Michael Wozney
From Pivot Magazine

Are you being served? Restaurants face a turning point

In the midst of labour shortages, supply chain issues and shifting consumer tastes, Canadian restaurant owners are finding new ways to survive

Michael WozneyExecutive chef Michael Wozney and his Mexican food truck (Photograph by Johnny C.Y. Lam)

For an industry that has always operated on the thinnest of margins—on average between three and six per cent, with even the most highly successful operators only reaching near 10 per cent—the financial hit that the restaurant industry has endured over last three years has been unprecedented.

According to Restaurants Canada, there were 303 bankruptcies in the foodservice industry in the first five months of 2023, the highest of any industry and representing an 89 per cent increase over the same time period in 2022. By comparison, bankruptcies for all other industries increased by only 30 per cent.

While the pandemic may be over, the industry as a whole is still reeling. As restaurant owners, managers and workers find new, and often better, ways to work and serve their customers, many are still facing an uncertain future.

That holds true for both full-service, dine-in establishments or a quick-service restaurants (QSRs). According to Andy Brown, partner in audit, consumer and financial markets at KPMG Canada, they’re facing different headwinds. But, what they have in common is that both styles of restaurants have begun to focus on the overall dining experience. That means incorporating aspects of ESG into the dining experience—including ethically sourcing food, keeping an eye on reducing waste and investing in new technology.

“As part of the experience, customers’ expectations of what restaurants should be doing to get what I refer to as the ‘social licence’ to operate, is the minimum that restaurant needs to do to make the customer feel good in terms of where the food is coming from and how ethically it’s sourced, for instance,” says Kostya Polyakov, partner and national industry leader for consumer and retail at KPMG Canada. “At the same time, it’s part of the solution to balancing out the economics. If you as a customer say, ‘I’d like to eat at a restaurant that has zero waste,’ then that will cost the restaurant a significant amount to achieve. And the restaurant can say, ‘That’s fine, if you’re willing to pay the extra cost for that, I’m happy to do that for you.’”

However, restaurant managers and owners need to balance ESG concerns while also keeping an eye on the bottom line.

“In terms of dealing with rising labour and food costs, restaurants can balance this by significantly increasing their use of technology, both in terms of order intake and food prep. If you look at some of the QSRs in the U.S., some of them have no order counter, “adds Polyakov. “Here in Canada some brands have the option for you to order from a screen, but they still have a full staff complement taking orders. There is also a lot more robotic equipment to produce the food, especially in the QSR sector.”

Brown has a different take.

“Does that automation detract from the experience you’ve worked so hard to build to attract customers into your restaurant?” he says. “If you’re ordering from a tablet, is that conducive to what you’re trying to do—which is create an experience that’s encouraging people to sit in your restaurant as opposed to sitting at home eating the same food.”

According to a 2023 survey by Square, 88 per cent of consumers agree that they would understand if their favourite local businesses raised their prices as a result of inflation and the rising cost of goods. Understanding and paying, however, are not the same.

“Everyone’s bill has already gone up 20 to 30 per cent,” says Michael Wozney, executive chef for The Capital Hotel in St. John’s, Newfoundland. “And, being based in Newfoundland, we pay two to three times more for transportation. So, produce is even more expensive than on the mainland.”

Wozney is also a business owner, operating a Mexican food truck during the summer months with his wife. “I work for a large hotel, but as a small business owner, the supply issue is even harder. A lot of ingredients during the pandemic were no longer available, so we had to adjust our menus several times. It doesn’t impact larger businesses as much because you’re ordering from large-scale suppliers, but specialty items for our food truck became harder or impossible to find. And there’s only so much you can raise prices.”

As well, Wozney has noticed that customers who used to come in for large dinners are opting to hold dinner parties at home instead.

Alex SawrattanAlex Sewrattan, DOF, Pizza Pizza (Photograph by Johnny C.Y. Lam)

That’s an issue facing the entire industry, says Brown. “If I’m looking to take my family out for gourmet burgers on a Friday night, the rising prices are maybe making me look at delivery pizza or takeout instead. The market dynamics are changing so drastically that QSRs are looking to see how they can capture the trade-down crowd that used to dine in.”

Alex Sewrattan, CPA, MBA, is the director of finance at Pizza Pizza, based in Toronto but with 750 locations across Canada and Mexico that offer both dine-in and delivery/take-out service. Facing double-digit price increases on certain items, the chain decided to implement more tactical changes in pricing, rather than sweeping increases across the board.

“We really pride ourselves on being a value offering for our customers. But we need to balance what our customers are paying with the costs our franchisees are incurring due to inflation and supply chain costs,” he says.

The chain focused on two metrics: how much an average customer spends per order, and the traffic volume to its stores, overall. “We’ve found that while individual order amounts have gone up slightly due to those increases, the number of orders has also increased. So, the pricing structure has worked so far.”

As consumers have now become comfortable with home delivery of more than just pizza, the use of various delivery apps has created yet another headache for restaurant owners and managers.

“The challenge for restaurants is that it’s incredibly expensive for them,” says Polyakov “The fees for delivery services are in the low 20 per cent range.”

Given that this is a significant piece of the restaurant margins, those fees don’t seem tenable. “It’s difficult for a restaurant to make money on a delivered meal,” continues Polyakov. “So, we’re seeing a shift in how restaurants are approaching delivery services. And that’s where we’re seeing new concepts popping up.” Those include “ghost” kitchens, in which a restaurant will create a separate off-site kitchen that is strictly for delivery, and doesn’t interfere with existing service or operations at the main location.

Pizza Pizza, which mainly has in-house delivery drivers, has looked at different ways to battle the incursion of third-party apps while still using them. “I think the biggest challenge for restaurants is getting people to order organically, meaning walking into a restaurant or ordering online directly from a restaurant,” says Sewrattan. “When someone orders from us through a third-party app, we try to put one of our flyers on top of the pizza box, so people see we have our own website and our own app. And we’ll also include something we call a boomerang, to draw the customer back into the restaurant. So, hopefully, the next time, they’ll order directly from us.”

Then there’s tipping, which as we all know has become a hot topic among restaurant patrons and owners alike. Complaints of “tipflation” abound as diners are encouraged to leave tips that can climb up to 30 per cent as a suggested minimum. Why are they so high? The answer lies in the traditionally low wages that front-of-house staff (servers, bartenders, bussers, etc.) and often also back-of-house (chefs, cooks, dishwashers) make. Could the answer be to avoid tipping altogether?

Pricilla Deo and Colin UyedaPricilla Deo and Colin Uyeda, co-owners of Folke (Photograph by Johnny C.Y. Lam)

Pricilla Deo and her partner Colin Uyeda believe it is. When they decided to start a restaurant in Vancouver, they had a clear vision of the kind of food and experience they would offer. Folke opened in June 2022 with a plant-based menu that veered toward fine dining while still trying to be approachable enough for a casual Tuesday night dinner with friends.

It was a success from the start. Locals appreciated having another dining option among the slightly sparse offerings of the west Kitsilano neighbourhood and the city’s vegans and vegetarians embraced it. But it wasn’t just the guest experience that the two owners were focused on.

Deo and Uyeda drew on their combined experience in the hospitality industry to decide on what they did and did not want for their staff. “Having been a pastry chef in fine dining restaurants and worked those typical 18-hour days constantly, I knew exactly the type of environment I didn’t want,” says Deo.

This in-part led them to their strict no-tipping policy. So strict, in fact, that they have chased customers down the street to return tips left at the table. Why? “Tipping culture is so toxic,” says Deo. “It shouldn’t be up to our guests to decide how much our staff makes. If a guest is just having a bad day or is in a bad mood, they’re not going to tip as much. Everywhere else in the world, hospitality is treated as a career, except for North America. And it should be a career, so we decided to make it our responsibility to pay our staff fairly.”

And that can also make good business sense.

“If people want to eat at a place where workers make a living wage, they will pay for that experience. And from an accounting perspective, dealing with income from tipping is more complicated [than dealing with salaries],” says Polyakov. “Tracking of tips for accounting here in Canada can be challenging, as how the tips are dispersed among the staff varies widely from one restaurant to the next. Some restaurants tip out at the end of the night, with everyone receiving a share of the tip pool, in some restaurants the servers get to keep their tips, and other restaurants expect a certain portion of tips to be shared with kitchen staff.”

Ian Tostenson, president and CEO of the B.C. Restaurant and Foodservices Association, agrees on the importance of making hospitality careers a serious pursuit. A study done by the BCRFA in 2018 in partnership with the B.C. provincial government found that for every three people that retire from or leave the industry, only two can be replaced with domestic labour and one would need to be sourced via immigration. The B.C. government also recently released its labour forecast for the next decade and it indicates that 38 per cent of the million workers that will be needed over the next 10 years will need to come through immigration, often via the Skilled Foreign Worker Program. In other words, labour is at a premium.

The industry has also seen a large attrition among its workforce as servers, cooks, bartenders and bussers all decided to leave restaurant work over the last three years for jobs that offered better pay, better hours and fewer (if any) physical demands. According to a 2023 survey by Square, the payment app, on the future of restaurants, 31 per cent of restaurants have been short-staffed for more than two years. And according to an earlier report from Restaurants Canada and RC Intel, by February 2021, only 48 per cent of the lost jobs in foodservice and accommodation were recovered, compared to 88 per cent for all other industries.

“We’re headed toward an industry that sees that it has to find the depth and resources to create long-term careers in food service, like you see in Europe and most other parts of the world, where people don’t view working in a restaurant as a way to get to something else,” says Tostenson. “That being said, tips are still important. Most front-of-house staff earn around minimum wage, which is currently $16.75 in B.C. But they can make an additional $30-$40 per hour in tips, depending on where they work, so it’s the tips that are the priority. Even cooks and chefs, who always earn more than minimum wage because of demand, will get an additional $5-$10 per hour from the shared tip pool.”

At Folke, instead of tips, all staff are paid more than a living wage and receive full benefits (including mental health resources), paid vacation and sick leave, and schedules designed to promote a healthy work-life balance. “Our salaries are similar to what you would find if you were starting in the tech industry, which is very competitive,” says Deo, who’s worked in that industry herself.

According to a February survey from Angus Reid, 59 per cent of Canadians surveyed would prefer an all-inclusive, no-tipping model where staff are paid a higher wage.

The result of that model at Folke? The restaurant is fully staffed and often fully booked, and isn’t dealing with the labour shortages in the kitchen or front of house that most other restaurants are experiencing. Part of the reason for that may also be the nature of the restaurant itself, according to Tostenson.

“The staff at some places like Folke are attracted to a specific model. So, if you’re a vegetarian or vegan yourself, you’re more interested in working in a vegetarian or plant-based restaurant,” he says. “So, it generally won’t have the labour issues of larger, more generalized operations.”

Tostenson does acknowledge the changing expectations of the workforce, however. “We were dealing with labour shortages long before and during the pandemic, and that continued after normal operations resumed, when the consumer demand for dining out bounced back to an extraordinary level, leaving restaurants with clamouring customers but not enough staff to look after them.”

Employers like Wozney have adjusted their hiring practices to compensate for those shortages. “We do rely a lot on recent immigrants, who may not have the skill set you’re looking for, but they are willing to learn. We’re also relying on leadership to be educators as well as managers,” he says. “Every day, I’m teaching not just the how but the why behind everything. And the hotel offers great benefits, stat holidays, overtime with double pay, you even get your birthday off with pay. They also offer great opportunities to be promoted from within and offer ongoing learning to managers. Most of my line cooks work an eight to 8.5-hour shift.”

So what can CPAs do to help their hospitality clients?

“If you look not just at CFOs but at CEOs in Canada, many of them are CPAs, including in the restaurant industry,” says Polyakov. “As CPAs, our financial background gives restaurants ammunition for their business and a deeper understanding of the financial impact of every decision. We always say, ‘Give data a seat at the boardroom table’ because it’s mainly been about guts to this point. Follow your customers and they will take you where you need to be.”


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