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Restaurant recovery slowed by higher costs, Covid surges as 2022 gets off to a ‘pretty sober start’

Robert Freeman is hopeful Congress will replenish the Restaurant Revitalization Fund as his restaurant continues to struggle in the pandemic.
Kate Rogers | CNBC

Rising labor and food costs are chipping away at the restaurant industry’s hard-won gains and delaying recovery, according to the findings of a new report.

As the world enters the third year of the ongoing pandemic, restaurant operators are continuing to adapt to doing business in the face of an onslaught of challenges from labor to inflation and Covid variants. While sales are rebounding, a report from the National Restaurant Association suggests it will be a year or more before conditions return to normal as tens of thousands of restaurants have shuttered — some permanently.

The foodservice industry will reach $898 billion in sales this year, up from $799 billion in 2021 and surpassing pre-pandemic sales levels from 2019 of $864 billion, the group estimates in its “State of the Restaurant Industry Report” on Tuesday. However, when adjusted for inflation, sales in 2022 are projected to remain below pre-pandemic levels, they said. Much of last year’s gains were tied to higher prices as costs soared for operators.

Off to a ‘pretty sober start’

“2022 for the restaurant industry will remain another year of transition, and the year is off to a pretty sober start,” said Hudson Riehle, senior vice president of the association’s research & knowledge group. “When you survey restaurant operators, 76% across the country now say that business currently is worse than it was three months ago. It remains a fairly volatile and uncertain environment.”

While the group’s data show more than half of all operators believe it will be at least a year for business to return to normal, most operators, from fine dining to quick service, said they expect sales will either maintain or grow this year, exhibiting cautious optimism.

The report was compiled from a survey of 3,000 operators taken in November and December 2021.

At Robert Freeman’s restaurant in San Francisco, The Buena Vista Cafe, things are improving but are still a challenge. Sales dropped more than 60% in 2020, and rebounded to down 31% in 2021.

“It’s been a little like Coney Island — up and down on a rollercoaster,” Freeman said of the Covid variants and operational regulations that have shifted over the last two years.

On-premise businesses like Freeman’s are still short-staffed, the data show, with 7 in 10 saying they didn’t have enough employees to adequately staff their restaurants. The shortage was felt the most in family and fine dining categories. In all, the sector added back 1.7 million jobs in 2021, the data show.

The Buena Vista could use about a half dozen more workers at the moment, Freeman said. He is running shorter shifts to make things work.

Profits under pressure

While labor remains a top challenge, inflation is a close second, Riehle said. Food costs as a percentage of sales are up for 9 in 10 restaurant operators compared with pre-pandemic levels, and profits are down for 80% of operators compared with 2019. What’s more, 96% of operators experienced supply delays or shortages of key food or beverage items in 2021 — and these challenges will likely continue in 2022.

“There has been a rapid escalation of restaurant operators input cost in a time where consumer demand remains pretty weak, particularly for those on-site dining occasions,” Riehle said. “In this environment, the operator is extremely, extremely — not only careful about raising menu prices — but looking for more productivity and efficiency in the typical restaurant operation.”

Operators have also leaned on innovations and technology in a big way to weather the storm, from QR code ordering, delivery, outdoor dining parklets and alcohol-to-go. Operators across the industry say off-premises dining represented a higher proportion of average daily sales than it did prior to the pandemic, and many plan to increase investments in this part of the business in 2022.

Looking for a lifeline

The industry is also waiting on another lifeline. The National Restaurant Association is urging Congress to replenish the Restaurant Revitalization Fund, pointing to its own data that show half of restaurant operators that did not receive RRF grants from the $28.6 billion program feel it’s unlikely that they will stay in business beyond the pandemic without access. The group says $48 billion would resolve the 170,000 applications still pending for businesses with the Small Business Administration, which runs the program.

Freeman is among those who was initially told the cafe would receive a grant and then had the grant rescinded.

“I understand there wasn’t enough money, but why wasn’t it done on a pro-rata basis? You have $30 billion to spread around, that would have been so simple. Everybody would have gotten something, and no one would be in the position that I am,” he said.

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