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Recessions aren’t fun for most people, but restaurateurs stand to benefit from the economic dip in many ways. Recruitment and cost cutting are just two.
Why a Recession is Good for the Restaurant Industry
1. Recruiting – According to the National Restaurant Association, one of the top 10 most pressing restaurant industry challenges for the last 20 years has been recruiting and retention of employees. However, each time there is a recession, the restaurant industry is one of the greatest benefactors. With unemployment currently hovering at 10%, the restaurant industry is finding job seekers that we would not have seen during periods of low unemployment. While many may see the restaurant industry as a short-term solution until something “better” comes along, often a large number of them end up staying in our industry and making a permanent career switch. During recessions the restaurant industry benefits with greater supply and quality workers and this is the very best time to bring in new talent.
2. Reduced Rent – As much as residential property valuations were over-inflated, in many areas the commercial rentals are now above what the market can support. We are finding clients across the USA and abroad successfully renegotiating leases right now. The ideal “occupancy cost” for a restaurant (rent, C.A.M., etc) is 8% – 10% of sales. If you have experienced a big reduction in revenue or are paying more than this optimum range, now is the time to negotiate a rent reduction.
3. Locations – In recessions, new locations come available that were out of reach or budget before the recession. One client had his eye on a location for almost 20 years and never could make a deal happen. Half way through the recession he not only got his ideal location, he got a better deal on the rent and lease terms than he could have in any other scenario. While many restaurant companies are forced to contract, some have cash surpluses and are putting them to use by expanding. For those with money, the best time to expand can often be at the tail end of a recession.
4. Innovation – There is a saying, “Necessity is the mother of invention”. When our backs are against a wall is when we must prove our mettle. In downturns, we look at the P&L more closely, we engineer processes to be more efficient, and we look for new ways to be successful in spite of tough times. Generally people are motivated by the desire to avoid pain and gain pleasure. When we feel pain, we move with a greater sense of urgency and purpose. When the pain of a recession bears down, successful restaurateurs innovate. They bend like the willow. As Darwin said, “it is not the strongest of the species that survive, but those best adapted to evolve”.
5. Forces smarter buying – We all tend to shop differently in lean times. When cash is plentiful it can be underappreciated and misallocated. Scarcity compels a higher valuation on resources. During times of a recession, buyers can find better deals on products from suppliers that need to move inventory and service providers trying to keep their best employees fully utilized. Not only can you find better deals, a recession also serves as remedial training on remaining disciplined and diligent in purchasing decisions. This is the time to look at inventory par levels, menu yields and utilization, ways to introduce technology for greater efficiency, and much more. For a typical restaurant, 95% of the revenue coming in the front door goes out the back door to suppliers and vendors; leaving just 5% profit for the owner. Getting better at procurement and supply chain issues is necessity. Careful not to cut too much though (see 10 ways NOT to cut costs for your restaurant).
6. Pruning – As insensitive as this may sound to some, the fact is our industry needs recessions to keep us all on our toes and to prune out the underperformers. A rose bush must be pruned to be healthy; which means cutting away certain branches, blooms, and shoots. A forest must have forest fires to stay healthy. Forest fires seem devastating – and there is certainly collateral damage – but the greater good is served and this natural phenomenon is part of the necessary cycle. As an industry, we too need the cycles of recessions in much the same way a forest needs a brushfire. We as an industry get better. And as painful as it can be to see some not make it through, they too learn, grow, and often come back better than before. As my father always liked to say, Edison failed 20,000 times before he invented the light bulb.
There is a silver lining in every cloud, even if it doesn’t feel like it at the time. You just have to look for it.
About Aaron Allen & Associates
Aaron Allen & Associates is a global restaurant consultancy specializing in brand strategy, turnarounds, and value enhancement. We have worked with a wide range of clients including multibillion-dollar chains, hotels, manufacturers, associations and prestigious private equity firms.
We help clients imagine, articulate, and realize a compelling vision of the future, align and cascade resources, and engage and enroll shareholders and stakeholders alike to develop multi-year roadmaps that bridge the gap between current-state conditions and future-state ambitions. Learn More.