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Texas Restaurants Find Change on Postpandemic Menu

On the Record: A Conversation with Emily Williams Knight

Emily Williams Knight is president and CEO of the Texas Restaurant Association (TRA). It represents the state’s $52.4 billion restaurant industry and its more than 43,000 food and beverage outlets. This summer, she will join the National Restaurant Association as its chief collaboration officer and executive vice president of industry relations. Knight discusses how the dining industry survived COVID-19 and the changes that have occurred.

Q. The pandemic has been traumatic on high-contact sectors such as restaurants. How was the restaurant industry in Texas affected?

It is important to first understand where the industry stood before the pandemic. Going into 2020, growth was phenomenal, and Texas eating and drinking establishments expected their best year in history. That all changed on March 19, 2020. In the six weeks following the broad shutdown, more than 750,000 employees were laid off or furloughed out of the estimated 1.3 million employees in the industry.

Today, as we look back, 2020 saw a $17 billion revenue loss; 160,000 employees are still not working, and about 9,000 restaurants have closed for good.

When the pandemic shut down everything, we initially thought everyone [in the industry] was going to be hit very hard. What we saw was that the impact across the spectrum of restaurant businesses varied, and we actually began to see bright spots, led by many restaurants’ ability to quickly pivot or take advantage of existing operational capabilities.

Quick-service restaurants finished 2020 very strong—many with record years—due to strong demand for to-go, and some casual dining survived with a shift to increased takeout. However, as you move more toward fine dining, the negative impacts of the pandemic were felt more, as those tend to get less demand from delivery and rely more on convention and business traffic, which came to a halt.

Q. How important was the federal Payroll Protection Program (PPP) to the food-service industry?

The entire PPP package and [subsequent] multiple rounds were crucial to the survival of restaurants. The average restaurant has very little cash on hand—usually enough to support operations for 14 days. Most were not prepared for the sudden halt to operations.

We estimated that when the shutdown began, only 34 percent of restaurants could generate any revenue, and that was through delivery, drive-thru and carryout only.

PPP offered a safety net by providing grants to cover payroll and rent costs and, subsequently, for PPE [personal protective equipment] and to retrofit establishments to meet the changing business model of off-premise and outdoor dining. Additionally, through employee-retention tax credits, restaurants received additional financial relief.

Emily Williams Knight

[The year] 2020 saw a $17 billion revenue loss; 160,000 employees are still not working and about 9,000 restaurants have closed for good.

 

However, the first round was not without its challenges in execution, conditions and high demand. Most of our small restaurants were left out as they didn’t have lending relationships, did not have the formalized operations to navigate the initial [PPP] rollout or faced a language barrier.

We stepped in to support many of these restaurants through partnerships with banks and chambers to ensure they were aware of the conditions and had that direct access to banks they may not have had. This included the translation of marketing materials and required documentation to ensure awareness and access for Spanish-speaking restaurant owners in Texas.

These efforts have been especially successful for the second round of PPP and with the recent launch of the Small Business Administration Restaurant Revitalization Fund (RRF). To highlight the continued demand and need for such programs, the recently launched RRF received 186,000 applicants nationally within its first 36 hours.

Q. What long-lasting impacts will this event have on restaurants? How will restaurants do business differently post-COVID than they did pre-COVID?

The investment in technology will be the most significant change. It is estimated that the industry saw five years of technology gains in a 12-month period. To survive, many restaurants needed to quickly adopt technology to support online and contactless payments. These restaurants also saw the need to expand delivery services, with many choosing to sign agreements with third-party delivery services.

In addition, the to-go business is expected to continue. As the economy reopens and restaurants fill up, to-go business has not dropped. This is and will be supported by innovations that came out of the pandemic, like the ability to add grocery [sales] to restaurant offerings. For example, alcohol-to-go was signed into law during this past [Texas] legislative session.

The evolution of delivery and virtual kitchens is also something we are watching. These large commissaries where restaurants can rent space are leading to change and growth in the industry. The ability to rent kitchen space allows for consolidation of space and smaller footprints, even for dine-ins [that lease out part of their kitchens], and provides a lower barrier of entry into the restaurant industry by dramatically reducing the upfront investment.

As to-go and delivery look to remain a strong revenue generator, those services operate out of any of these kitchen operations without the need for on-site dining space.

Q. We hear about labor market tightness in your industry despite a high overall unemployment rate. What are restaurants telling you about difficulties finding workers?

Access to labor is probably the largest crisis we are facing outside of COVID. TRA members were polled in early May, and 91 percent reported openings they cannot fill. This is extraordinarily high for an industry where previous highs were around 65 to 70 percent.

We are seeing this due to multiple factors. To start, much of the workforce left the industry and found employment in areas that saw significant growth, like logistics or grocery. The current additional federal UI [unemployment insurance] benefit is also driving people to make a rational choice for their family when it comes to returning to work.

The vaccine, the stimulus and the supplemental [federal] unemployment benefit of $300 are certainly major factors. If one does not have to pay for child care and can be home earning about the same amount, they will tend to make the choice not to return to work. Given our workforce is 55 percent women, the availability and affordability of child care must be addressed to begin resolving the current labor challenges we face.

Q. A national $15-an-hour minimum wage has been proposed. How would that affect Texas restaurants?

A national minimum wage of $15 an hour has varying regional effects due to differences in the cost of living. In Texas, which has a lower-than-average cost of living, $15 an hour represents a much higher real wage than in California and New York, where the cost of living is much higher.

That specific proposal would have had a unique effect on the restaurant industry, as it also included the elimination of the tip credit. The proposal would have led tipped personnel, who currently have a minimum wage paid by the employer of $2.13 per hour, to have the same minimum wage as everyone else. [Currently, if a tipped employee does not make at least the $7.25-per-hour federal minimum wage after tips, the employer must pay the difference.]

If this had passed, many restaurants would likely have eliminated the need for tips, as prices would have needed to increase to account for the wage adjustments. The TRA had many discussions with tipped workers about the proposal, and many were against it since they saw it as likely reducing their overall wages.

We know we have to have a conversation about what wages need to be going forward, especially as the industry evolves following the pandemic. For now, we can see that the market is driving up real wages across the country.

Q. . What are some lessons learned during this historic period for the restaurant industry?

Our food-service supply chain is really challenged, and we expect this to be the case into late 2022. The grocery store and the restaurant supply chains are different, and we need to rethink how to create a more fluid supply chain. When restaurants opened back up, there was no easy way to shift [the supply chain] from the grocery back to us. This is very important to address in order to protect our food system.

Consumer demands are evolving, and the need for more technology and automation is only growing. For example, the ability to order from your table via your phone and have the food delivered to your table is becoming more of a reality and requirement.

Moving forward, restaurants must first embrace technology and then begin looking at how the workforce will coexist with technology to provide a new, but still great, customer experience. The restaurant industry represented 51 percent of the food dollar before the pandemic, and that only dropped to about 48 percent at the height of the pandemic.

The economic impact of that volume of food and beverage is on top of the 1.3 million direct industry jobs in Texas.

I will say this: Texans love restaurants, I know we will recover, and we are coming out of this smarter and more innovative. I am surely betting on restaurants.

Southwest Economy is published quarterly by the Federal Reserve Bank of Dallas. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

Articles may be reprinted on the condition that the source is credited to the Federal Reserve Bank of Dallas.

Full publication is available online: www.dallasfed.org/research/swe/2021/swe2102.

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