Is Reopening A Restaurant Worth It?

(CBSNewYork) -- The country is attempting reopen its economy in the face of a coronavirus pandemic that remains very much a threat. (To date, over 1.6 million people have contracted the disease, and almost 100,00 people have died; both totals are likely higher.) What this means for local restaurants remains to be seen. But the weeks leading into summer could be a good indication of the road ahead.

Different regions are at different points in the reopening process. San Francisco recently entered phase two of California's reopening plan, allowing curbside pickup in much of the state, among other things. Miami has lifted citywide stay-at-home orders and let some non-essential businesses open with restrictions. Minnesota restaurants can host outdoor diners starting June 1. New York City, the country's hardest-hit area, remains under indefinite lock-down, even as other parts of the state begin reopening.

Only two states had met the federal government's guidelines for reopening as of last Monday. The Centers for Disease Control and Prevention (CDC) later released more detailed guidelines. Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, has warned of the real risk of future COVID-19 outbreaks if the country reopens too soon. And Memorial Day weekend saw well publicized opportunities for the virus to spread.

Businesses face plenty of uncertainty in the marketplace as they reopen their doors, and restaurants may top the list. Local government restrictions will raise the cost of opening up dining rooms. Consumers will be wary of dining in public places. And then there's the job loss and economic pain of restricting service to delivery and takeout or staying closed altogether.

Facing a very real bottom line, and an uphill battle to reach it, is reopening a restaurant actually worth it?

Turning a profit in the restaurant business is a risky proposition during the best of times. The typical profit margin for an average sit-down restaurant falls somewhere between five and eight percent. Given the predetermined cost structure, pushing those profits higher is hard, but allowing them to slip is easy.

The prime costs for any restaurant are food and labor. According to Christopher Gaulke, a lecturer in the food and beverage area at Cornell University's School of Hotel Administration at Cornell University, "those generally account for in the neighborhood of 60 to 65 percent of gross revenue. Those numbers will vary a little depending on the type of restaurant. Each takes up about half of that 60 or 65 percent."

Occupancy costs (i.e. rent) also matter, and those are generally in the range of eight to 10 percent of revenue, with restaurants in more expensive markets like New York City facing 12 to 15 percent. Smaller expenditures like insurance, maintenance and utilities push up the overall cost of running a restaurant even further.

All those costs eat up a sizable chunk of a restaurant's total revenue. (Some Random Bar in Seattle, Washington recently posted an illustrative video laying out their own profit and loss statement.) And all those costs are factored into determining a restaurant's break-even point, the point at which that restaurant turns a profit.

Gaulke elaborates. "When we set a break-even point to cover all those fixed costs, it's usually somewhere in the neighborhood of 80 [or] 85% of the seats available. So if we have 100 seats in the restaurant, we need to fill 85 of them during a service period in order to break even, for example."

This what it takes to make money during normal times. These are not normal times.

With COVID-19 threatening communities around the country, various measures have been recommended to keep people safe. Social distancing guidelines suggest (or mandate, depending on the location) at least six feet between people outside the home. Face masks have become a necessary accessory in public.

These and other precautions can drastically change the dining experience. Restaurant tables are generally closer to other tables than that. And face masks make it hard to eat.

State and local governments around the country that are allowing dine-in service have placed capacity limits on restaurants. The rules vary widely. Colorado is allowing "50% of the posted occupancy code limit with a max of 50 customers." Dallas restaurants also faced 50 percent capacity limits over Memorial Day weekend, with bars limited to 25 percent.

Any occupancy limit will come in at a significantly smaller percentage than the 80 or 85 percent required to break even. As Gaulke points out, "if we are in a situation where we're actually only legally allowed to seat 25 percent of them, we're obviously in a deficit there. Even as they relax the restrictions and we move to 50 percent -- that might be a month later -- we're still operating, in a lot of these situations, in a deficit. And so the economics are not in these operators' favor."

On top of that, the cost per visit of serving those limited customers has also grown with all the additional safety measures. "Gloves, temperature checks, face masks... disposable menus is something that's been discussed," Gaulke notes. "We now have to provide all of that personal protective equipment to the staff, potentially even to the guests."

And then there are larger capital expenses. Public bathrooms may have to be remodeled to accommodate the new reality. According to Gaulke, "we're seeing things like ozone spray disinfectant machines that we can go over all the soft surfaces and the hard surfaces alike. These are thousands of dollars for one that will last a reasonable amount of time. So that's a definite expense that a lot of operators are looking at in a time when they really don't have the cash to be making such an investment."

Take out and delivery options have helped some restaurants stay afloat in the short term. Additional table service set up on sidewalks and patios could increase capacity even further. But neither seems sufficient to push a restaurant into the black.

And even if a restaurant is willing to take all the necessary precautions, one overarching factor can still limit business. Many people in many parts of the country still aren't comfortable eating in a restaurant again. "This is a cultural thing that's varying quite a bit by region," says Gaulke. "We're seeing those locations that have been more hard-hit are obviously more hesitant than those that have seen very few cases."

For restaurants in many parts of the country, only the passage of time may draw customers back into their dining rooms. Unfortunately, given their mounting bills, time is in short supply.