After spending several weeks sheltered at home, we are all looking forward to having a great meal with friends at our favorite restaurants. Unfortunately, for most restaurants, and the "Mom & Pop" industry in general, the journey through this valley is going to be arduous. It will be Hell’s Kitchen.
Here is why. The restaurant industry is economically sensitive and runs on thin margins to begin with. The need of its patrons to now socially distance themselves, in addition to massive unemployment and less patrons overall, is a one-two punch. During high unemployment such as the present time, patrons generally forgo weekday meals and high margin items (appetizers, drinks, and desserts) to find a balance between eating out and saving. During weekend peak hours, restaurants will operate with fewer tables, so patrons are socially distanced. However, a 30% drop in revenues is enough to wipe out the profitability of the business. Anything below that and most restaurants must close.
Please see the illustration below to understand these numbers. This restaurant - Hell’s Kitchen - has sales of $3 million per year and profitability of $600k. Cost of food, labor, and other operating expenses is 80% of revenues. There are additional overhead costs, buts let’s forget those for now. In a normal world, Hell’s Kitchen is a profitable restaurant and the envy of most "mom & pop" restaurateurs. But in a Corona virus world, most of the profitability is wiped away at 30% decrease in revenues. And believe me, it will take a herculean effort to regain those sales. If the best are likely to struggle, what are the chances of the average restaurant business to survive in this new world?
The outlook is grim and requires extreme creativity on the part of the restaurateur. They will have to find ways of filling tables during off-peak hours, work extra hard to grow the takeout and delivery business, and find ways to reduce costs. This means working with the landlord to reduce rents, and other service providers to find payment relief. We as consumers also play a part in this recovery. Those who have the means must make a concerted effort to order from their favorite local restaurants. Ultimately, small businesses are the cornerstone of every community and without them, no community will be the same. The restaurant business is fighting an enemy like never before, and we can all play a part in helping them stay in this fight.
This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment.
This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future.
I am an investor and these are my personal thoughts on investing, behavioral finance, markets, and sports viewed through the prism of a Latticework