Economy serves up an unhappy meal

[one...two...tree 2,762]

B.J. Hernandez, co-owner of the Valley's three Havana Cafes, had planned to open another restaurant but was turned off by today's business climate. She said she would leave Phoenix if she could.

Ronald J. Hansen

| The Arizona Republic

Arizonans aren't abandoning their affection for other people's cooking. But the restaurant industry in Arizona finds itself heading into stiff economic head winds.

A combination of rising prices, a faltering economy and legislation they didn't want has restaurateurs saying they have entered the most difficult time in more than two decades.

The problems have cut into profits, owners say, and put many expansion plans for a key sector of the economy on hold.

B.J. Hernandez, who co-owns the three Havana Cafes in the Valley, said she had planned to open another restaurant, but the current troubles have changed her mind.

"I would say it's off for at least a couple of years until I see a light at the end of the tunnel," said Hernandez, who employs about 40 people. "I feel the environment in Arizona has become so anti-entrepreneurial. If I could leave here, I would."

With 283,000 workers, Arizona's hospitality-and-leisure industry is larger than the state's contracting business, federal employment records show. But sales-tax figures tell the story of an industry and a state losing momentum.

In 2005, taxable sales at Arizona restaurants and bars grew 13 percent, according to the state's Department of Revenue. A year later, they grew another 10 percent.

In 2007, sales grew 4.4 percent.

The general downturn in the state's economy has affected nearly all businesses, but other forces have hurt restaurants in particular:

• Two recently enacted laws with broad popular support put special pressure on restaurants. The state's employer-sanctions law, which threatens to pull business licenses for knowingly employing illegal immigrants, has made filling some posts more difficult, owners say. They add that the law may have chased away immigrants who had been customers, too.

Meanwhile, a higher state minimum wage has pushed labor costs up rapidly. While relatively few workers made the minimum wage, employees who receive tips saw their guaranteed hourly wages climb from $2.15 an hour to $3.90 in just more than a year. Owners say this aspect of the law helps employees who already were doing well and cuts into restaurant profits.

• Gas and food costs also have risen sharply. But restaurant owners say increasing menu prices drives customers to their competition or keeps people home altogether. The problem is especially hard on smaller restaurants, which can't command discounts like chain operations.

• The public crackdown on drunken driving in Arizona not only has cut into alcohol sales but hurt dining out generally, owners say.

As an industry, restaurants generally have single-digit profit margins, say consultants and those in the business. This leaves it especially sensitive to shifts in the economy.

The industry still expects to grow $400 million this year, said Steve Chucri, president of the Arizona Restaurant and Hospitality Association. If it seems impressive, it is actually a concern.

Two years ago, the industry grew $700 million, and last year it grew $600 million, he said.

"If you're growing and expanding by population growth only, then you're really not growing," Chucri said.

High-end restaurants are still seeing single-digit growth, Chucri said, but that has deteriorated markedly in the past two months. Mid-level table-service restaurants are losing customers to less-expensive fast-food and fast-service operations, or to the choice of eating at home, Chucri said. Gil Guggisberg, a consultant to prospective restaurateurs, knows well the pressures the industry is facing.

Liquor sales are down 20 percent, while the cost of food items is up about 10 percent, said Guggisberg, who is also a business-development manager for Shamrock Foods, the largest distributor in the state.

"It's certainly as challenging as I've seen it in my 40 years in the business," he said.

Sanctions law frustrating

While the weak economy has hurt restaurants across the country, the state's sanctions law poses a unique concern.

Richard Melman, a Chicago-based restaurateur with 75 businesses across the country, recently scratched plans for adding a Scottsdale site.

"I was a little concerned about the law being passed regarding immigration," Melman said. "You put in $3 million or $4 million, and you can be shut down for a mistake. Why take a chance? I want to see how it plays out."

Melman, who has been described as "the Steven Spielberg of the restaurant industry" for his creative concepts and successful track record, said he had spent nearly $100,000 for an Asian-themed restaurant and had hired designers and architects before walking away from his latest venture in Arizona.

Instead, he is opening it in suburban Washington, D.C.

Melman's case also points up one of the complaints raised by businesses in suing to overturn the state's employer-sanctions law.

Last year, Illinois lawmakers passed a law barring employers in that state from using E-Verify, the federal online program that checks employment eligibility, because it wasn't considered reliably accurate. Meanwhile, Arizona legislators passed the employer-sanctions law that virtually requires using E-Verify.

Melman said he frequently dispatches his trusted managers to help operate new restaurants, but the competing laws could make it impossible to follow the rules in both states. Each law is being challenged in court, and in both cases legislators are also weighing changes to their laws.

Whatever the final legal decision in either state, Melman heard enough to convince him not to expand in Arizona at this point.

"I really do like Phoenix," Melman said. "But we said, 'Not now.' "

High prices force change

Ken Nagel, for one, scoffs at the E-Verify system.

The co-owner of Aunt Chilada's and the Rustler's Rooste, both in Phoenix , Nagel said he recently hired one of his daughters, who was born in the United States, and she flunked the eligibility check.

It was just another frustration in a changing environment. To cope with the higher cost of gas, suppliers are now charging delivery fees, Nagel said.

From corn and poultry to beer and tequila, items that are especially popular in Southwestern fare are getting pricey fast, owners said.

Hernandez, of Havana Cafe, said, for example, the cost of a 50-pound bag of flour nearly doubled overnight, from $6.35 to $12. Nagel said his revenues are up but his profits are down.

The turbulence has led Nagel and his wife, Candice, to branch out into catering special events like weddings in hopes of finding more stable work.

"People find the money for certain life experiences," Nagel said. "So we've retooled ourselves."

http://www.azcentral.com/business/articles...urants0303.html

[Niels Bohr 72]

Hmmm....Looks like consumers will be eating 'lighter' this year. More 1 dollar/day.

Edited March 3, 2008 by consolemaster