Why restaurant and hospitality business owners have been hit hardest

Some clients survived by dipping into their diversified investment portfolios

Why restaurant and hospitality business owners have been hit hardest

Over the past two years, the Canadian economy has suffered repeated hammer blows from the pandemic and, more recently, the spectres of inflation and rising interest rates. And while many segments of the private sector have been able to recover, a lot of hard-hit business owners – notably from the restaurant and hospitality industries – are going through a much more trying time.

“Initially, one of the main challenges we saw among our business owners was dealing with the shock of it all and addressing the massive revenue decline they experienced,” says Orest Fialka, AVP and Portfolio Manager, CWB Wealth Management. “All the while, they were doing the best they could with managing costs; pandemic rules and restrictions; and providing safe employee and customer experiences.”

According to Fialka, some smaller business owners in immediate need of personal or corporate liquidity had to dip into their investment portfolios; many of the firm’s clients were able to withstand the large equity market drawdowns early in the pandemic thanks to their diversified portfolios.

“We stayed in touch with clients more frequently, especially in the initial stages of the pandemic, to ensure that their investment portfolios remained properly aligned with their long-term objectives,” he says, noting how some clients were concerned over the economy shutting down and the February-March 2020 market correction. “We took advantage of the cheap equity market valuations and added equity to client portfolios.  This decision added tremendous value to our clients, and at the end of the day we helped mitigate the stress of managing their investment portfolios while they were busy navigating the challenges in their business.”

Even as the broad economy improved and mobility trends ramped up with easing pandemic restrictions, many hospitality-based businesses are still challenged. Because spending in the oil and gas industry has not yet fully recovered, Fialka notes, enterprises that are driven by that sector are still languishing.

“Although economic conditions and restrictions have improved, energy industry spending remains below prior cycle levels,” he says. “In fact, according to ARC Energy Research, estimated 2022 industry capital expenditure is forecasted to be about 50 per cent less than the prior peak in 2014, despite after-tax cash flow being twice as much today than it was in the prior peak cycle.”

Whether or not they see customers coming through the doors, expenses are a fact of life for owners of small- and medium-sized businesses. And according to Jacob Mancini, AVP, Restaurants and Breweries with CWB Franchise Finance, the arrival of inflation has been particularly distressing for restaurateurs.

“Cost of goods sold (COGS) and labour represent at least 60% of restaurants’ costs, and both have seen double-digit growth as a result of inflation and lack of supply, among other factors,” Mancini says. “The restaurant industry already operates at thin margins, so the inflationary pressures in the market have made them even thinner.”

With the return of in-person consumption and leisure activities this year, demand for restaurants is at a high; that gives business owners capacity to pass some of their increased costs to consumers, but not all of it. Supply-chain issues have also hindered growth-seeking operators, who are seeing significant backlogs in ordering and receiving equipment or supplies to open new sites.

Following the wind-down of pandemic support and recovery programs, the federal government introduced measures in the recent budget to help business owners get back on their feet. In Mancini’s view, some elements of the budget are certainly helpful, including revisions to the foreign worker program to help alleviate current labour challenges. But there’s still room for improvement.

“In my view, an opportunity still remains for more industry-specific support such as reducing excise tax to help navigate inflation pressures and keep menu prices down. For example, breweries are taxed for production which can cause brewers to raise prices,” he says.  “To remain profitable, restauranteurs must maintain higher menu prices, which can discourage some people from dining in. In 2021, the government paused these automatic tax increases, which was well received, but went back to it this year – this could be an impactful piece for the government to revisit in the future.”

Debt is also a significant concern for the restaurant industry, according to Mancini, particularly as they consider margin pressures and rate increases. As payment obligations and borrowing costs rise, he says there’s a real possibility of many business owners being over-leveraged. Given that, he suggests debt forgiveness should be explored.

“Many operators have taken on debt through the last two years, and for some, it is more than they can realistically expect to pay,” Mancini says. “This is a point that should be considered in future budgets.”