Observations From a Veteran:

Observations and insights from a 45-year veteran of the restaurant industry. Yes, I started very young however some say I am in the 4th quarter. I have been through all the ups and downs of the business cycles since 1974. I was involved in a high-end steak house brand that we acquired in 2007. Our comp sales dropped 18% in our first year of ownership and we barely were able to pay the interest on our public bond. Our partners hung in there with us and we continued to train, teach, improve food quality, service remained paramount, so we did not cut service staff. When the market turned, we exploded and 8 years later were able to sell at the right price. There were lots of restaurants that did not make it through the 08 crisis because they were over leveraged and as a result of that, they started to cut quality, service, etc. The restaurant industry is made up mostly of independent operators who are for the most part under-capitalized, and a couple of bad months can put them out of business. The margins in our industry are not what most people think. There are exceptions to this rule, with high volume restaurants with heavy liquor sales can run what we call a four-wall margin of 25%. This is before debt and corporate overhead. Most of the pack is in the 10-15% four wall range which when you pay some debt and overhead may leave 5% on the bottom line. As a result when the bank turns you down for a loan because they tell you that the restaurant industry has the highest failure rate it is because most restaurants are not owned by big chains, but by Mom and Pop who live and die on how there restaurant performs every day.

This crisis we are currently in will wipe out most of the under-capitalized operators who were on the edge to begin with. The big well capitalized chains will become stronger. The successful operators who own large multi-unit brands are reinventing themselves. The full-service guys are becoming efficient at take out and catering. One of my favorite restaurants here in Phoenix is Tarbell’s. Mark Tarbell is celebrating 25 years in the same location. I stopped by Saturday night to order dinner to go and there was Mark delivering an order himself. He also had a few cars with a free delivery sticker on them being driven by his employees who would have been furloughed. Instead they are bringing food to their loyal customers. This is the sign of a great leader and why Tarbell’s is still in business after 25 years. Because everyone is on pause, they are going back in and tightening up the operations in order to survive. When this is over, they will come back stronger than ever. Do whatever you can to keep your key people and help the furloughed hourly collect unemployment. Hopefully our government will get off their ass and get some financial aid to our hard-working men and women of the industry. Do not cut your level of food quality or service if you are full service the customer still demands great service. I would rather see you reduce the menu size and increase the quality. Work on some minor design changes while you are closed. Our partner Gregg Rapp (menu Dr.) can help you with your menu. We at Reconstruction Partners are here to help guide you through these tumultuous times.

Sincerely,

Lee Cohn
@Mark Tarbell
@R. Wallace Hite
@Gregg Rapp