A seasoned restaurateur breaks down the dicey finances of operating in a shutdown
This article is part of our “10 Bars for 2020” feature. Read more stories of bars that are defining this moment in drinking.
It’s about managing your own expectations and your ability to adapt,” says Matty O’Reilly, owner of Republic at Seven Corners. “If you can do those things, then you’re in way better shape. If it’s ‘I want it back to normal,’ well, you’re going to go under, quick.”
For the last 10 years, arguably no bar in the Twin Cities has been more associated with the explosion of local craft beer than Republic at Seven Corners. But it might surprise some to learn that beer has not been the driving force behind its success—it’s the food.
“It’s shocking to me, that a beer bar on a college campus manages a 65-35 food-to-liquor split,” he says. “We’re a restaurant, and that’s what it was designed to be.” And with a spacious patio and segmented indoor space, O’Reilly can now seat a good number of dining guests at a social distance. He’s also re-tooled and truncated the menu to be more takeout-friendly.
But even the best restaurants, O’Reilly tells us, are battling back from the beginning of 2020, which appears almost tragi-comically designed to sink their business model.
“When you come out of January and February, historically the two slowest months of the year, your fixed costs stay the same. Rent is the same. Salaries are the same.” To compound the balance-sheet woes, at the end of January, when your revenue is at its lowest point, you’re paying vendors for the food, wine, and liquor you purchased for holiday parties in December.
So you suffer through two lean months, with just a little cash coming in and expenses a little greater than average, because you expect to make it up with busier months down the road. But not this year. “The timing of this is what no one’s really talked about,” he says.
Imagine two trains chugging down parallel tracks at the same time—a revenue train and an expense train. They’re both moving, and at different times of the year, one is moving faster than the other. But they both have to continue to move—and you’re hoping to keep revenue just ahead of expenses to stay afloat.
But on March 16, as on-premise dining was shut down in Minnesota, the revenue train for most restaurants derailed while the invoices kept coming. “With the expense train, you can hit the brakes, but it doesn’t stop,” he explains. “You can do your best to stop it, but it doesn’t have a reverse.”
Your invoices for liquor, wine, and food, and anything else (except beer, which is cash on delivery), are paid on somewhere between 7- and 28-day terms. “Everything that company bought from February 16 to March 16 was due between March 16 and April 17, with no revenue coming in,” he says.
He charts out a hypothetical restaurant doing $1 million in revenue annually. Monthly expenses are about $6,000 in rent, $25,000 in payroll, and $28,000 in food. Just those three, to say nothing of any other costs, are $59,000 monthly. “If you’re doing a really good job, you make $100,000 a year […] and after taxes, about $60,000 profit on $1 million in sales,” he explains. “So the expectations of managing a cash flow business with the revenue shut off like a faucet, you would have had to have a year’s worth of profit in the bank to absorb the simple high-level expenses of one month of operating [during the shutdown].”
“Honestly,” he reflects, “I don’t know how half these places are still in business.” And that goes for his own restaurants, two of which he expects won’t survive the year.
So, editorially speaking now, while we mourn the loss of some of our favorite restaurants in these last few months, perhaps we should be thankful that any of them still exist. Yes, let’s all keep getting take-out, but for many restaurants it simply won’t be enough. Now’s the time to pressure lawmakers for more specific relief to the service industry as well.