Restaurants brace for mass closures

KPMG Chief Economist Brendan Rynne is optimistic about job retention rates in the hospitality industry, despite the second lockdown in Melbourne and the budding COVID-19 outbreak in Sydney.

Specifically, Rynne believes that businesses will successfully adapt to COVID-19 operating restrictions:

“A lot of restaurants started to adopt a different operating models. Instead of eating in, they went to takeaway. This meant that they were still able to keep the lights on and to keep some of their staff employed”.

“So instead of having say 15 people working at a restaurant, they may have had six. While that’s a significant job loss, it’s not 15. I suspect we will start to see more of that. Plus people starting to realise that their business can in fact operate in a different way”.

I take the opposite view and believe the hospitality industry is facing decimation.

This is a sector that relies on thin margins and high turnover. Thus, COVID-19 restrictions, alongside reduce demand, will push many restaurants and cafes deeply into the red.

On this point, Alan Kohler illustrated the problem well earlier this month:

According to Kohler, regulations in Sydney and Melbourne requiring diners occupy four square metres each, alongside average rents for restaurants in those cities costing $3,000 a year per square metre, means that diners would need to spend an average of $300 per head for a typical restaurant to break even. And this was before Melbourne’s latest shutdown.

This analysis alone suggested that a significant proportion of restaurants face closure unless COVID-19 restrictions end.

The situation will obviously be made worse when JobKeeper is reduced from October, limiting the industry’s ability to maintain staffing and operations.

Most Australian restaurants were already struggling to survive prior to COVID. Now they are facing obliteration.

Leith van Onselen

Comments

        • My brother in law and I go to that fancy brewery/burger joint in Mascot when I fly down for work. The schooey prices are eye watering.

          Back up to the Fed in Alstonville for a $5 Stone and Wood schooner.

          Sydney prices, mercy!

          • I brew beer, have made wine, make salami every year, hams, keep my own bees for honey, preserve fish, tuna, sardines, smoke meats, dry age beef, preserve lemons, make jams etc- grow fruit vegetables and worked in hospitality for 20 years from the 1980’s on-wards.

            What I see today has almost NOTHING to do with food and wine – and is almost entirely about peoples emotional well being, people needing to be made to feel special, and people wanting to be seen to be smart, intelligent, well heeled by “talking food”.

            Back in the day food was measured by quality (freshness, size etc) – now its measured by chef and ingredient list. Heres the thing – I can go out and buy $15 bottle of wine, cellar it for 20 years and open it and its absolutely awesome. People will go into a wine bar – pay close to $25 for a glass of wine I KNOW that the bottle would cost less than $10 for the restaurant = and the grower already made $8.

            What makes me angry is that the person paying $25 bucks for this pinot cat grigio thinks they are living the life.

            Meanwhile my $15 home cellared wine would be retailing for $500.

            Its like art and classical music – they wanted more sales so they brought in the seething masses to walk past a Van Gough for $50 a ticket so they think they’re cultured.

          • Geez man how do you find the time. I’m lucky I can find the energy to boil an egg when I get home from work.

          • SnappedUpSavvyMEMBER

            there is no $15 bottle of wine in existence that will cellar for 20 years

          • “Geez man how do you find the time. ”

            And all that’s on top of being Russia’s greatest love machine.

          • KPMG Chief Economist Brendan Rynne has no idea… publicly “optimistic”! According to Jon Taffer, up to 40% of US Bars and Restaurants will fail financially. Many restaurants are running at 10% of their former revenue, Federal PPP rescue programme doesn’t cover inventory, some have no cash to restock their kitchens. The bar industry is more of a challenge due to social distancing requirements and customer fear. Serving the same number of people spread over a longer time period to accommodate social distancing requirements raises labour costs without raising revenue.

            Nothing goes back to normal…

            And just to state the bleeding obvious, before the pandemic, most of the service sector were running on tinny margins (<5%)! And is the reason why the cash economy in this sector is so big. They cannot affair to pay tax – but at least they are not on the dole.

            West End theatres in London, cannot even cope with one metre distance requirements, which means 30-35% capacities. ALW reckons that most productions need 70% capacities before you break even. none have bothered to reopen. The whole arts industry, dead.

          • Most $15 Riesling under screwcap has no problem going 20 years. Wynns white label shiraz used to be awesome for clearing 10 and was often on sale for $10. Just don’t try it with that NZ cat wiz!

          • SnappedUpSavvyMEMBER

            Ok other then cheap Riesling that would still taste like cheap Riesling after 20 years

        • It must be 2 decades since pubs were a working class pastime. Now excluding anyone but the 25% highest paid (unless your stupid with money). And still people dont recognise the rentier, parasite economy that rides on the back of the majority of real businesses.

      • blacktwin997MEMBER

        Look I’d happily fork out $28 for a beer provided there’s the opportunity to glass cvnts. The only downside is that you’d very rarely find yourself putting one away next to say Innes Willox or Gerry Harvey. For the type of venue where you could rub elbows with those right sorts of guys it would probably be worth paying $280 for a beer.

  1. $300 per head? well that just wipes out about everyone, unless they go takeaway style.
    Not worried about the jobs, we have plenty of spare jobs they can migrate to like.. umm… real estate?

    • On the takeaway thing – I noticed that post the first lockdown all the restaurants who’d introduced the take-home option for that lockdown ditched it as soon as it finished. I’m wondering if a hybrid model even for some high-end restaurants will be more sustainable. At least it spreads the supplier bills and kitchen wages over some extra turnover.

  2. BoomToBustMEMBER

    Maybe its time to start reducing restaurants over heads like rent and council rates. Then we can hack some more out of the utility companies for power and gas. That would start to make the industry competitive again.

    It appears the rounds one shakeup will have restaurants going broke, round 2 will be the landlords. Once this has settled down we will see how viable the industry is again.

    • Somewhere in your chain someone gets financially ruined.

      The Melbourne restaurant scene is 100% predicated on massive amounts of equity and developer money from flogging bank debt to mindless speculators which is all being stuffed under the back seat like unwanted parking tickets for our grand kids to pay.

      The idea of nurses, teachers, cops, ambulance drivers, accountants, clerks and bailiffs all dining out every day on foi gras and 4 $5 coffees as being somehow sustainable is ridiculous. $20 for sandwich and drink for lunch, $30 for basic breakfast, $100 for a main meal is absolute standard – no one blinks. That is entirely reasonable.

      Its not. $2.3 Trillion in household debt.

      We just doubled that – and are about to do it again next year.

      First thing that needs to evaporate during a period of extreme austerity is ridiculous levels of self indulgent hedonism. Australia is facing off against China and Asia – BILLIONS of people with an unrepentant work ethic, highly educated, highly capable who will work for every cent.

      Australia is going to turn into a nation of cheap street vendors where a meal costs a couple of bucks – rightly so. Some very serious life lessons coming down the pipe line.

      • @ Rasputin
        “First thing that needs to evaporate during a period of extreme austerity is ridiculous levels of self indulgent hedonism”

        But that’s our entire economy and our entire life – tourism, entertainment, nails, hair, gyms, non-essential clothes & furnishings, renos, base cost $75,000 weddings…..

        pfft all gone. nothing left but immigration…no wait, that’s gone too….

        • Diogenes the CynicMEMBER

          Gyms everywhere and not cheap either. I’m surprised lock down didn’t sort that out. My own gym set up is a mat, 2 pairs of dumbbells and 2 kettlebells. Invent a programme or use one of the billion on youtube. Total cost less than $100 and the commute is quick too.

          • Funny, my gym’s identical to yours 🙂

            Maybe this covid will lead us on a path to less of everything and Gaia may let us hang here a little longer. The problem is to find work for all the aimless idiocy we used to call ‘industry’. Perhaps Pol Pot-like we’ll all move to the land lol

      • Poochie the Rockin DogMEMBER

        I would welcome cheaper options like more food trucks and coffee carts – Traditional restaurants hate them and will ring the council to try to get them out of the area.

      • “ Somewhere in your chain someone gets financially ruined.”

        I figured not someone but nearly everyone. Good. Reset required. Land prices down. Elec / gas prices down. Competitiveness returns. It will only happen if a lot of people get ruined first.

      • The issue isnt the fact that people buy lunch and coffee during the working week or go to a restaurant on the weekends. It the fact that the parasite class has taken over, whether its obscene rents riding on obscene property prices or banks backing the speculator class. Most people I worked with stopped buying these things 10 or more years ago thanks to the price spiral. If these landlords go bust, so what, that might be a taste of capitalism they havent experienced before and would be better for all society. Perhaps the actual business owners could then buy in at sensible prices. People socialise and eat out all over the world even more frequently than most Aussies do and at a much cheaper price than we do but then they are not having to pay the same rent tax as Aussies do.

        • This is so correct. Everything in Oz is so expensive starting with property owners & ridiculous rents for sh!t property especially retail, commercial & eating/hospitality (& of course residential) & industrial. It all starts at the property class a$sed!cks. Begin there & we are starting on a very good 1st course of disruption/destruction.

      • @ Rasputin Bingo!!! Nobody is saying this but it is absolutely correct – you might want to ‘screw your courage to the sticking point’ (Henry V) around here
        To rebalance to a productive sustainable economy a lot of stuff has to go. Then it takes a long time for the productive industries to grow sufficiently to take up the slack.
        The big problem her is that it is happening all at one time so the distortion is large and very obvious. Just depending on how this plays it may be only the start. e.g. Can we afford all these public servants who occupy the restaurants anyway – especially now a whole sector of the economy is being dumped? There are tribes of lawyers and accountants not needed. The cascade may go on and on.

        With current economic policy and philosophy we were going to hit this wall at some stage with sudden impact. The trick is to change economic direction, dump the modern economic BS and get back to some serious ‘common sense economic solutions’ – like saving i.e. higher interest rates
        -like cease running an overvalued currency to keep city jobs alive that shouldn’t be there
        Then you have all the educational and social problems we have created.
        Yes! I believe it is all impossible – the answers lie back in time …. but we need to START…..and we don’t start by simply wildly printing money and throwing it around

    • DominicMEMBER

      When you go into these establishments and pay eye-watering prices, you’re actually a handing a good chunk of that to some corpulent landlord.

      When rents halve across the board, business models will become more sustainable

  3. I wonder if people were out dining on Tasmanian fresh shucked Oysters with finger limes, Claire Valley Riesling jus with a late Harvest Barrossa grenache sparkling red to wash down a 3 month dry aged Wagyu during the great depression without a job or a home?

    JobKeeper is brilliant – seriously amazing.

    Right now I’m without a job, guzzling on some sensational Botrytis Riesling a bit of white truffle Semi-Fredo – lazing in the pool of this mansion in Kew that I don’t even have to pay for – even better – will be a kept man until March 2021 – no house payments with a cool $1500 fun tickets to spend on nose candy every fortnight !!

    WINNING !!!

    Best thing is the grand kids are picking up the tab. Us Boomers are just better.

    ..

    • Melbournes restaurants and food in general is some of the most expensive I have paid anywhere in the world – and Ive lived in a LOT of places. Including London and Paris. Its just ridiculous.

      I was eating fresh white truffle pasta with some of the BEST Montepulciano wines for around $15 AUD. That would be minimum $50 anywhere you could actually get it in Australia – probably more.

      And while Melbourne set the food standard of Australia in the 1960’s-1990’s – early 2000, from there it was just the same as any other metropolis on earth – certainly was nothing like New York – but the attitude and cost was beyond absurd.

      Just burn already.

  4. Yogi Berra’s timeless quote is even more true now: “Nobody goes there any more, its too crowded”.

    I haven’t had an eat-in meal at a restaurant since February.

    The business model will only be viable if rents fall. In theory the wage bill can be scaled down in line with reduced sales volumes, but its the fixed costs that will kill restaurants. That said, does anyone want to sit in a restaurant with tumbleweed blowing through? Kills the atmosphere. Maybe the sector is just toast.

  5. The rent on a 70 sqm apartment would be at most $700 per week or $35000 per year, i.e. $500 per square metre. How can it be that the rent for a restaurant is six times larger?

    • Also, some analysis from New York showed that before mobile phones, inner city restaurants could manage two lunch sittings instead of one. In the old days, people would sit down, immediately look at the menu, and be ready to order when the waiter came to their table. Today, they sit down, start frigging with their mobile phone, and don’t look at the menu until after the waiter has come over to them.

      • I am GrootMEMBER

        On the other hand, when you reach the front of the queue in the Times Square Maccas, you’d better be ready to spit out your straight from the menu order without delay lest looks should kill.

    • I mentioned in a comment below that the figure is absolutely wrong, probably by a factor of ten, eg it’s more like $300/m2. I work in commercial property, rents for our tenants are usually $350-$400/m2, admittedly not restaurants but some cafes and the like. The best office at 101 Collins St wouldn’t even be anywhere near $3000/m2 (maybe half that). It’s a pretty embarrassing gaffe, his whole analysis falls apart because his assumption on rent is so wrong.

      • Maybe a gaffe, but seriously every single property in every square inch of every Australian city is sooooooooooooo way over priced per every fu%^ing square metre of rent. Commercial rent & quality in Australia is absolute crap. Everyone in that industry needs a disruptor/destructor. It is the thing that is crippling Australia. All in one single doom loop.

  6. Aussies Can't Socially Distance

    A lot of people with businesses or jobs in travel or hospitality need accept they’ve lost their businesses and livelihood. False hope isn’t helping anyone.

    A lot of employees and the unemployed have been told to tighten their belts, people have taken 20% pay cuts, but it seems like business owners, asset owners aren’t really prepared to let their wealth and lifestyles take a similar hit.

    Most of these restaurants were barely profitable and relied on scab labour before this virus so let’s stop trying to save them.

    It’s over. The global world no longer exists and that’s how it’s going to be for most of the planet until there’s an unlikely vaccine for a mutating virus successfully injected in 7 billion people or the virus magically mutates into something innocuous. Could happen but unlikely at this stage.

    • Yup.

      Restaurants are going to have to go. People need to seriously become more self sufficient anyway – no one has idea of the value or cost of anything in their life – they don’t cook, don’t build, don’t repair, don’t clean, don’t even look after their kids.

      • 10
        I was reflecting just the other day – in the old days people used to save pieces of string!
        Later generations think they are conservationists because they go to a demonstration and then have a latte somewhere before driving home in the imported 4WD.

  7. Hospitality is a big employer of all these ‘skilled’ and ‘student’ visa holders. Without jobs in this sector, where will all these proposed new arrivals work when the floodgates reopen in January?

    Ramping immigration while tapering dolehider and reducing the dole itself might result in a lot more problems and not just Covid related ones. A lot of angry locals who can’t find work and 300K third world desperados flown in.

    • Not one chance on gods green earth they will open the flood gates in January. The Melbourne experiment – and repeated around the world from Europe to Asia – you can not open the borders.

      Wont happen.

      • I put nothing past ‘Scummo’ and ‘Dunderberg’ given the vested interests they serve.

        The ALP will not raise a squeak and opposition will be left that enduring useful idiot Pauline Hanson.

      • billygoatMEMBER

        Mask skam will eventually be deemed a success. Oz will be Covid world beater -same as Melbourne most liveable city. Ok to open borders to incoming discount property buyers – no outgoing except to homeland for newest property over lords:) God bless

  8. Poochie the Rockin DogMEMBER

    Restaurants in the future will have to be beyond super efficient to survive. They can’t rely on delivery apps (even Menulog at 13% Commission is too high), delivery is unscalable and the only way delivery apps can deliver cheaper is if they circumvent labour laws. But the laws are catching up & this loophole won’t exist for much longer. So in the future a restaurant will have to manage their own delivery, have people pay at the counter and collect their meals from the kitchen (no wait staff), with the only people employed being kitchen staff and people doing delivery/bussing tables. If they do all of this they’ll be able to survive. Side note I’m currently building an app for restaurants to let them add no Commission ordering to their websites – but the end game is to make an app that makes restaurants as efficient as possible.

  9. Brand new eateries in Brisbane were closing their doors after a month or two going back at least as far as last December (from my annecdata previously posted). Too many idiots with access to too much debt thinking the food establishment game is a doddle.

  10. even before covid and restrictions majority of restaurants were losing money … but miraculously they are going to be fine …

    I guess that’s true the same way Soviet union economy was fine when half of workforce got on welfare

    we don’t have economy right now,
    what we have right now:
    – 42% of workforce on welfare plus 6% of people quitting workforce
    – hope everything will be fine when epidemic ends while doing everything to make sure epidemic never ends

  11. So will the government continue handing out business visas for setting up or buying food outlets / restaurants given this?

    If so, they will be complicent in the wage theft that will occur as a result.

  12. Jumping jack flash

    No room in the budget for eating at restaurants or for any other luxurious discretionary spending, as the debt deflation roars on.

    600 billion in debt wiped off since sometime around or before October last year. Some of it replaced through recent stimulus but the money had to come from somewhere… it came from this, and similar things.

    • billygoatMEMBER

      Covid thrives in small business hence they are being quietly closed except for $5 mug of cuppo cino.
      Thank God Bunnings Coles & Woolies are Covid immune. Sure small business owners would like some of the vaccination the businesses got hold of or is it herd immunity that protects them. Packed car parks & lots of folks lined up a metre apart scares the living crap out of Covid virus so it goes for easy picking at your local cafe, nail salon, wax joint, children’s playground, park bench, library, post office.etc.

  13. BoomToBustMEMBER

    How much debt is going to need to be written off for bankruptcies in the next few years for personal and business? Where does this money come from? Higher interest rates or capital raising?

    When the risk weighting increases on property both residential and commercial and the banks need to hold more capital, where does this money come from? Higher interest rates or capital raising?

      • Well he specifically talks about the rent being $3000/m2 and yes I’m aware its per annum, that’s how the industry measures it. I work in property and I can tell you no one is paying that much rent, not for the best office in the best building in the best location in Sydney or Melbourne, let alone a middling restaurant serving burgers. As I said, maybe $300/m2 to $400/m2 in the suburbs and more in the city.

        • boomengineeringMEMBER

          Peter, hope this helps
          The Corso in Manly has very high rents, Surfection was paying 26k a week for a small prime pos and one on the other end is now for lease 2a The Corso Manly which they have been dropping the price for ( sorry couldn’t copy paste properly) Vaguely remember tiny shops 30 yrs ago costing 3M to buy.

          • Boom, I don’t mean to sound snooty but our firm runs a commercial property portfolio with a little over $1b in assets. I’ve got a pretty good idea where commercial rents sit 😉 I’m a little out of touch with retail (we don’t do it) but a short while back small specialty stores in really good Westfield’s were being charged a little over $1000/m2 and the rent on the best A grade tower in Sydney was a bit more than that. There’s no way in god’s green earth that an average restaurant is paying anything like $3000/m2 – that’s about what it costs to construct the building not rent it.

  14. A lot of high end restaurants were heavily reliant on exploiting both overseas and local workers – they can burn for all I care. Local family run takeaways near us are still going strong.

  15. Working and supplying this industry, I can say that orders are back to 70-80% levels. Might be due to the huge stimulus by gov, time will tell, but it’s not as bad as we all think.

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