Laying Off 2,000+ People — Welcome to the Economics of the Restaurant Industry

We all know there’s a ripple effect to the quarantined, socially distanced, shelter-in-place life we’re living right now.

Here’s a little perspective on one slice of the ripple.

For the past couple of years, I’ve been part of a startup that makes software to help multi-location tenants manage their leases. Restaurants make up the biggest chunk of the company’s customers.

The people who use our software are mostly small-business owners. I’m talking about folks who own maybe five to 12 franchised locations of nationally known pizza restaurants or burger chains.

I’ve learned a lot about the restaurant industry and franchising. But there was one thing I didn’t know until a couple of weeks ago. It was the week of March 16. I was on a call with a half-dozen franchising experts when one of them dropped this little truth bomb:

“Most of these guys only operate with maybe two weeks of cash reserves. Once they get into about week three with no revenue — they’re in trouble.”

I knew margins were tight in the restaurant business. But until that moment, I didn’t understand how vital continuous cash flow is for the operators.

It was the middle of March when shit started getting real. Meaning that by the time rent is due on April 1, most operators will be in week three of the shutdown.

So hundreds of thousands of restaurants may not be able to pay rent next week. Then landlords won’t receive the rent checks they need to service debt and pay their bills.

The ripple widens.
 

‘You Just Can’t Keep the Lights On’

Danny Meyer is the CEO of Union Square Hospitality Group. He opened Union Square Cafe in 1985 and went on to open Gramercy Tavern, Blue Smoke, The Modern, and other iconic New York City restaurants. Even if you’ve never eaten at one of Union Square’s NYC restaurants, you’ve probably heard of its most well-known brand — Shake Shack.

At about the same time I was on that call learning about the economics of restaurants, Danny Meyer was making the gut-wrenching decision to lay off more than 2,000 people.

He did that because he believes it's the best way to save the business so they can re-open after the smoke clears and hire back as many people as possible.

Danny was the guest on a special episode of the Masters of Scale podcast released on March 24. During the interview, he walks you through the decision process and explains why it's the unpalatable but right thing to do. If you’ve read this far and have any interest in restaurant economics or what it takes for businesses to survive the pandemic, then I encourage you to give it a listen.

Here’s an excerpt:

"It blows my mind how inefficient our industry is because, in order to produce the revenues we produce, it takes so many more human beings than say, the tech industry. The tech industry can make a dollar with a tiny fraction of the number of people hired than it takes to run a restaurant. … Our real estate costs and our labor costs make us a very, very inefficient business, and yet, really one of the nation's most important employers. And that's why even a company like ours – and even the big chains, which you would say, ‘Well, it's a public company. They should have all the money in the world.’ Guess what? The economics of our business are such that if you have no revenues, you just can't keep the lights on. It takes those revenues to eke out what on a good day for most restaurants is a 10 percent margin. That's a good day. So now imagine restaurants that are on a 5 percent margin or a 3 percent margin. Once this crisis hit, revenues went poof – but you still have fixed costs."

Listen to the Danny Meyer episode here, or get it through whichever podcast app floats your boat.

Be kind, be safe, and stay the fuck home.