to socialize.

"They don't just cut it out, but they do look at it."

One reason a recessionary economy bludgeons restaurant bottom lines: A restaurant profit margin is typically 4-6 percent, says Donohue.

"The restaurant industry is not high margin," says Baker. "You make profits from volume. If volume goes down.... It's so expensive to run a restaurant, the labor, the food, and the property lease, the overhead. You can only cut so much and still be open. If you lose volume, there's nowhere to go get resources—no one's loaning any money now."

The restaurants that are doing fairly well? "The ones that offer good product and good value—that is the one segment that is seeing a little decline but not nearly as haywire as the fine dining scene," says Holly Hambright, a long-time local chef who recently assumed a job as operations manager for the two American/Asian fusion Nama Sushi Bars, under the new ownership of Nama LLC. "People still want to eat well, and fresh, and be at a place that's easy to get to, not out of the way."

Another group that will survive, even prosper, are the deep pockets, says Baker. "If you're well capitalized, and have enough money, you can make the decision to weather the shifts."

Or even to expand, like Greenwood Village, Colo.-based Red Robin Gourmet Burgers. Already the owners of 420 units in the United States and Canada, the 40-year-old company announced a new 5,818-square-foot restaurant to be opened in late April in Turkey Creek, with jobs for 100 in the offing at the family-friendly casual dining chain.

"While Red Robin is slowing its development, we still see opportunities where we can continue to grow the brand in family-friendly communities," says Red Robin spokesperson Jamie Minkin. "We're using existing cash flow to build new restaurants."

That is just the type of eatery that will conquer the current economy, says Baker. "If you have a lot of money to spend, you can capitalize on the cheaper real estate market and the available work force to grab some market shares, and be in a good position when we come out of this."

When might that be? "I have no idea," says Baker. "It's been a vicious cycle, and I don't know if we've hit bottom yet."