Closing time: With one-third of America’s restaurants expected to close, industry in crisis as winter looms

While many businesses have managed to get back on their feet since the initial economic blow dealt by the COVID-19 pandemic, one industry is still staring down the barrel of a gun: the restaurant industry.

By year’s end, approximately one-third of the nation’s restaurants are expected to permanently close, according to Chicago-based restaurant consultancy Aaron Allen & Associates.   

That’s a sobering outlook for an industry that started off 2020 projecting to churn $899 billion in sales and employ 15.6 million people as the country’s second-largest private sector employer, according to the National Restaurant Association.

Over the past six months, the restaurant industry has been upended by the ongoing global pandemic. Government-imposed restrictions have curtailed cash flow and changed the way people dine, leaving restaurants gasping for air with no other option but to adapt with scaled-back operations focused on carry-out, delivery, outdoor dining and limited capacities.

That’s come at a price.

On a national scale, employment in food and beverage establishments is down by 2.5 million since February and restaurant sales between March and July were down more than $131 billion from expected levels. In July, Yelp reported that the restaurant industry has seen the highest total of business closures since March, surpassing retail.

In Wisconsin, about 30% of the state’s food and beverage establishments are expected to shut down at the hands of the pandemic, and that prediction could be on the conservative side, said Kristine Hillmer, president and chief executive officer of the Wisconsin Restaurant Association.

“To be honest, the longer this goes on and, especially as we lose outside dining because of the weather, that estimate could skyrocket,” said Hillmer, who anticipates some parts of the state to be hit harder than others due to varying levels of restrictions on dine-in service.

Leading the state in positive COVID-19 case counts, the city of Milwaukee has mandated some of the toughest restrictions on bars and restaurants, including a 50% limit on indoor dining capacity. That’s a challenge for full-service restaurants with revenue models that depend on bringing diners through the door.

Scaling back to off-premises business has been an easier transition for quick-service chains and fast-casual concepts, where drive thrus and online ordering were already the norm.

But many independent operators were forced to leap into the unknown of contactless curbside and third-party delivery just to keep the lights on, all while learning how to prepare food that would taste just as good from the couch as it would have in their restaurant. Some got creative with family-style meals and cocktail kits, and continue to find ways to innovate.

“That really gets at the heart of what operators are,” said Hillmer. “They have that entrepreneurial spirit, they have the hospitality spirit, so they’re figuring out ways to manage.”

Still, the pandemic has already begun to take a toll on the region’s dining scene.

According to Yelp’s second quarter economic data, 537 businesses in the greater Milwaukee area closed between March 1 and July 10. Of those, 281 were marked permanently closed as of July 10, including 70 restaurants.

Recent Milwaukee-area restaurant closures include Fauntleroy in Milwaukee’s Historic Third Ward; Jackson’s Blue Ribbon Pub and Pizano’s Pizza & Pasta in downtown Milwaukee; Crazy Water in Walker’s Point; Wooden Goose in Mequon; Blue’s Egg in Shorewood; and AJ Bombers and Smoke Shack, both at the Mayfair Collection in Wauwatosa.

Survival came at a cost for Milwaukee-based chef-owner duo Dan Jacobs and Dan Van Rite. They closed Fauntleroy in mid-July, not long before the French restaurant’s second anniversary. Second quarter sales had been down 90%.

The decision to close one of their Historic Third Ward restaurants was the difference between losing tens of thousands of dollars and losing everything, said Jacobs. They own two other restaurants nearby, DanDan and EsterEv.

“It was one of those circumstances that sometimes you gotta lose your toe to save your leg,” Jacobs said.

Meanwhile at DanDan, sales are down about 5% from yearly expectations. The Asian restaurant has been open for patio dining only this summer, in addition to carryout and delivery.

Jacobs said it’s up to his staff whether the dining room will reopen this winter. Takeout and delivery sales aren’t enough to keep everyone on the payroll, but reopening safely would require a $20,000 investment in upgrades to the HVAC system and partitions to separate tables.

That’s on top of other expenses the restaurant has taken on since the start of the pandemic, including third-party delivery fees. Jacobs said UberEats takes a 35% cut off each order, which hurts, but is ultimately worth it with all the business it drives on a weekly basis.

Ripple effect

When a restaurant goes under, it creates a ripple effect in the community, said Hillmer.

Often considered cornerstones of “Main Street USA,” restaurants are where people gather, celebrate anniversaries and birthdays, and experience the culinary arts. They also generate significant tax revenue.

A vibrant food scene is part of the draw for residents and businesses looking to relocate. But replace that with empty storefronts and blight, and the area no longer becomes a destination of choice.

“So, when you look at potentially 30% going out of business (statewide), that’s huge,” Hillmer said.

Wisconsin’s restaurant employees totaled 212,400 in 2019, according to the National Restaurant Association.

Mass layoffs have flipped the tides of an ongoing labor shortage in the local industry, said Omar Shaikh, co-owner of upscale steakhouse Carnevor in downtown Milwaukee. He said prior to the pandemic, the restaurant would run hiring ads every week, consistently short one or two staff members.

“Now, restaurants are in the driver’s seat,” he said. “Everybody’s applying for jobs because everybody needs a job and I see that continuing to happen over the next two years where we have a shake down where there’s a lot of restaurants that aren’t going to make it through this, period.”

The restaurants most likely to go under, he fears, are the independent operators that aren’t capitalized like larger groups and chains.

A national study released in February ranked Milwaukee among the metros with the highest percentage of independent restaurants. Using data from Yelp, it found chains make up 18% of all restaurants in the Milwaukee area, while the remainder are locally owned.

On top of a loss of jobs and, in some cases, an operator’s life savings, a restaurant closure has a direct impact on the suppliers, purveyors, farmers and other businesses that make up the supply chain.

Local farmer Mike Jozwik had been on track to achieve record sales earlier this year. Jozwik, better known as Mushroom Mike, has established himself as one of the region’s premier wild mushroom foragers and farmers, supplying to the likes of The Bartolotta Restaurants, Odd Duck, Morel and Chef’s Table.

Once the pandemic hit in mid-March, Jozwik watched restaurant sales plummet 80% to 90%.

Since launching Mushroom Mike LLC in 2012 with his wife and father, Jozwik had grown his network to about 1,000 restaurants in the upper Midwest, including Madison, Milwaukee, Chicago, western Wisconsin, northeastern Wisconsin, and had expanded his product line to about 250 items, including rice, nuts and wild berries. Revenue was driven largely by restaurants.

“We basically had to switch our entire
decade-long model of direct-to-restaurant sales and had to create something new within three days,” he said.

After adjusting prices and grow room schedules, the business started selling its products at grocery stores and directly to customers through online orders. Jozwik expects a 50% drop in sales compared to last year, but at least he can pay the bills.

“I’m making enough to be able to survive. That’s all I can really ask for right now, and that’s a lot more than what other people have,” he said. 

Restaurant real estate

As restaurants struggle to get by, owners of the properties they occupy are faced with a more immediate dilemma if a struggling restaurant owner can’t pay the rent.

“Landlords have obligations to banks,” said Andy Hunt, director of the Center for Real Estate at Marquette University. “They have to make sure that they’re meeting those monthly mortgage payment requirements because they don’t want to go into default on that mortgage.”

While landlords are unable to waive rent payments altogether, they’re incentivized to work with tenants that are struggling in order to keep the space filled and at least some cash flowing, which is better than having no tenant at all.

The COVID-19 crisis compounds on an existing challenge within the commercial real estate industry. The rise of Amazon and e-commerce has had a major impact on retail real estate and left an abundance of vacant storefronts in its wake. The owners of area shopping centers like Bayshore, Brookfield Square and The Avenue have invested millions of dollars to redevelop vacant brick-and-mortar retail space into offices, entertainment and restaurant space. The loss of restaurants is putting even more strain on the retail real estate market.

The situation will present an opportunity for some. As more local restaurants close, Hunt said, well-capitalized chains such as Darden, which owns Olive Garden, The Capital Grill and other prominent brands, are eyeing up high-performing locations as possible investments and expansion sites.

“And they’ll probably be able to get good deals,” said Hunt. “Landlords are a little more incentivized to do that right now because in a lot of cases some cash flow is better than nothing. Restaurants that can take advantage of that might be putting themselves in a really good position in the next few years as we come out of this.”

When Allison Meinhardt set out to open her own restaurant, she knew she wanted full control of the real estate she’d occupy. It’s been almost a year since she opened Bay View’s newest fine dining concept, T he White House. Six months into a global pandemic, owning her own business and property has taken on a new meaning.

Meinhardt purchased the historic former White House tavern building on South Kinnickinnic Avenue last summer and spent months converting the building into a restaurant and second floor apartment, where she now lives.

“I would never lease because you give up control to do the upgrades that you want and your landlord has control of upping the rent,” she said.  “This way, you’re building equity.”

The restaurant was open for barely three months before it was forced to close under the state’s stay-at-home order earlier this year. Meinhardt, with manager of operations Grant Jahnke and executive chef Robert Tringali, used the time to work on the business and the property. They transformed the back lot’s sand volleyball courts into an expansive terrace and garden, using it this summer for outdoor seating and growing vegetables to cut down on food costs.

Meinhardt herself hand-laid 800 cream city bricks from a wall that had collapsed inside the century-old building to create the patio. Hiring someone to do the project would have cost $15,000 to $20,000, she said.

Meinhardt is seeking historic preservation tax credits through the National Registry of Historic Places as she continues restoring a neighborhood gem. She continues to believe a safe fine dining experience will stand the test of time and turmoil.

“Going forward, I think there’s always going to be people who want that formal experience to host a celebration — they just got engaged, they’re celebrating their 25th wedding anniversary,” she said. “Those things will always be important to people.”

Innovate or die

Real estate location will continue to be key to a restaurant’s survival, but as the pandemic shifts consumer behavior, the ability to innovate is just as important, said Hunt.

In mid-August Menomonee Falls-based Cousins Subs marked its 17th consecutive week of comp sales growth and 11th week of comp sales growth over 13%.

While the past six months haven’t been without challenges — the sandwich chain took an initial sales hit followed by four permanent store closures and budget cuts — the company entered the pandemic one step ahead. 

“Long before the pandemic, we were starting to see a change in consumer behavior,” said Justin McCoy, vice president of marketing. “While we live in the Midwest, and consumers tend to be a little bit slower moving on technology and newer things, we still took the time to invest and explore these options.”

Over the past few years, Cousins has invested heavily in its technology infrastructure, updating its online ordering channels as well as implementing a new point-of-sale system across its entire store footprint. It also negotiated deals with a third-party delivery provider and a loyalty program partner.

“Having all of those things in place and being able to spend time educating guests on the fact that we had them, versus trying to get those things in place when the pandemic hit, put us in a much different position than a lot of different concepts,” said McCoy.

During the pandemic, Cousins has seen a 200% year-over-year increase in online ordering and has partnered with three additional third-party delivery partners to expand its reach. Going forward, the company will continue investing in those channels to drive business as consumer behavior changes.

Online ordering has become a lifeline for Zócalo Food Truck Park in Walker’s Point. Plans to automate and simplify operations for its six mobile food vendors and on-site tavern had been in the works for months, but the pandemic created an urgent need for entirely contactless service to keep employees and customers safe.

Using a free mobile app, called Cashdrop, customers can browse the menu, place an order and receive a notification when their food or beverage is ready to grab from the truck or tavern pick-up window. QR codes are posted on tables and around the park for easy access.

Zócalo started piloting Cashdrop last fall as the Chicago-based startup’s first customer.

“We really started seeing the results of how it can help us with operations in the last two months,” said Zócalo co-owner Jesus Gonzalez, who also owns one of its food trucks, Mazorca.

Prior to opening Mazorca in 2017, Gonzalez worked for Chipotle and noticed the company investing a lot of money in its online ordering platform. That later got him thinking about where he could incorporate technology at his own food ventures.

“It’s the future,” he said. “The Midwest is always late, but if you’re hanging out on the East Coast or West Coast, they use mobile apps for everything. It’s more convenient and it’s a lot safer now.”

An entirely outdoor concept, Zócalo will have to get especially creative about drawing business this winter. Plans are in the works to launch curbside pickup at the adjacent parking lot, but there’s hope that customers will still want the in-person experience when temperatures are bearable.

Food trucks represent another way the restaurant model has and will continue to evolve post-pandemic. Historically, operators launched their concept with a brick-and-mortar location that they would build out and later scale if it was successful. Now, there are other ways to build a business, said Sean Phelan, president of Phelan Development and co-owner of Zócalo.

“People are going to see that they can prove out concepts more readily or easier with less barriers to entry with a mobile food unit,” he said.

The same goes for food halls.

“(Restaurant) margins continue to get worse over the years, so spending a million dollars on a build out and hoping you make your money back — for most, those days are done,” said Shaikh.

In addition to his ownership at Carnevor, he’s a partner at 3rd Street Market Hall, a new food hall opening in April at The Avenue in downtown Milwaukee. He sees the food hall model as the future of dining.

“I think a lot of talented chefs and, frankly speaking, startups could raise the money and get in (to a food hall) for a lot less,” he said.  “You don’t have all the overhead that a normal restaurant does and you can make your money quicker and be part of a larger consortium of restaurants that all work together.”

The 3rd Street Market Hall will open initially with 12 local food vendors, instead of the 19 that were on board prior to the pandemic. Those that backed out have gone into “survival mode,” said Shaikh.

But those that stayed on are financially secure and focused on what lies beyond the economic downturn. And so is Shaikh. He’s excited about all the development going on west of the river in downtown Milwaukee and expects the area will come back to life once a COVID vaccine is available. But for now, it’s tough drawing people downtown with no shows, sports or concerts to attend.

Adapting while staying the course

The food hall model has provided a crucial step toward where one Milwaukee-based restaurateur ultimately wants to take his business, and he’s not letting the pandemic stand in his way. 

Despite challenging times, Jason Alston, owner of Heaven’s Table BBQ at the Crossroads Collective food hall on Milwaukee’s East Side, is moving forward with plans to open a brick-and-mortar restaurant across town, in the city’s Uptown neighborhood.

The space will allow for an expansion of the menu to appeal to diners who may not want barbecue. 

“One of the challenges of being in a food hall space is the space,” said Alston. “You’re only allowed to have so much product because you have to take into consideration the other vendors.”

Sales have stayed steady during the pandemic, which Alston chalks up to the product itself; barbecue travels well and it’s a timeless favorite among diners. Customers have been eager to support the restaurant as it made weekly donations to frontline workers at hospitals, he said.

Takeout orders already drove 70% of business, so there wasn’t much of a loss to make up with the drop in dine-in customers. The new location will maintain a similar takeout-focused model as well as an open concept kitchen for full transparency.

Alston said it’s important to build diners’ trust these days and allowing them to see safety practices inside the kitchen is part of that.

“With life, you have to adjust,” he said. “Even before COVID, we had meat recalls, lettuce recalls. It’s all about adjusting to whatever situation is presented to you, and that’s the great thing about cooking. You should be willing to switch it up. Don’t just throw in the towel. Do all you can first.”