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Recently here in Maine, there has been a spate of restaurant closings. The trend has hit both long-established businesses and upstarts alike.
Patrons, workers, neighbors and business owners themselves, many of whom have put their life savings into the dream of owning a restaurant or bar, have been hit by a wave of heartache in an ever-changing restaurant scene.
The overall economic landscape is challenging, but it is hitting restaurants particularly hard. When a restaurant closes, we notice it, and a little piece of the fabric that binds us together is loosened with the loss of critical “third places” where people can gather in a place that is not their home or workplace.
There have been several recent stories about restaurants closing in Bangor, Searsport, Portland, and southern Maine. This is happening nationally, as well. Applebees, TGI Fridays, and Dennys have all had closures this year. Red Lobster is in bankruptcy. Subway has closed nearly 6,000 stores since 2015.
Here are a few of the variables behind the closures, which also tell us something about broader negative feelings about the post-pandemic economy.
latest closures
Inflation
For a restaurant owner, the two biggest inputs are the price of ingredients and the price of labor. These two things represent two-thirds of a restaurant budget, according to an industry estimate.
Food inflation has been significant since 2020, driven by disruptions in global supply chains, rising fuel costs, and weather conditions. Between 2021 and 2023, food prices surged, particularly for meat, dairy, and grains. While many of the bottlenecks have eased up, prices did not necessarily come down in response.
For restaurants, this surge in food costs was devastating. With razor-thin margins, many have had to raise menu prices, cut portion sizes, or substitute lower-quality ingredients to keep pace. Higher prices and compromises on the overall dining experience risk driving away customers, however, creating a balancing act for owners trying to maintain profitability.
This is particularly challenging for smaller local restaurants that are more burdened with the increasing cost of ingredients and supplies because they lack the purchasing power of chains.
Labor costs
Related to and interconnected with overall inflation, of course, is the rising cost of labor. Labor costs have gone up 31 percent in the past four years, according to the National Restaurant Association.
For an industry that typically makes about a 5 percent net profit margin on sales, that much of an on one of the major inputs represents a shock to the income statement. The main ways around this are to cut staff or institute counter service, which risks undermining the experience, or to increase menu prices, which risks driving customers away.
The labor shortage is acute in parts of the country with a more limited workforce, including in Maine. We have an older workforce, a low birthrate, and not much in-migration. That means businesses have had to pay more and more to attract and retain workers. That’s good for workers but bad for profitability, especially in a restaurant.
Rising costs are not just limited to food and labor, however. Insurance, property taxes, credit card processing fees, repairs and maintenance, the cost of marketing: you name it, it is all more expensive in 2024 than it was a year or two or five ago.
Pandemic aid
One quick and final variable that has led to a sudden jump in restaurant closures is that pandemic relief aid has finally run its course. There was a lot of pandemic aid for restaurant owners and business owners of all types from federal Paycheck Protection Program loans to restaurant-specific programs at the state and local levels.
All of that aid masked some of the problems the restaurant industry was experiencing due to inflation and generational turnover. The aid may have been enough to get many restaurants through. Now that it has run out, there is a realization that the cavalry is coming no longer.
“In many ways, a lot of restaurants never actually recovered from the pandemic,” one restaurant owner recently told me.
Final thoughts
One thing that distinguishes restaurants from other businesses is that they are highly visible, and the closure of one is often news. Look under any Facebook thread on a restaurant closure and you will see a range of reactions — from nodding to politics or the business climate or people who say that they have cut back on eating out.
That’s a reminder that customers are also dealing with inflation in their lives. Negative sentiment about the economy is one of the major themes of the post-pandemic period. It has persisted despite a better recovery than other developed nations and lessening inflation, with one researcher citing a period of “sticker shock” that lasts longer than the economic condition itself.
A discretionary purchase like going out to dinner is going to be easier for people to cut than their mortgage, rent or auto insurance. It is easy as a consumer to get frustrated by how much it costs to eat out. It’s easy to blame the restaurant owner. But if restaurants are to keep the doors open, they have to make up rising costs somewhere.
Perhaps as inflation continues to level off, things will be better for restaurants. Otherwise, it will take time for consumers to accept that a burger now costs $17. Eventually acquiescence takes hold, and it will probably be the case for people eating out. But it doesn’t make it any easier in the short-term for restaurant owners struggling to stay viable in the face of such headwinds.
Ben Sprague is a vice president at First National Bank in Bangor and a former member of the Bangor City Council. A version of this post initially appeared on The Sunday Morning Post, his Substack publication.
