Q&A: Restaurants recover from pandemic, still struggle with profitability

• Michigan has 4,000 more food service operators than in 2019
• But the number of employees is about the same too, as bigger restaurants close and smaller ones open
• Profitability remains a concern and margins remain low

Michigan’s restaurant industry spent the last five years grappling with acute policy issues, from state ordered COVID-19 closures to court-ordered changes of the tipped minimum wage and paid sick leave for workers.

Both issues are behind it now, but economic pressures persist for the state’s $45 billion hospitality industry, Justin Winslow, executive director of the Michigan Restaurant and Lodging Association told Bridge Michigan.

“Restaurants aren't more profitable,” Winslow said. “They are less profitable than they were a few years prior, even though restaurant prices have jumped about 25% over the last five years. 

“It's the challenge that keeps most operators up at night.”

Consumers are still feeling the pinch of inflation while adjusting to tariff-related price increases, Winslow said, even as unemployment ticks up in the state. 

Restaurants historically have operated with low profit margins, and successful ones need to be more creative than ever, focusing on value and take-out, Winslow said.

He spoke recently with Bridge Michigan business editor Paula Gardner about the state of the industry and what it means for customers. Here are excerpts from the conversation:

How would you rate the health of Michigan's restaurant industry now? Employment in hospitality is about back to pre-pandemic levels of around 435,000.

More stable than the last time we spoke, but I don't know if the idea of a “full recovery” exists or ever will. I think it's just a different industry and always will be going forward. 

Restaurant owners, especially the smaller independents, are still trying to figure out exactly what that means for them. 

How is it different? 

When COVID hit five years ago, we had a little over 16,000 total restaurant license food service licenses. That's not exactly the same as saying a restaurant license, because any snack shop has to have a food service license as well. That number is 20,600 now.

But the landscape changed.

That large 8,000 square-foot, dine-in restaurant that you can think of that your family would go to and was there for a lot of large-style events is maybe the one that went by the wayside. 

That's one license gone, and instead is two licenses that have opened. One might be a Dunkin Donuts with 1,500 square-feet and a small fraction of the employees, and the other might be a fast casual restaurant with a drive-through, again with a much smaller employee footprint.

Why is that transition happening?

More food is designed for (consumption) away from premises. That's just the reality. That's not changing. And so in one way, while we have 4,000 plus more locations, we still are operating with (about 2,000) fewer total people working in leisure and hospitality than were when COVID hit in 2020.  I find that remarkable. 

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What are the characteristics of ‘winning’  restaurants in Michigan today?

Those who are winning have adapted quickly to welcoming technology with open arms and have tried a variety of things to see what works best. Those who can augment their sales through the third-party delivery, which can be tricky, or who have figured out an efficient way to get more food off-premise — whether it's delivery or pickup or carry out — are faring better than those who are trying to pretend that it is like running a restaurant before.

Fast casual continues to do the best with traffic. Your higher-end fast food, like Chipotle and Panera, have done well with traffic.

I spent $150 on a relative’s birthday dinner recently. It was disappointing because it was just so average. I vowed to only go to restaurants where I knew the quality aligned with the price.

I hear that all the time. Restaurants need to nail the efficiency side of the equation. On the other hand, if you’re not into value, you’d better really nail the experience side. If the prices jumped up on you 25% from what it was just a couple of years ago, you’d better walk out of there feeling like you had something super special, or it is a frustrating, not-going-back type issue. And you see that in the traffic numbers in a lot of these brands. 

People do not want to pay that price point and come back. They will if it's worth it. The billion dollar question in the restaurant industry right now is: how do you deliver that kind of special experience? 

The Pure Michigan campaign seems to be debated every year. This year it will have $30 million for marketing. The governor has proposed $15 million starting Oct. 1, and the state Senate proposed $11 million. 

It's been a tougher sell because Pure Michigan has been sort of thrown exclusively into the general fund discussion, as opposed to where it used to have a more stable non-general fund source of funding. We at the state level need to figure out a long-term play there, but in the short term, we can't eliminate a marketing campaign that generates so much revenue and holds so much employment in this state.

We have an elite product in Michigan, and it needs to be sold as such and shared as such with the broader world out there. It frustrates me that it shouldn't have to be this hard of a sale.

What else is on your policy agenda?

Credit card swipe fees. I think there's a line in the sand coming and a desire to see some policy change on that front. …Rates here can get to 3% or 3.5% and (other countries) seem to operate from 0.3% to 1.5% while still magically keeping all of the programs, the miles, the points, etc. There's a way to do this that is a little less damaging to the small operators that have to bear these fees.