Restaurants in the Pandemic

May 24, 2020

The NYT ran a column by a bar-restaurant owner telling of the horrible circumstances facing restaurants during and after the shutdown period. While the restaurant industry is among the hardest-hit sectors, and many will not survive, a few of the complaints in the piece need some qualification.

For example, it tells readers:

“Rent is obviously one of our biggest expenses, especially in larger cities. Rent easements are not voluntarily coming from landlords afraid that they will not be able to pay their taxes and other expenses. For commercial rent forgiveness to become a given, it would have to be mandated by the state government, and for that to work, the landlords would in turn have to be granted easements of property taxes. That might mean drawing a straight percentage line, cutting rents by law to 50 percent, say, or pegging easements to monthly gains against former revenue as shown by tax records.”

While we could look to legislate rent reductions, that would be hard to do in an equitable matter. As a practical matter, landlords would be very foolish not to agree to lower rents for restaurants and other struggling businesses, given that the alternative will be a vacant building from which they will collect zero rent. We know from watching Donald Trump and his son-in-law chief adviser that big landlords often don’t know much economics, but most of them probably do understand that some rent is better than no rent.

As far as the landlords’ obligations, most importantly their mortgages, banks will also likely recognize that it is better to get some payment on a loan than no payment. They can force properties into foreclosure, which they will then be looking to sell in the middle of the worst economic slump since the Great Depression.  Again, the housing bubble taught us that bankers are also not very good at economics, but presumably most of them can be made to understand that it doesn’t help their bottom line to foreclose on commercial property owners who cannot pay their full mortgage.

The piece also includes a complaint about payroll taxes that does not make any sense:

“When we pay out $16,000 of payroll to the staff, I’m adding another $8,500 in payroll taxes.”

It is hard to understand how payroll taxes can be 53 percent of wages. Perhaps a digit was dropped in the size of the payroll, but nowhere in the country has taxes anywhere near that rate.

But the piece’s first and main complaint is about social distancing requirements:

“Protocols already being readied in most states will limit indoor business to 50 percent of prior capacity — even down to 25 percent in some states — and restrict seating to safe distances of six feet.  …   That is quite effectively a death sentence. It would result in revenues of 25 percent or less of our normal operation, which in this business, even given a popular spot doing quite well, yielded razor-thin margins to begin with. There is, quite simply, no possible way for anyone to make those numbers work.”

There are two problems with this argument. First, it is not clear that many people would want to patronize a restaurant if they did not feel that it was taking reasonable precautions to ensure customers’ safety. That has been the experience in many places that have allowed openings with lax standards.

The other major problem is the assertion that the industry has “razor-thin margins.” That was the case before the crisis. There is no reason it would be the case now.

As the column complains, restaurants will only have 50 percent or possibly even 25 percent of prior capacity. This means that they will be able to serve many fewer customers. Also, many restaurants are going out of business. This means there is far less competition.

In that context, what would prevent a restaurant from substantially increasing their prices? Even if price hikes cost them half of their former customers they will still have all the business they can handle. The idea that everything in the world changes, but somehow a law of nature mandates that restaurants operate on low-profit margins, makes zero sense.

In reality, we should expect that in most cases the restaurants that reopen will do so with sharply higher prices. This will be needed to cover their higher per-customer costs. That is not good news for people going out to restaurants, but it is likely to be the world we face until the pandemic is controlled or we develop more effective treatments.

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