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Walnut Creek Magazine

What is happening to California's restaurant industry?

May 18, 2019 02:53PM ● By Pam Kessler

What is happening to California’s restaurant industry?

Rising costs, cultural shifts, and labor challenges are changing the way we eat out.

                                                                             BY PAM KESSLER AND FRAN MILLER


Chefs, restaurateurs, real estate brokers, and others in the industry have marveled at  the growing restaurant bubble in recent years. But now it’s beginning to burst as seen by the ongoing rash of Bay Area restaurant closures. Notably Jardinière and Elite Café in SF, Spenger’s in Berkeley, Camino in Oakland, Momo’s and Le Cheval in WC, Shed in Healdsburg, Redd in Yountville, Yankee Pier and Chow in Lafayette, and the list goes on across California.

Many factors contribute to why a restauranteur decides to say goodbye: high rent, fierce competition, lack of foot traffic, outdated concept. But in 2019, restaurant owners overwhelmingly point to increasing payroll costs. With narrow two to three percent profit margins common, wage increases can spell disaster for chef-owned, small independents. Walnut Creek Magazine sat down with a prominent group of Bay Area restauranteurs who openly shared their perspectives.

LABOR

California is experiencing a huge labor shortage: a construction boom, a government crackdown on immigration, and new ways to supplement income with better paying jobs in the gig economy. Chef Kevin Weinberg who with his partner Ellen McCarty have owned Walnut Creek Yacht Club for the last 22 years says, “We used to run an ad on Craigslist and hundreds of resumes would come in. Now, we’re lucky to get one a day and then hope they show up for the interview.”

WAGES

“The biggest challenge is rising wages,” says Rocco Biale who has owned his popular pizzeria, Rocco’s Ristorante, for over 20 years. “California is one of only seven states in the nation that requires employers to pay tipped employees full state minimum wages.” This means as the minimum wage continues to climb annually (currently at $11/$12 per hour) to $15 by 2022, most servers will be making $35/per hour. “If California legislated a ‘tip credit’ like 45 other states, we would be able to pay a lower hourly wage to tipped staff and increase the money paid to employees in the back of the house,” (washers, cooks, hosts, food runners, and cashiers.)  “On top of that,” says Biale, “California’s minimum wage increase prohibits restaurants from counting tips as wages, but owners must pay payroll taxes on the tips. And staff must count tips as income.”

PAY GAP

The industry has long struggled to shrink the pay gap between front-of-house and back-of-house staff. Prep cooks and dishwashers typically earn a set hourly rate, while servers earn minimum wage plus tips. Some restaurants pool tips, others share tips, others add a service charge to the check. While raising menu prices may seem like an easy solution, it’s not. “What customer is going to pay $25 for a burger?” asks Rolla Ghaben, who with her family, owns 16 restaurants around Northern California, including Broderick in Walnut Creek and Batch & Brine in Lafayette. “The pay discrepancy in a restaurant is unsustainable,” says Biale. “On top of the minimum wage, servers often get $30 or $40 an hour more. A cook, working just as hard, expects similar pay.”

“The restaurant marketplace today is unlike it's ever been,” says Weinberg. “There are so many issues—pressure on payroll, lack of qualified employees, labor disputes. It's difficult to make a profit, to comply, to make staff happy. It's draining my creativity as a chef. And, just as society is squeezing out the middle class—it’s the same with restaurants. The nice, mid-range, full-service restaurants will disappear, and the no-service counter model will take over.”

RISING COSTS

California’s increasing minimum wage has also hit suppliers (linen companies, meat distributors, among others) causing raw material costs to go up. The Trump administration’s crack down on immigration has led to a limited workforce and Bay Area rents have doubled in the last decade. John Burns, who owns The Cantina in Mill Valley, has spent 45 years in the restaurant industry as owner of California Cafe and Blackhawk Grill. "It has become more and more difficult to find employees, let alone pay them. I've always been able to finagle the P & L, but rising employee costs are simply not sustainable." 

The pie is getting cut into smaller and smaller pieces. Dave Homer, who purchased Danville’s Pete's Brass Rail 13 years ago says, "Our costs are going up faster than our revenue; every year our profit margin is squeezed. Plus there are 50 to 60 percent more bars and restaurants in the area than there were a few years ago. We’re all fighting for the same customers."

APPS & SOCIAL

The hype cycle is instant and constant with Instagram, Yelp, Facebook, Twitter, and TripAdvisor promoting endless ways to eat and drink—and sometimes offering damaging critiques. Add to that the lure of convenience. More and more people are finding it easier to stay home, watch Netflix, and order from a delivery service.

SERVICE CHARGE

Lauren and Arash Ghasemi of Main Street Kitchen & Bar recently completed a stunning makeover of their downtown restaurant, doubling its size, and adding a 20% service charge to diner’s checks. "We've had hard core pushback on the service charge, but people are starting to get it,” says Lauren. “Customers feel an element of control is lost, but if there is a problem with service, we take it off the tab. The costs associated with running a restaurant with quality ingredients are expensive. How do we make a profit while serving really good food?"

SUSTAINABILITY

Fast casual restaurants are on the rise. The full-service model is on the decline. One way to sustain business and reduce costs is to scale back. Sunrise Bistro plans to convert its back room into a catering center, reduce full-service floor space by 50%, and vastly expand its counter service and carry-out. Ben Shavar, who owns and operates five Buttercup Grill locations with his family says, "It's probably the most challenging the business has ever been in 30 years. Everything ties together - it's a confluence of events—plus, it’s crazy the number of new restaurants opening. The established brands have the market share and the new players are fighting to take away their patrons. The industry is a like a dam that is starting to show cracks.”