In this episode, host Jonathan Havens, co-chair of Saul Ewing Arnstein & Lehr’s Food, Beverage and Agribusiness (FBA) Practice, and colleague Stephen Ravin, a partner in the firm’s Bankruptcy and Restructuring Practice, speak with Spencer Ware, Managing Director and Retail Practice Leader of national business advisory firm Riveron. They consider the challenges facing the food and beverage industry in the post-COVID world, from labor shortages and turnover to the effects of inflation on the prices of food, gasoline, and fertilizer. They explore how restaurants need to be flexible with their offerings, pricing and operations to thrive, for example by trimming portion sizes, maintaining flexible hours, and/or adapting menu items as the availability of certain proteins change. Finally, noting that restaurants and food suppliers have more negotiating power than ever before, the group discusses how it is imperative to work out arrangements with landlords and lenders at the earliest sign of trouble in order to remain financially sound.
Episode: How Restaurants Are Adapting to the Post-COVID World
Jonathan Havens, Spencer Ware, and Stephen Ravin June 2022
Jonathan Havens: Thank you so much for joining us for our food beverage and agribusiness podcast series, “Don't Miss a Beet.” My name is Jonathan Havens and I am the co-chair of both Saul Ewing’s Food, Beverage and Agribusiness Practice, as well as the firm's Cannabis Law Practice. And I'm based in our Baltimore and Washington, D.C. offices. Today, I'm thrilled to be joined by Spencer Ware, who is a managing director with Riveron. He has over 20 years of experience in corporate turnaround and restructuring. I'm also thrilled to be joined by my partner Steve Ravin, who is a seasoned insolvency and bankruptcy attorney. Spencer, thanks so much for joining us on today's episode. I’ve really enjoyed getting to know you in prep for this episode. Would you mind sharing a little bit with our listeners about your background?
Spencer Ware: Yeah, sure. Absolutely, John. I've been, as you mentioned, in restructuring for over 20 years now. I started with a firm by the name of Zolfo Cooper when we had the Enron mandate and then I followed Steve Cooper over to Krispy Kreme and spent another seven years at Zolfo before I went over to AlixPartners. Through the pandemic, I was an officer at JC Penney's, getting them over the retail situations. And about a year ago, I moved over to Riveron’s practice in New York to lead the retail restructuring efforts, which has been a great opportunity. I've worked with the folks here through the years before, and I couldn't be more impressed by the leadership, the teamwork and the execution, both on our accounting advisory side of the house and then with the legacy Conway MacKenzie business, focused on turnarounds and restructurings.
Jonathan Havens: That's great. So, as our listeners know, this is a food and beverage and agribusiness podcast. So we're talking today about the food and beverage industry in the post-COVID world, or we're trying to get to the post-COVID, I should say, and the challenges that you see facing the food services industry. I think the common themes that we're hearing about, especially the news of today, is inflation, labor shortages, supply chain challenges, similar to the rest of the economy. Is that consistent with the challenges in this space or is it different themes?
Spencer Ware: Yeah, no, I would say those are the broad themes. However, it's more nuanced when you bring it to food and beverage. You know, we find that restaurants, stores need to be much more dynamic in how they approach their business. And now they're going to need to be even more flexible than ever with their offerings, with their pricing, with their operations. Long gone are the days where you can just sort of set and forget the menu and the
model, and then just focus on executing. You're going to need to be very flexible and very dynamic to navigate all of these challenges because they're going to constantly change.
Jonathan Havens: Yeah, no, that makes a ton of sense. Can you – you gave some great broad strokes. Would you mind drilling down a little bit and get into giving us some examples of how this is happening?
Spencer Ware: Yeah, no, I think a big thing that we're hearing everywhere is labor and this is a major variable cost for restaurants and it's something that they're having a hard time maintaining, right? We've seen everywhere from quick service to fine dining that restaurants are short-staffed. They're going to need to think about how to navigate this. We've found that a lot of restaurant employees moved or pivoted over to the gig economy during the pandemic. They did it for a few reasons. You know, restaurants were closed. They needed to find something to do. They found that flexibility more attractive, right? They could work as much as they needed to. They could work when they wanted to. And they had changing demands at home. You know, those with families, with children, they didn’t know when the kids were going to be in school, when they were going to be out of school and to navigate all of it, the gig economy became very attractive. And now that we find there's wage inflation, that the turnover is tremendous. And look, when you walk into a restaurant, the fast food companies, they have their standard operating procedures and they train people up quickly, but even there, and even more so with the fine dining restaurants or fast casual, these are teams of people that figure out how to work together. It’s a bit of an orchestra and this high turnover leads to tremendous inefficiencies, the training costs and the customer experience and the onboarding. So, I really find that restaurants are suffering. They're burning a lot of costs, finding people, training people, and then getting rid of the efficiencies. I mean, over the last six months, the number of times I've had meals and items comped because of just tremendously poor, slow service – I don't even need to ask about – is something that I haven't seen before and this is hurting restaurants.
Jonathan Havens: Yeah, that makes a lot of sense. So labor is definitely changing, both on the labor side of it and then how industry's reacting to the changes in labor, but what about inflation in general? Can you talk a bit about that and how it's impacted the industry?
Spencer Ware: Yeah. I always find the consumer price index a bit misleading. It's about seven or eight percent year over year. But certain items will come in and go out to navigate that and manage that headline number. But a lot of food experts are knowing that costs have risen more this year in the food space than they have in the past 40 years. It’s eroding margins. People are finding – they’re having to change the prices and the customers are seeing this, not just only in the grocery bills, but gasoline and other places. And we just talk about the cost of food. There's a compound effect, right? The price of gas is increasing. We need to transport our food, frequently, across the country. It's going to get worse as the shortage of fertilizer comes in. People talk about how a lot was produced in Ukraine and Russia – it’s about 28 percent. But one of the biggest ingredients – ammonium nitrate – fifty percent of ammonium nitrate comes from Russia, right? So that's going to be even a bigger fallout. And that's just not our produce, but all the feed that the livestock eats, right? That's going to push through to the protein as well. So we're going to have – continued inflation should be expected. People are trying to get ahead of this. You'll see, as I mentioned before, prices are coming up. I have been impressed that the fast food chains – I think they did this a few years ago – got rid of all the dollar menus and now they're value menus, right? And it gives them that ability to just change costs more rapidly or change prices.
Jonathan Havens: Yep. Makes a lot of sense. And, beyond fertilizer, I've heard a lot of the wheat supply globally is coming from Ukraine as well. And so that’s certainly having an impact and is something we talk about here internally. Your point is an interesting one on the value menus. I was a big fan myself of the dollar menu, so I was a little upset to see those go away, but I certainly understand why. So it seems like fast food companies were getting ahead of this issue a while ago. Let's talk a little bit more though about menus and menu costs. Obviously inputs are changing and labor's impacted, but what about menus and menu costs?
Spencer Ware: Yeah, no. I mean, menu costs are sort of a classic thing that economists talk about, right? The price – sort of the cost of changing your prices. But interestingly, some of the technology that's been adopted or more accepted, I would say, during COVID and other investments have made this easier than any other cycle. You talk about hyperinflation – a long time ago in Germany where they would actually change the prices and call it out during the price of the evening and change the prices of beer pitchers. So people would buy extra so they can save on that. But now, look, the fast food companies all have digital menu boards, right? So they can rapidly pull things from the menu if they wanted to change the pricing. And it's not a massive effort to update everything and have it rolled out store by store. It's just a click of a button. And the other thing we've seen with COVID is the QR codes on every table. I think it's more acceptable now to have all or a good part of your menus to be digital. And people, through that and some scarcity, became more flexible, right? So, they don't have to print out all their menus. People are just happy if they get a piece of paper rather than a menu board, which costs – the cost of printing and updating. But they're going to be more flexible on what they’re offering, and so I think people are going to take advantage of that and pull items, potentially, from their offering at times.
Stephen Ravin: Can I say, actually, I took a restaurant management course, like three or four decades ago at the New School in New York. And I told Spencer this – in the first night of the course, the first point that the instructor made was that restaurants waste too much money on expensive menus. And I don't mean the expense of the food – the preparation of the menu itself. So her point was, and this was many years ago before COVID, her point was don't waste money on menus. So, some things haven't changed.
Jonathan Havens: What's old is new again. Yeah, I mean, I was going to make that point on digital menus. I practice in the regulatory space and we advise chain restaurants on compliance with FDA's menu labeling rule, the nutrition information, calories, those sorts of things and digital menus are obviously a lot easier to manipulate than paper menus and printed up big, expensive plastic board. So I think there are some advantages to digital menus more than what we're just talking about. So, back to Spencer, we're talking a lot about technology. I imagine there's expense to a lot of this technology. Is there an advantage for larger organizations in adapting and using this technology to adapt?
Spencer Ware: Yeah, no, I think the larger organizations with their technology rollout – it’s definitely something they can leverage. However, when it comes to food and beverage, I would say size definitely matters, but it cuts both ways. There's advantages to being large. And there are advantages to being small. Larger organizations are going to have more
purchasing power and available, kind of brain power to navigate these challenges and get ahead of pricing or costs and how to bake that into their menu prices. They'll be able to think more globally on the supply chain and on labor. But smaller organizations are able to be much more nimble, right? To be able to totally revamp their menus, pull items, take advantage of not just reacting to prices going up, but pricing opportunities. Maybe there's a decline in certain proteins and they could change their menus, take advantage, or pull items and be more flexible on their hours.
So, and then also, one thing I think we'll see is – when we talk about the size of organizations. We should also think about the size of portions. We've seen it in consumer products where inflation has hit both on the dollar, but also in the subtly in the size. There's less in boxes; there's less in cans; there's less in rolls. I think it's become less on your plate. I think people are going to be careful and say, “what if we just trim the size of this slightly? We could save a lot of money as we multiply this out through a number of tables, restaurants, checks in a week, month and year.” And then, I think the other piece where you're thinking about the amount of food is shrink. Shrink is a big one. So we talk about that in food and beverage. It's the amount of waste that you have. I've been seeing it more often. I'm sure you both have as well where restaurants just will run out of certain items. And I think that's strategic, right? They'd rather run out of something and not have the waste, than just make sure they have a full complement and potentially have that food spoil. So I think people are going to be much more thoughtful about their shrink.
Jonathan Havens: Yup. Look, this has been really informative. I guess I would ask you, although you've already offered so much information, are there other things that stakeholders in the food and bev space should be thinking about here?
Spencer Ware: You know, we've talked about labor. We've talked about food costs and I just wouldn't assume that any of your costs are fixed. Don't hesitate to negotiate with your landlords. Think about changing suppliers. As costs have been going up, people have been trying to pass these along. But consider re-sourcing items – your cleaning supplies or paper products. There's a ton of peripheral costs that are increasing and just don't simply accept those pass-throughs. It's going to be an interesting cycle for sure, for restaurants. Hopefully they don't need to endure many more or any more lockdowns, but regardless there's a need to be incredibly flexible, thoughtful, really be playing heads up ball as it seems our operating models are going to be on attack from all sides through this cycle.
Jonathan Havens: Yeah. That makes sense. So, let's switch gears a little bit. Steve, it's obvious that Spencer has a ton of experience in this field. I know our listeners are going to get a lot out of his comments. You’re a bankruptcy lawyer. What have you been seeing and what might you suggest to stakeholders?
Stephen Ravin: Well, thank you, Jonathan. I have been seeing a lot as the result of COVID, a lot more give and take than what used to be. It seems that the so-called debtor, let's say the restaurant franchise operation, has more leverage than they used to have. And the landlords, the lenders and the suppliers are a lot more negotiable than they ever were. And it's really out of necessity. They don't want to lose a customer, and they certainly don't want to lose a hundred percent of what they may be owed. So, in essence, they have to play ball and the businesses, the restaurants, the food suppliers should not be shy in attempting to negotiate arrangements that will suit their necessities rather than running out of money.
Jonathan Havens: Yup. That makes a lot of sense. So what suggestions do you have for these businesses to help them better weather this storm?
Stephen Ravin: Well, I'll tell you. And this is, again, not much different from history. A lot of businesses will wait until it's too late to help themselves. For example, where they may have money in their bank account to be able to work out arrangements, they may wait thinking that things are going to turn around, which they rarely do without significant help. And the point is that if you see trouble or the early signs of trouble, hit the nail on the head and take care of things as best as possible at an early stage, rather than wait until there is no stage.
Jonathan Havens: Yup. That makes sense. So I guess in wrapping up, any tips to impart to our listeners or stakeholders?
Stephen Ravin: I don't want to repeat what I just said, so that's really it. Don't wait too long. Don't be shy to negotiate and think more long-term than paying a hundred percent of today's bill rather than stretching it out and staying in the game.
Jonathan Havens: Yeah. I liked what you said about the negotiating power. Everyone's looking to make things continue to move along and make the trains run on time and where it used to be that maybe you didn't have any negotiating power on negotiating rent or supplies – I think people are willing to play ball more. At least that's what I'm hearing from you. So, that's great. Well, look, Steve and Spencer, it's been a really great conversation. I told you when we first started playing this out, it was going to go quick. We are at the end of our time here. But I really want to say thanks so much to you both. Great insights, great experience and practical tips for our listeners. So, with that, I want to say thank you to our listeners and we hope you join us next time on “Don't Miss a Beet.”
Stephen Ravin: Well, thank you, Jonathan. Thank you, Spencer. It was a pleasure.
Spencer Ware: Many thanks. Glad I could join the team on this. This is wonderful. Thanks.