Traditional Full Service Restaurant Models 2019: A ‘Day of Reckoning’

By: Patrick Maguire

Book Chapter: Rules of Engagement

Posted: 01/21/2019

The Server Not Servant blog and book project has always been about facilitating conversations, in addition to sharing my personal experiences and opinions. This guest post, shared with permission, was originally published via Medium by the former owner of Tawla, a San Francisco, CA restaurant that closed after a little more than 2 years. I personally find the piece to be a refreshing, candid, “behind-the-curtain” look at the trials, tribulations, and thought processes behind an arduous journey in an overly-romanticized industry. A must read for aspiring restaurateurs.

Despite the backlash, and tinge of inherent hubris, in my opinion, there are too many important issues raised here not to share the post. Some issues are specific to San Francisco, but many will resonate with restaurateurs, staff, and customers everywhere. Respectful comments will be published following the piece below. It would be especially insightful to hear from former employees of Tawla. Thank you.

Why SF Restaurants are Suffocating

That Saturday was the last day for our lead line cook. He’s one of the last three people left from the original 25-person team that joined us when we opened Tawla more than two years ago. We saw him grow, take on more responsibility and become a critical part of our team. We also got to know his family and celebrated with him the arrival of his fourth and last kid. Six months ago, he was asked to leave his rent-controlled apartment, another Ellis Act victim and yet another loophole that many landlords exploit to get rid of tenants with rent control. Forced to move, our cook, his wife, and four kids, one younger than 6 months, have struggled to find a place to live, spending more than four months moving from one friend’s couch to a cousin’s couch. We thought hard about all the ways we could help from tapping our networks to find a more dignified temporary place for our cook to stay, to figuring out how to pay him more without having him lose access to different low-income programs for which he currently qualifies. We gave him time off to go search for housing and sign up for the different city-run seminars that are required to qualify for low-income housing. Yet, on those lists, he was never with the highest priority. There were always many others with higher risk and urgency ahead of him in the queue: seniors, those with disabilities, and families with more dependents, and the list goes on and on.

This has become almost a cliche story you hear in the restaurant industry. When I set out to open a restaurant in San Francisco’s vibrant restaurant market, I thought I’d employ all I’ve learned from an MBA from a top school, the rigor of an engineering education and a decade and a half launching and managing some of the most successful businesses for Google and other tech companies. Furthermore, I wasn’t naive to think that I knew better than all those who’ve been tenured in the industry. I actively sought out the mentorship of many titans who’ve been generous with their time and knowledge of the industry. So I opened Tawla, a restaurant in San Francisco’s Mission district. I hoped Tawla would provide a fresh lens onto the culinary cultures of Turkey, Greece and the Levant area that is more humanizing. With food being a most humanizing lens, Tawla was a restaurant that aspired to present the home-cooked food of that region while sourcing local ingredients from farms and purveyors, creating a healthy environment for our employees where they can thrive, be reasonably priced to many, and be a good citizen in our neighborhood. In today’s San Francisco climate, that all seems like a tall order and very few restaurants that don’t belong to large restaurant groups will be able to exist without compromising on one or more of these dimensions.

Over the past two years, it was quickly and often apparent that there’s nothing that a small and young business in SF could do to make the city a living option for its employees. There is no amount of money an owner could pay an employee within the economics of a small business to allow their employee to live within the borders of the city or even within a reasonable radius that doesn’t have them traveling for two-plus hours a day to come to work. This is the reality of where we live. Our line cook’s story is one of numerous we’ve personally experienced within our business, and we hear so many similar stories from other food-and-beverage businesses. Unless you’ve been living under a rock, this shouldn’t be news to you.

We, among others, tried to be innovative. We tried to go the ‘service charge inclusive’ route, automatically including 20% in every check. Currently, tips are only allowed to be claimed by ‘anyone involved in the chain of service’, which includes all Front-of-House (FOH) staff from servers to bussers, to runners and hosts, and excludes anybody who works in the back-of-house (BOH), cooks, prep staff and dishwashers. Unlike a traditional tip structure, the service charge model allowed us to distribute supplemental pay more equitably. That also allowed us to give our employees private healthcare instead of relying on the broken Healthy SF system which has proven to be very hard to navigate by our employees who try to file claims and only applies within San Francisco city lines, which means no healthcare for most of our employees who cross the bridge to where they live. Additionally, we subsidized commuting expenses and offered healthy staff meals to all employees while at work. Our hope was that at least, by doing that, we’d help our team keep more of the money they make knowing that they don’t have to spend money coming to work and they don’t have to spend money on healthcare.

The current situation is dire, saying the least. The front-of-house hated the above pay scheme because they too were struggling in SF, maybe not as bad as our BOH, but they too could not afford SF’s high cost of living. With the service charge, our servers were making $38 per hour (hourly base + hourly service charge) or the equivalent of $70,000 to $80,000 a year if you were working for us full-time. If we assume you’re spending about 36% on rent after tax, normally considered a healthy spend on housing, that would mean you have about $1,460 available for rent per month.

Cheryl Young, an economist for Trulia, found that in nearby San Francisco, only 0.1% of restaurant staff can find affordable housing in the city, with the average monthly rent for a one-bedroom apartment at an insane $3,447, according to a 2018 rent report by Adobo. The U.S. Census revealed in March, the median rent in San Francisco in 2016 was roughly over $1,600/month. These numbers are worrisome in a few ways: 1. The egregious rent amount that is required for somebody to live in the city today. 2. The jump in median rent in a mere two years. 3. The $1,600 median rent from 2016 also included rent-controlled apartments which indicates their rapid disappearance.

Ok. So you may be able to make $70,000 to $80,000 annually and you would need two roommates to be able to barely afford a one-bedroom apartment. What about that is dignified when you’re an adult and you have to share a room or be the one who sleeps in a living room-turned-bedroom? This brings us back to our service charge scheme and the reason our FOH staff opposed it. They had to share some of it, though nominal, with the BOH and they don’t get to pocket the whole 20%. But what we thought would be a welcome steady pay that wasn’t dependant on the whims of diners, wasn’t welcome at all. This has been a classic struggle even in pooled houses that tip out the back-of-house. Servers never want to share tips with the BOH and as they get squeezed because of the rising cost of living, that’s even more the case.

Furthermore, we were astonished when employees asked if we could pay them a better wage if they went without health insurance. Luckily that’s not an option! But we realized that when you’re struggling to live, you don’t even have higher order thinking that allows you to plan for the possibility of a health emergency. Without insurance, an average ER visit can cost anywhere from $150-$3,000 or more and if surgery is required, it may cost as much as $20,000.

Due to incessant requests from our team, we moved to a hybrid model. We did a 6% service-charge inclusive and a traditional pooled house tip model. The service charge allows us to continue to supplement BOH pay. The tip pool is shared among FOH. And now, we don’t pay for health insurance completely but instead, subsidize about half of it and kick more of that money back to the team.

This yielded unexpected and somewhat unwelcome outcomes. In order to get a few more dollars in their pockets each pay period, most of our staff opted out of health insurance which now they could since our team shrunk to less than 20 employees and employer mandated health insurance was no longer required. FOH staff now makes $42–48 per hour ($85,000–95,000). You’d think that this would allow us to retain staff but we’re still losing FOH staff to either other jobs that are perceived to pay more, to other occupations or more schooling, or to a different geographic location (city and/or state) altogether.

In the most expensive city to live in the world, FOH may be able to find that unicorn one bedroom, but what about saving, investing in a 401K, having a family, and god-forbid planning for old age?

If you thought the FOH situation is unfathomable, let’s go back to my talented, hard-working line cook who’s his family’s breadwinner and made $24 per hour (base pay + share of service charge) or a little shy of $50K a year working full time for us. How is he going to find a place to live, send his kids to school and feed them? Forget saving! He tried really hard. He made it through the spring semester for his kids’ schools and then he packed up and moved.

Nothing about this yields inspiration or ideas of career longevity. Why would you aspire to build a career in this industry? Why would you strive to grow, be better and progress in an industry that doesn’t reward tenure?

It’s become harder for a person to be in hospitality and in aggregate it’s become harder for the hospitality industry to attract professionals.

And those teachers, students, and artists who also worked in the restaurant industry and made for wonderful staff, already moved out of the city because they can no longer afford to live here.

After you think through solving all your team’s gut-wrenching issues, you think about what this does to the economics of running a restaurant.

Astronomical turnover pushes labor costs even higher.

The situation in this industry has created a mercenary frenzy where everyone is running around trying to maximize what they’re able to make per hour. According to culinary hiring service Instawork, annual turnover in the restaurant business in San Francisco has reached as high as 90% and operators pay about $3,000 to rehire and train a new hourly employee. For context, overall national restaurant industry turnover was a little over 70 percent in the last two years. From our experience, the associated cost of turnover for an employee who leaves us is $2,600-$3,200. This cost includes sourcing a new employee, training them until they’re able to be independent contributors and any overtime associated with somebody covering for that shortage in labor. In total, our business has seen a 10% increase in labor costs due to turnover alone.

The quality of the labor pool is quickly dwindling.

As alluded to earlier, the mass exodus of individuals from this workforce leaves fewer people and less reason for those people to excel. Compounded with financial woes that are often a constant in one’s life, it makes it even harder to focus on one’s job and do good work.

When restaurants are desperate for anyone to fill a role and are concerned to lose people because of the aforementioned scarcity and turnover costs, the staff has very little incentive to do good work, to strive to be better and to keep a high-quality work-product. This, of course, has a high impact on the quality of the product and service a restaurant is putting out there. It has high management costs associated with it as you’ll need more exempt managers to ensure training, quality and to pick up the pieces when the quality is just not there.

The combined impact of high turnover and a poor-quality labor pool has resulted in the unoriginal ‘beet and goat cheese salad’ showing up on 5000+ restaurant menus in the city. A phenomenon brought to light by the San Francisco Business Times, restaurants are creating simpler and less inspired food items that don’t require highly trained or talented kitchen cooks to execute.

What was once a celebrated culinary city boasting creativity, innovation, and diversity, is now quickly deteriorating to ‘me too’ concepts.

Not surprisingly, the most celebrated new restaurants right now are yet another ramen, pizza or pasta shop.

We, like many others around us, have also suffered from employees with substance abuse, employee theft, and just frequent ‘no call, no show’ occurrences. We had an employee who was terminated for embezzling thousands of dollars to pay for his cocaine debt, only to go on and be rehired into important roles at four other prominent restaurants that each, in turn, fired him for similar offenses.

Restaurants are so desperate for talent that no one is going through the proper channels to reference check and validate a new hire’s competency and performance history.

There’s no organizational headspace to think about growth or innovation.

In a people business, your team is the oxygen that allows your business to not only function but also grow. That’s the case for any business in any industry. In tech, where I started and built my career, we understood that really well. The job wasn’t just about getting the daily operational work done but it was also about giving you enough room and headspace to innovate, try new things, and explore new avenues for growth from products to better processes to new business opportunities.

If the economics are such that you’re trying to always keep a small team so that you can do better by them then you never have any slack to grow beyond the ‘survival’ stage.

And the city doesn’t help.

Small businesses are highly taxed with very little value offered for those taxes. When you see what the city has done historically and the extensive tax breaks given to large companies to set up shop in the city, it gives you pause. In addition, the tax code is very complex with a high minimum franchise tax and combined with ‘nonconformity’ policy that allows the state to disregard certain federal tax benefits available to small businesses, the state can be very aggressive in seeking state revenues. In addition, the minimum wage hikes, though are very necessary to allow people to earn a livable wage, in absence of other holistic programs addressing housing and healthcare end up being ineffective.

When it comes down to it, diners today don’t care. Really.

Today’s SF is in love with ‘the idea’ of ‘local’. It is in love with ‘the idea’ of ‘small business’. And it is in love with ‘the idea’ of ‘economic diversity’. But it’s all about ‘the ideas’. When it comes to living those truths, few are doing the work to support those ideas.

To be fair, the average San Francisco resident has changed. People who’ve lived in San Francisco for a long time are moving away in droves, seeking more cost-effective cities to call their own. Those people are the ones that have grown up with this foodie city and have learned to appreciate the product that’s being put forth here using superior produce fresh from the farm and our local purveyors. Those are also the ones who’ve learned to understand the importance of small businesses and the role they play in defining what San Francisco is.

They’re being replaced by a younger, wide-eyed high-earning transplant who’s moved here from rich locales such as New York, New Jersey, and Illinois, and is hungry for the opportunity to work in tech and other fast-growing industries. Most of them don’t understand what’s made San Francisco special including not understanding what it means to support small businesses and what it means to offer a high-quality food product.

This new diner also doesn’t understand what it takes to get produce fresh from the farm daily and why one would want to pay more for it and support “eating local”. He also doesn’t understand the history of small businesses in San Francisco and why they’re an integral part of the economy and makeup of this special city.

The impact is seen when we tried the aspirational ‘Service Charge Inclusive’ model. Diners were so dismayed by it. We often heard “why should I be putting money towards your employees’ healthcare?” or “how come I no longer have a choice in deciding how I pay tips?”. It was always the more affluent who complained, the ones who bought that $200-bottle of wine. This disconnect pained us.

Today’s San Francisco pretends to be a liberal city, but when it comes to having a real impact on people who work in small businesses, the majority are not willing to put their money where their mouth is.

And the service charge model only works if all restaurants do it but everybody is scared of the diners’ wrath. We know it works because that’s how it works in the rest of the world but it only works if the whole industry runs that way.

In summary, if small businesses are the backbone of our economy employing more than half of our workforce, and the challenges faced are moving the businesses away from hiring more people, then what impact does this have on the labor economy and on this city that we love, economically and culturally?

I was asked, if I were to do it all over again, would I? Seeing how our industry has been rapidly changing where the core principles behind what I hoped to accomplish are in question, I don’t know if this would have been an endeavor I could comfortably and confidently pursue.

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