The restaurant industry has always faced numerous challenges. For those who are drawn to it out of love for food and service, the benefits can supersede the drawbacks. For those that enter into it for the pure financial gain, making it through the tough economic times can prove insurmountable. If you are just entering the fray, here are several cities and states that have made our “restaurant friendly” list. Geographically, these may not be a bad place to stake your first claim.
Cost per Square Foot
Demand is still exceeding supply. What is an acceptable rent for your restaurant? According to traditional restaurant industry benchmarks, your occupancy costs should not exceed 6 to 10 percent of your gross sales. This includes rent and additional fees such as property taxes and insurance. The demand for commercial space in walkable and mixed-use neighborhoods is steadily on the rise as Gen X and Millennials are looking for live-work-play urban communities. Generic national brands are replacing independent owners due to the rising rents that landlords can ask, and obtain, in these highly targeted areas. So, just where have all the affordable cities gone? They are not in cities like Charleston, Cleveland, Nashville and Grand Rapids, where rates are rising at unprecedented speeds. And, while rents have increased in all the major cities as well, such as San Francisco, Los Angeles and Seattle, there are a few surprises. Rents have actually declined in San Diego, Atlanta, Chattanooga, Columbia and Tampa.
Federal minimum wage has remained at $7.25 per hour since 2009. States and cities, however, are on the rise. With the increasing minimum wage laws spanning America, restaurants that count on tips to make up a person’s hourly rate are finding it difficult to keep their doors open. Seattle’s minimum wage was set at $15 just two years ago. With 30 percent the norm for a typical restaurant’s food costs, 30 percent for operational costs, and 36 percent for labor costs in Seattle, most restaurants were making a slim profit margin as it was. When labor costs went up to 42 to 47 percent, restaurants were forced to either close their doors, increase their prices, reduce food costs by lowering quality or menu selection, or cut back on labor.
In addition, 33 states have adopted minimum wages for tipped employees. This may, in part, explain the current explosion of fast-casual dining—quality food in an upscale environment without servers.
States that require employers to pay tipped employees full state minimum wage before tips: Alaska, Seattle, Oregon, California, Nevada, Montana and Minnesota.
States that require employers to pay tipped employees a minimum cash wage above the $2.13 wage required under the federal Fair Labor Standards Act: Hawaii, Idaho, Arizona, Colorado, Florida, North and South Dakota, Iowa, Missouri, Oklahoma, Arkansas, Illinois, Wisconsin, Michigan, Ohio, West Virginia and all northeast states outside of New Jersey.
Affordable Care Act
The promise that there would be some changes or cut backs to this 2,700 page regulatory monstrosity seems to be faltering or, at the best, morphing into another regulatory compromise. Restaurants operating on a thin margin may have difficulty offering insurance to every employee working full-time. While restaurateurs want to support their employees, closing the doors due to regulations that increase costs that cannot be sustained does little for either employers or those who work for them. The top ten states that offer employee state insurance enrollment at affordable prices include: Massachusetts, Hawaii, Vermont, Iowa, Minnesota, New Hampshire, Maine, North Dakota and South Dakota.
Between regulations, wages and rising costs, restaurants have an increasing burden to bear in an already challenging industry. The one thing we do know: Those that love being restaurateurs will somehow find a way to thrive despite the present economic challenges they face.