This is the second instalment in a five-part series looking at what Ontario can do now to address systemic issues that the COVID-19 pandemic has brought into sharp relief. Read Part 1 here. Watch for Part 3 on Wednesday.
Last month, here at TVO.org, I interviewed a series of experts on big, system-wide challenges the province will be facing as it exits the pandemic. But there was so much more that could have been covered, so we’re doing it again: five more articles about specific challenges the province faces today — this time, with a greater emphasis on what can be done now. It will take many years to build new hospitals and train thousands of new nurses, but what can be done in weeks, months, or even just a few short years?
Today, TVO.org speaks with Tony Elenis, president of the Ontario Restaurant, Hotel and Motel Association, about Ontario’s battered hospitality sector.
Matt Gurney: Tony, let’s start at the beginning. I’m particularly interested in restaurants, but I know lodging is part of this, too. What did the pandemic mean to these industries?
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Tony Elenis: COVID-19 devastated Ontario's hospitality industry, both restaurants and hotels. Restaurants might be feeling it the most because of the low margins — the razor-thin margins that traditionally apply in that sector — but both hotels and restaurants have been hurt. Even though we are seeing signs of overall economic recovery, our industry will have a tough road ahead, and that’s going to include rising costs and repaying loans. For example, food prices have already gone up and are expected to go even higher. Labour costs are going up because the workforce is becoming a severe issue. The workforce was the biggest issue in our industry before COVID. Now, it is critical that everyone, including government, support a remedy for that. COVID is not going to be over until we are sustained through at least 18 months of recovery.
Gurney: You mentioned loans there. I'm imagining that's involves government loans or rent relief or a whole series of government programs, but probably also restaurant owners taking personal loans or drawing down on home lines of credit and things like that to stay alive.
Elenis: Owners have tapped into government loans, bank loans, and, especially in the restaurant sector, personal loans. I've talked to many who had to borrow just to keep the lights on. And, for most restaurants, it was very tough to obtain loans from a bank — it always has been. So owners got whatever loans they could, and those loans aren’t free. Some of the government loans had some structure where you could have some forgiveness, but not bank or personal loans. Ontario’s restaurants had the narrowest profit margins in the country — you're talking about 1 or maybe 2 per cent profit, and that includes the big players in there. The independents are more likely at 1 per cent, at best.
And now we have added extra costs, incremental costs. Food is more expensive, as I mentioned. The entire supply chain. But there are added costs everywhere now, including health measures. And, then, on top of all that, the cost of the loans. This is going to be a crisis, and this is where government can help the industry.
Gurney: Hold that thought for just a minute — that’s what I want to talk to you about, but I want to really drill down on something here. This is something people need to understand, and I don’t think most of them do. Restaurants have always been just a ruthlessly difficult industry with the barest of margins. By the time they’ve paid their rent, their utilities, their taxes, their food costs, and their labour costs, restaurants owner are lucky to have anything left for themselves. Honestly, Tony, I know people in the industry, and the more I learned about it, the more I realized how difficult it is. Even in a good situation — good location, good client base, reliable staff — it’s hard. But we take this entire sector for granted. There’s always been a local diner or pub or burger place. We could easily see a big, big part of this industry disappear.
Elenis: You're absolutely right. Other businesses can just push up prices to make up shortfalls. Restaurants are limited. They have a rigid price-elasticity model; the benchmark has always been the grocery stores, because the grocery store is able to sell most basic food products without HST or other hospitality taxes. Restaurants can’t. You can only raise your prices so much in a competitive market. Some of the bigger players have leverage due to the size of their orders. They can negotiate better prices on food. But, like I said, even the big players are in the 1 to 2 per cent range for profits. The smaller players are less.
Gurney: So now take a company with a 1 per cent profit margin and add a large loan that you’re paying off at an interest rate of — even if you got a really good rate — 3 or 4 per cent, and, for a lot of these guys, it’s probably a lot higher.
Elenis: Yeah. It’s a tough business. It always has been. You have to be savvy and passionate to stay in it, and that was true even before COVID. These people were determined to stay, but it’s going to be really hard for a lot of them. COVID has shown how determined and how adaptable they are. They’ve coped with shifting rules, lowered capacity — which is just devastating to financial health — and they’ve stayed open. A lot of them have lost money. But they want to hang on until after COVID. They want to see the shining light of a recovery.
Gurney: Most of my local haunts survived the pandemic. And I’m really glad about that. Having good local bars and food in your neighbourhood makes it a nicer place to live. But there was one place I liked to go to that couldn’t make it. They made it until this spring and then shut down. There just wasn’t anything else they could do or any more money they could borrow, so they closed. And that makes me really sad. Worse that they almost made it, but not quite. So for all the restaurants out there, right now, that are right on the bubble, what can we do quickly to keep these guys alive?
Elenis: If it wasn’t for government programs like rent relief and CEWS, which was the federal-wage subsidy for employers, you would have seen over 60 per cent of restaurants and 50 per cent to 60 per cent of hotels being closed. There’s just no way these industries stay open otherwise during COVID. It is critical that these programs not vanish immediately. We’ll need them until at least 2022 in order for this industry to be able to recover. And then we need to look at the expenses.
And there are things governments can do to lower our expenses. In Ontario, the government sets the prices of alcohol that owners buy and then serve to customers. We need to bring these prices down, and the government can do that, specifically the Liquor Control Board of Ontario, which is a government institution. Other provinces have done this. British Columbia and Nova Scotia, for example. Ontario has yet to do that or something like that. A change like that would flow right down to the bottom line. It's measurable. There are about 17,000 licencees in Ontario, and well over three-quarters of total restaurants would be favourably impacted.
Property taxes are a huge fixed cost. Both hotels and restaurants are paying regularly despite a depressed industry, using assessments from 2016. We need new assessments retroactive to March 2020. It's a huge expense.
Another one is hydro and heating costs, normally meaning natural gas. There was some progress bringing the global adjustment down in the 2020 budget, but a bit more can be done. And we need to look at hospitality and tourism, these businesses that are just hurting so badly, and understand they’re unique. There has to be sector-specific support, because, even as most sectors begin to recover, a lot of our restaurant and lodging businesses are going to be left behind.
Gurney: It strikes me that everything you’re saying makes sense, but government revenues have also been gutted, and they’re coping with huge expenses. There’s going to be a real reluctance to make major commitments, I think. But the booze one, in particular, seems like an example where a small change to what the government as a whole rakes in could make a huge difference for the individual owners out there trying to stay alive.
Elenis: Right now the industry is paying the same price as a consumer — consumer pricing is no different than what the industry is paying. This does not make sense. In a capitalist society, just about every product and service, if you're purchasing in volume, you are able to get a reduction in price. But now, with the LCBO, we're still operating in an archaic Prohibition-minded system. A lot of American chain restaurants avoid Canada, and Ontario specifically, because our alcohol regulations would undermine the business model that works for them in the United States. We have many quick-service brands — so-called fast food. Maybe most of the brands, but whole-service restaurants? The U.S. giants avoid Canada. They couldn’t make money here.
Gurney: We’re mostly talking about government efforts. What can the consumer do? I know the easy answer is “order a lot of food,” but is there something more specific we the public could do right away?
Elenis: We want people to feel safe to come back. So far, we've been scaring the consumer and telling them — rightly! — to stay home. We need to start changing that narrative and encourage people to go out safely. Ontario has budgeted $150 million for a rebate program for consumers. When they do go out and pay for a museum ticket or stay in a hotel or eat in a restaurant, they can tap into a 20 per cent rebate. That campaign is on hold because of concerns that the fourth wave will hit hard. We are hoping we get to see it launched early next year. We’d welcome that.
We will work with other parts of the tourism industry to build consumer confidence and let them know it’s safe to go out again. And we can work with other businesses, too. The federal government changed the tax rules years ago. You used to be able to expense 100 per cent of a business lunch. Then it was 50 per cent. If we made it 100 again, that would be an incentive for people to come back to their offices, come back downtown, and also to start lunching again. It would help the whole economy.
Gurney: We are talking about what we can do to save the restaurants that survived this far. But we’ve lost many. Lots of empty commercial space available for rent that used to house restaurants. Tony, this is obviously totally speculative, because who knows what’s going to happen. But I’m just curious about your opinion. Will the sector come back? Once COVID is finally contained, hopefully soon, will we see a burst of new places opening?
Elenis: Yeah, we have to look back for something to compare this to, and there’s really nothing. But let’s go back to the financial recession of 2007-2008. We had many, many restaurants close, but no one noticed. There was always a buyer. During COVID, there are no buyers. Owners had no one to sell to. We’ve probably lost 15 per cent of restaurants across the country — some of them might be able to reopen, but we’ve lost a lot. They’re just closed. Gone. Even when restaurants are allowed to open under safety rules, we’ve seen that people need time to want to come back. They need to feel comfortable.
So I think we will see a buyer's market moving forward. There will be a lot more trade in the next five years as restaurateurs find out how hard it now is to survive. Right now, owners feel good. Things feel like they’re getting back to normal. But then they’re going to realize, well, my costs are up, my wages are up, my rent is up, the wage subsidy is over, and the interest on these loans is going up. Over the next few years, a lot of owners are going to realize it’s a lot harder than it was, and some of them will want to sell. So if new people are coming in, they may come in as buyers.
Gurney: We’ve been encouraged to go to patios, to use delivery apps like DoorDash or UberEats, to do pickup from local places. What has this meant for the industry during the crisis?
Elenis: Patio expansion, where possible, was huge. It was very helpful. But not everyone had patios or could expand. So the e-commerce was important — especially allowing liquor sales, alcoholic-beverage sales, via the apps or for takeout. The e-commerce side had already been growing, but during COVID, many restaurants jumped in with both feet. They know this is here to stay. COVID has shown to many that it can work, and I think the concept will stay. Not everyone benefited. But the restaurants should get credit! It took market share away from grocery stores. The consumer would rather eat a chef-prepared meal at home than even a prepared meal from a grocery store.
So consumers were enjoying restaurant meals from the comfort of home. It’s great for those restaurants that found a way to make this work and be profitable. This has been great. The digital systems, for delivery services, let even independent businesses reach the consumer in a way that would not have been possible before. It was a very welcome new channel. Those that found a way to make it work will continue to enjoy it.
Gurney: Tony, any concluding thoughts?
Elenis: Consumer confidence is what I’m thinking about the most right now. We’ve been talking a lot about vaccine passports. Whatever you call them — a passport or something else — we do need a control mechanism to define those who are vaccinated and those who are not. We don’t want to go into another lockdown, and we want to bring consumer confidence back. But it’s not going to be as easy as some make it sound. What about international visitors? How could our system check them? It would need to be universal. What about kids? This still needs work — both on the health side and the business side, and also protecting privacy. But we do need a system to track who is vaccinated and who isn’t. And then we can get it all going in the tourism sector again: come to Toronto, see a ballgame, eat in a restaurant, and stay in a hotel. That will happen once confidence returns.
This interview has been condensed and edited for length and clarity.