Ontario COVID-19 policies expose the ‘frailty’ of the restaurant industry

Alcohol pricing, indoor dining limits, and unpaid rent are only some of the negative burdens COVID-19 has forced onto Ontario's restaurant industry. Can it recover?

Almost a year into the global COVID-19 pandemic, Ontario restaurants are still struggling as a result of lockdowns and restrictions on dining. Over one million hospitality workers have been laid off since March.

Many restaurants are still unable to access rent relief through the Canada Emergency Rent Subsidy (CERS), and supports like the Canada Emergency Wage Subsidy (CEWS) have been cut back significantly since the summer, resulting in more layoffs.

Having to constantly adapt to changing restrictions has been an additional financial burden on restaurateurs and options are limited.

Restaurants pivoting to takeout orders are up against delivery apps charging major fees. Additionally, businesses selling alcohol alongside takeout orders are dealing with high licensee prices that make it impossible to compete with the Liquor Control Board of Ontario (LCBO), Ontario’s government-owned alcohol retailer.

Prior to the province-wide lockdown, those who were able to stay open for indoor dining faced restrictive capacity limits and regional rules requiring all diners on a single reservation be from the same household.

Almost 200 restaurants in Toronto alone have permanently shut their doors and those who are left standing are fighting to stay afloat.

In an interview with The Pigeon, Bruce McAdams, an Associate Professor in the School of Hospitality, Food, and Tourism Management at the University of Guelph, said he’s worried that the magnitude of what restaurants are up against is not properly understood by decision-makers.

“No one really understands how severe this is. The amount of debt that’s being incurred by operators […] we’re looking at a five to ten-year recovery of this industry,” he said.


 

John Sinopoli of the Ascari Hospitality Group and Save Hospitality CA has the same fears.

He believes the government doesn’t understand the needs of the hospitality industry, causing the brunt of the pandemic’s burdens to fall on the shoulders of servers, bartenders, chefs, kitchen staff, and restaurateurs.

Even though it’s Canada’s fourth-largest employer, representing seven percent of the country’s workforce, and generating $90 billion to the Canadian economy, Sinopoli told The Pigeon that the restaurant industry hasn’t seen enough federal or provincial support.

“If this government wants a tax base […] saving us is the best financial decision they can make,” he said. “Why the government wouldn’t want to save an industry that creates so much revenue for them is beyond me.”

Sinopoli, who owns Ascari King West, Gare de L’est, and Hi-Lo Bar in Toronto, hasn’t welcomed customers for indoor dining since March and has instead turned his establishments into packaging stations for takeout orders, meal kits, and corporate gift boxes.

“If it involves food or drink and it’s in a box, we’ve done it. We’re making one-seventh of the money and still need 50 percent of the staff […] it’s inefficient.”

McAdams echoed this statement.

“No one is making money on takeout. Anyone doing takeout is doing it to keep brand awareness alive, to let their customers know they’re still open and frankly, to give their employees something to do.”

While many restaurants pivoted to takeout orders to survive the pandemic, it hasn’t been the silver bullet solution that many hoped it would be.

Restaurant meals aren’t meant to be served in Styrofoam containers. Doing so diminishes the quality of food products and limits the items restaurants are able to offer. Pivoting to takeout has also created additional expenses and time commitments for restaurants that had to purchase takeout containers and retrain staff to package orders for transport rather than plate them for a dinner table.

Perhaps the largest issue with the shift for takeout has been the large portion of sales that restaurants have had to sacrifice to delivery app companies such as Uber Eats and Skip the Dishes.

These apps have been a bone of contention for many restaurants since the pandemic—so much so that the Ontario government recently stepped in to limit the fees that delivery apps can charge.

While restaurants have seen traffic plummet by as much as 90 percent, delivery apps have been enjoying record sales as a result of the commission they collect on restaurant takeout orders, which is sometimes as high as 30 percent.

But large commission fees aren’t the only reason that Ontario restaurants are feuding with delivery apps.

On Dec. 4, Skip the Dishes and the LCBO announced a new partnership that would allow the food delivery app to deliver alcohol directly to consumers. Although LCBO paused the partnership following consumer backlash, the ability for food delivery apps to deal directly with alcohol licencing boards posed a threat to many restauranteurs.

Chef Adam Hynam-Smith from Dispatch Restaurant in St. Catharines told The Pigeon that the announcement undermined the ability for restaurants to remain competitive.

“They showed their hand with this. They do not give a sh—t about us,” he said in reference to the provincial government, which restaurant owners feel they’ve been fighting with for years, specifically in regards to the sale of alcohol.

Hynam-Smith, who’s originally from Australia, refers to Ontario’s liquor laws as “archaic,” noting how disadvantaged Ontario restaurants are compared to the rest of the world when it comes to what they pay for alcohol.

Even though restaurants, the largest purchasers for the LCBO, buy alcohol in bulk to resell it, they still pay retail price.

“Having to purchase at the same price as consumers is hurtful,” said Hynam-Smith. “We’re also then competing against people’s perceptions—people look at what the LCBO charges and get angry when restaurants charge more.”

Since restaurants are paying the same price for alcohol as consumers and paying upfront for multiple cases, they need to recuperate the costs, which is why the bottle markup in restaurants far exceeds the price consumers see in the LCBO.

In March 2020, the Ontario government introduced legislation to allow restaurants to sell alcohol with takeout orders. The decision, which has now been made permanent, provided some relief to restaurants.

However, it will be a moot point if consumers can purchase alcohol directly from the LCBO at LCBO prices while restaurants have to continue to charge more for alcohol to cover their costs without wholesale pricing.

This was why the partnership announcement between the LCBO and Skip the Dishes was so shocking to many in the industry.

Additionally, restaurants are only permitted to sell takeout alcohol with food, a restriction that the LCBO would be exempt from. Should the partnership be revived, the LCBO would be able to charge consumers less for alcohol and sell it without the added food expense, creating little incentive for customers to choose to purchase alcohol from a local restaurant.

Modernizing the provinces’ liquor laws is something that Ontario restaurants have been demanding for a long time.

Offering wholesale pricing to restaurants has long been the number one liquor policy recommendation from Restaurants Canada and was identified in the National Association’s 2017 and 2019 Raise the Bar reports as one that would go a long way to improve operations for licensed establishments.

Earlier this year, British Columbia announced wholesale pricing for restaurants. Now, British Columbia restaurant owners will pay 20 to 30 percent less than the current retail price. This is a move that was applauded by Mark von Schellwitz, Restaurants Canada vice president for western Canada.

In a press release, Schellwitz said this announcement will “make the difference for whether an establishment can remain viable in these challenging times.”

While waiting for similar supports here in Ontario, restaurants have tried everything to avoid paying retail prices at the LCBO, but haven’t found success. Even when restaurants opt to buy alcohol directly from a winery, brewery, or distillery, the LCBO still takes a percentage of the sale.

Despite not warehousing, delivering, or assisting in the sale of the product, the LCBO takes a percentage of sales even when restaurants purchase from independent producers.

“Getting rid of those taxes and fees would allow restaurants more flexibility, but [the government] doesn’t give a sh—t about our industry,” Hynam-Smith told The Pigeon.

Restaurants are also up against an additional alcohol tax that the federal government introduced in 2017. This escalator tax increases the excise duty rate on alcohol every spring. The tax was introduced without consultation or economic analysis of the hospitality industry.

Small business owners have called for the tax to be frozen in light of the pandemic and many have cautioned that it sets a negative precedent for tax increases.

Ordinarily, federal tax increases require parliamentary approval, but an escalator tax automatically increases annually, without a study or vote in parliament.

The annual increase in alcohol prices limits the resources that restaurants have available for expansion, innovation, or, this year, pivoting to meet the demands of a global pandemic.


 

While these existing policies put restaurants at a disadvantage early on, things only became more difficult when new restrictions were introduced for the hospitality sector as part of Ontario’s COVID-19 response framework.

“Public health and food safety guidelines are the bigger problem now” said McAdams. “The whole reason full-service restaurants are in this situation is because [of] capacity restrictions and limits on hours of operation.”

Restaurants are licensed to seat a certain number of people under the Alcohol and Gaming Commission of Ontario (AGCO). But McAdams noted that the restaurant business model is based on only about 75 to 80 percent of the capacity afforded by AGCO.

“Once you add in chairs and tables, restaurant capacity goes down to about 75 or 80 percent, and the two-metre rule made it impossible to even fit 50 percent capacity in restaurants.”

While indoor dining is currently banned in Ontario, even during periods when restaurant restrictions were lessened, restaurants offering inside dining were required to ensure at least two metres of space between patrons at different tables. This caused restaurants’ capacity to shrink ever further.

Restaurants operating with only a handful of tables are facing another challenge: how to recreate the ‘restaurant experience’, which McAdams said is what he worries about the most.

“As a restaurateur, having good energy and a busy place is critical,” he said.

He explained the three dimensions of a successful restaurant: food, service, and atmosphere.

“Since the pandemic and the various restrictions they’ve had to operate under, restaurants haven’t been able to produce the dining experience that they need. The experience between the server and the guest has really changed.” McAdams added.

“Servers aren’t servers anymore; they can’t communicate and connect with consumers. You can still get great food, but the service isn’t as hospitable, and the energy isn’t there. A year of this will alter the way restaurants operate for a very long time. The restaurant experience is going to be changed by this.”

McAdams also noted that in addition to capacity restrictions, the other major concern for restaurants is the lack of consumer confidence in dining out.

“The market is half of what it was pre-COVID,” he said.

Hynam-Smith says this lack of consumer confidence is a result of contradictory messaging from the government that’s creating confusion among restaurant owners and customers.

“These colour code systems keep you open, but then you’ve got the federal government and the provincial government telling citizens not to go out. They’re telling people not to go out, but they’re keeping restaurants open. Which is it? If you don’t want people to go out, then shut us down and give us time to recuperate.”

Hynam-Smith and employees. Photo courtesy of: Dispatch Restaurant.

At this point in the pandemic, many restaurant owners are frustrated and exhausted after months of trying to adapt to the government’s constantly changing COVID-19 regulations.

Hynam-Smith and Dispatch Restaurant have made several “pivots” to adapt to restrictions, including patio seating when indoor dining wasn’t permitted, opening a retail space and bottle shop, offering meal kits and takeout, and constantly rearranging their indoor seating to abide by capacity restrictions and distance requirements.

“We’re operating within restrictions that keep changing. You do something based on what you had in front of you and a week later the landscape changed, so you had to try something new and that costs money.”

“Everyone is hurting in their own way and it’s becoming tiring to have to constantly pivot.”

The latest blow for Hynam-Smith and Dispatch Restaurant came when the Medical Officer of Health for the Niagara Region issued an order under section 22 of the Health Protection and Promotion Act that indoor dining in the region was only permitted with members of the same household.

Since The Pigeon spoke with Hynam-Smith, Ontario imposed further restrictions, calling for a state of emergency and shutting down indoor and outdoor dining altogether.

“That killed us. That absolutely f—ing killed us.”

Hynam-Smith described spending a night calling customers with reservations for the weekend to confirm all diners were from the same household and subsequently having to cancel the majority of their reservations if they weren’t.

The struggle of being unable to keep up with changing regulations has left him and many other restaurant owners wondering if it’s even worth keeping their doors open.

“Many restaurants are talking about if it’s even worth it to operate through the winter because it costs so much to stay open,” he said.

Prior to the Ontario lockdown being announced, Hynam-Smith said many restaurants were on the verge of “making the call that the government won’t make” and shutting down completely.

While it might sound drastic to shut down for the winter, Hynam-Smith believes that closing down for a few months will give the industry an opportunity to address some of its issues and heal, in order to come back better.

“This has exposed the frailty of this industry and cracked things wide open for everyone to see how much it needs to change. It’s given our industry a chance to acknowledge it all and come back better. The level of dedication and drive and resilience of the people who work in this industry never ceases to amaze me.”

Hynam-Smith admitted that he’s shed tears in fear that the hospitality industry will miss this opportunity to cultivate meaningful change.

“We as an industry will have failed if we do not take this opportunity right now to make the desperate changes that need to be made.”


 

Emily de Sousa is a digital content creator, policy nerd, and Toronto native. She earned her Honours Bachelor of Arts in Environmental Governance from the University of Guelph and is currently pursuing an M.A. in Geography.

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