The relief package moving through Congress this week might end up better remembered for how many restaurants it puts out of business than for the money it added to save them.
For the past six weeks, we’ve been on the phone with restaurant owners in cities and towns across Texas. One of us (Mr. Roy) represents the congressional district home to the most restaurants per capita in the state, employing more than 50,000 Texans. The other (Ms. Knight) runs a trade organization for the once-thriving Texas restaurant industry, which as of Jan. 1 represented 50,000 restaurants, 1.3 million employees and $70 billion in revenue. To say restaurants have been devastated by government decisions to close their livelihoods doesn’t do it justice.
Many restaurants have shed staff and are operating solely on takeout and delivery, which nets owners some 30% less on every order than dining in, because of lower check averages and delivery costs, not to mention lost tips for employees. In many cases, restaurants changed their business models overnight and moved to selling bulk retail items to fill gaps in the supply chain and meet new customer needs.
We expect 688,000 restaurant jobs in Texas will have been lost by the end of April. Restaurants will see a record 70% decline in sales. Some 34% of restaurants have temporarily closed, while 6% expect to close for good in the next 30 days. In the past week, Austin institutions such as Threadgill’s, Magnolia Café, Veracruz All Natural and NXNW Brewery have shut down permanently.
Last week funding for the Payroll Protection Program dried up. Our estimate is that 50% of restaurants in Texas weren’t able to get capital.
One reason is that many small restaurants don’t have relationships with big banks, in part because restaurants aren’t a high-receivables industry. This makes it more difficult to obtain funding. Many small banks were hesitant to get involved, fearing they’d be left holding the bag when funding ran out and large lenders prioritized their clients. Without capital to stay in business, owners are left to choose between firing their employees and furloughing them.
If you terminate workers, you cut expenses. But to qualify for loan forgiveness, PPP requires that you hire them back. Owners have no idea, however, when they’ll be allowed to reopen. They also wonder if customers will be eager to come back. That means most restaurants can’t gamble on staffing back up to prepandemic levels.
On top of that, the Cares Act created a perverse incentive not to work, as restaurant operator Kurt Huffman pointed out in these pages. Because the Cares Act pays an additional $600 a week in unemployment benefits, many restaurants will find it difficult to get employees back on the job. And if they don’t, restaurants can’t receive loan forgiveness.
There are other hurdles. The PPP requirement that 75% of the forgivable loan be spent on payroll puts restaurants with expensive rent in an untenable position. That requirement doesn’t account for differences in business structures.
Small businesses are expected to navigate getting a loan, hire employees back while competing against enhanced unemployment checks, and hope that some of the loan will be forgiven. Many will discover that they don’t qualify for forgiveness and will be expected to start repaying in six months. The loan must be paid back in full, plus interest, in two years. Most restaurants can’t afford those payments. After Hurricane Harvey in 2017, it took Texas restaurants more than 18 months to recover—and that disaster hit 60 counties, not all 254.
Many of these restrictions aren’t required by law and can be revised in agency guidance, such as the 75%-on-payroll rule, which the Treasury Department should get to work fixing immediately.
But the bill in Congress won’t do any of that. We support additional funding for the program to help the one million restaurants nationwide that still need assistance. But without changes, that money won’t help restaurants forced to close, nor the ones barely keeping their doors open.