Episode 068: Overcoming Challenges and Embracing Opportunity for the Retail & Consumer Industry

Commentators (0:02): You’re listening to The Wrap, a Warren Averett podcast for businesses designed to help you access vital business information and trends when you need it. So, you can listen, learn and then get on with your day. Now, let’s get down to business.

Kim Hartsock (0:14): Hello, everybody, and welcome back to another episode of The Wrap. This is episode 68. It’s hard to believe that we have already done this many episodes. We’re continuing with our series focusing on our industry experts. Today, I’m really excited to welcome my co-host to this episode: Miss Cyndi Warren. She is a fellow Managing Partner down in our Pensacola office, and I’m excited to have you with us, Cyndi.

Cyndi Warren (0:46): Thanks so much. I’m excited to be here.

Kim Hartsock (0:48): This is our last recording of 2023. I can’t believe another year is over, and we’re headed into another new year.

Cyndi Warren (0:56): I can’t believe it either. I can’t believe we’re talking about 2024. Time seems to go faster and faster.

Kim Hartsock (1:02): Today, our guests are Branden Crosby—he’s also down in our Florida Gulf Coast area—and Charles Bailey, one of my fellow Atlanta partners. So, welcome and welcome back to the podcast.

Branden Crosby (1:16): Absolutely, guys, and thank you for having me today. My name is Branden Crosby, as Kim mentioned. I have been a partner with the firm for a couple of years. I’ve been in public accounting for well over 10 years, and I’ve had the privilege to work with many restaurants, breweries and distilleries in the area. So nonetheless, great space to be in, and thank you for having me again.

Charles Bailey (1:36): This is Charles Bailey. Kim, I want to thank you for having me as well. I’ve been working with restaurants since I got out of school, which was a little over 30 years ago. It’s been a great practice, and I’ve enjoyed it. Branden is the director for our Retail & Consumer Group and has done a great job. I look forward to what we’re going to talk about today, since there are a lot of great things going on in the industry.

Cyndi Warren (1:58): Every industry has its challenges, so we’d like to hear from you guys today about some of those challenges in the retail and consumer group and how they are impacting those businesses.

Branden Crosby (2:12): Absolutely, Cyndi, I recently had the opportunity to attend the Restaurant Finance Monitor’s annual Restaurant Finance and Development Conference. This is a great group that gets together every year, probably about 5,000 or so attendees. Some of the challenges that they’ve mentioned really revolved around staffing shortages and food costs. Restaurants, as you would expect, are just struggling with inflation and trying to figure out how to maintain a healthy level of profitability. Many restaurants that experience a food cost have seen an increase of 18% to 22%. So, you can see that that’s challenging, and really navigating through and walking through that. 2024 is probably going to have similar challenges, but we’re hoping that it’s going to ease up a little bit as we continue to go ahead.

Charles Bailey (3:00): One of the things that you talked about, Branden: the occupancy cost as well as a lot of other costs are going up. You know, one of the rules of thumb I always hear about is that you should try to estimate how much your rent is going to be in terms of gross sales, and you always either compare it to gross sales or you compare it to square footage. The best percentage you use is 6% to 10% of gross sales.

The reason why I say this is because we’re starting to see occupancy go up. I don’t know if it’s because COVID is over, and everybody’s trying to take advantage of the market now. People are eating out a lot more, but occupancies costs are going up. Matter of fact, there was a survey I read the other day, and it talked about how 65% of operators say that their overall occupancy costs for 2023 were a lot higher than they were for 2022. I’m seeing what’s happened to the menu pricing on that. There’s a couple of restaurants that I’ve been to where I happen to know the owners, and I know that their rents have gone up, and they’re trying to pass that along. That can have a huge impact on your survivability. I was at a restaurant not too long ago—and it’s not an upscale restaurant—but because of the occupancy cost, a hamburger was $26.

Kim Hartsock (4:12): Yeah, well, most of you know that my husband is a restaurant owner. I can certainly attest to the increase in costs of labor, food and all those things, and trying to get the general public to understand that the increase of a $26 hamburger is not because the owners pocketing 50% of that. They’re just trying to make a meager profit out of that and just cover their costs. So that’s a challenge of trying to get the public to understand that. So, Branden, talk to me a little bit about how these challenges impact their finances and their financial statements for owners of retail and consumer businesses.

Branden Crosby (4:52): Yeah, it’s got a direct impact. It really affects the bottom line as you would expect. In fact, pre-COVID, we would see many restaurants operate at a net income level of about 5%. That would be standard. If those same restaurants were not to increase their prices because of inflation, they would have a net loss of 10% or more. So, you can see that this has really affected a lot of people. Hopefully, the restaurants that are seeing these changes are revisiting their menu prices and updating their menu prices regularly—just having the confidence to do that and pass some of that cost on to the customer to try to make this a viable situation for both parties.

Charles Bailey (5:34): One thing I would add to that is—talking about rising prices on occupancy—you know, one of the things that you can try to do to combat inflation is trying to see if you can get into a sublease. That’s another way to try to get a good start on getting in at a lower price. The other thing is if you’ve got a concept. In New York, there’s a building, and the restaurant’s only open Monday through Friday. It’s a very, very nice upscale restaurant. What they did was they took a concept—and they do probably almost $10 million a year—but they catered it just for the people that are in that building (and they have a rooftop bar). So that’s all, that’s something else. If you’ve got a concept that you think might can work. That’s great. They’re Monday through Friday, and their hours are stable, because they’re just there really for the employees.

Cyndi Warren (6:21): It’s amazing how businesses adapt to those challenges, and they use the resources that they have and change things around. So, I’m interested—and I know you’ve talked a little bit about this—but in terms of their overall business strategy, are you seeing big changes as a result of these challenges?

Charles Bailey (6:42): Cyndi, to answer your question, yes. Companies and industry have begun bringing elevated offerings to their customers, such as outdoor dining, locally sourced menus, delivery options and alcohol to go. Alcohol to go has been a very big one that we’ve seen in this industry. Some of the stats that are interesting, and I’m sure we’ve all seen them.

31% of restaurants have cut their number of menu items. I was at a restaurant here in Atlanta last night—great restaurant and very nice food—but you have maybe five to six selections for your entrée. So, they’ve cut back on that, which is interesting. Also, operators have reduced the number of vendors that they work with, so they’re trying to get consolidated. Also, there’s enough software out there and in terms of making reservations, you can get your own versus having to go through an app. One of the things that Branden was talking about was profit margins. We are starting to see an increase to pre-COVID profits, which is good. We’re getting there little by little, so that’s some of the ways that businesses are thriving.

Kim Hartsock (7:49): One of the things that that significantly impacts your profit margin is labor cost, and we certainly have seen labor costs increase over the last few years. So, what is happening in the industry to respond to that staffing crisis? I would say, I’m sure many of us have gone through a drive-thru that has said: the inside of the store is closed or we’re only doing drive thru. People have cut hours to try to adapt to that. So, what else are we seeing, Branden, in terms of staffing?

Branden Crosby (8:21): Yeah, so the workforce is really going through a rebuild right now. We’re seeing the effects of COVID on unemployment, and it was very deep. A lot of people were affected: young people, middle-aged people and older people. It goes across the entire board. In fact, millions were forced to leave their employers during 2020 for various reasons and circle back to reenter the workforce. So, I think now we’re seeing a lot of people come back into the workforce.

We’re seeing states that are growing exponentially within that workforce, such as California, Florida, Georgia, New York and Texas. I think we’re going to continue to see those growth numbers continue throughout 2024. I think the big thing we’re going to really see though is that 60- to 70-year-old group come back and start exploring the restaurant industry—staying involved, reentering and retooling their skill sets. So, I think it’s going to be an interesting next couple of years ahead, but we’re going to see some alleviation certainly.

Commentators (9:33): Want to receive a monthly newsletter with Wrap topics? Then, head on over to https://warrenaverett.com/thewrap and subscribe to our email list to have it delivered right to your inbox. Now, back to the show.

Cyndi Warren (9:45): With the labor force, I think it’s so interesting that the number of our younger people—in that age of like 18 to 25—is just steadily declining. I think that’s pretty fascinating, actually.

Branden Crosby (10:04): That is interesting, Cyndi, and from what we’ve seen, about 30% of 16 to 19-year-olds are expected to enter the workforce between 2031. This number is down 37% compared to previous years. So, if you think about it, you’ve got a teenage group that’s not entering the restaurant workforce, as many of us did in the past. There are various reasons for that. It’s just certainly a change in demographics and a change in preferences, but it’ll be an interesting few years.

Cyndi Warren (10:33): It sure will. Charles, talk to us about technology. Every business has big changes constantly happening in technology, and I wonder in this business, is that the case as well?

Charles Bailey (10:46): Yes, it definitely is. For many years, we’ve had restaurants that are fast food or casual dining. You’ve got the counter there, and they go through. We always have the cameras focused on the cash drawers. They are always focused on the drawers. What we’re finding is with labor shortages—and we’ll talk about AI. I know we’re scared to use that word, but it’s in the restaurant space now, and I’ll talk about that in a second. But as it comes to management, some of the things that restaurants are doing now is they’re putting cameras in throughout the whole back kitchen. So, it’s no longer just focused on the cashiers, but it’s focused on everybody. It helps with management if you stop and think about it.

If you’ve got a manager that’s over six to eight stores, that’s a lot of traveling for them. Well, with technology, now they can sit there on a computer, see what’s going on in each store with each one of the different cameras, so they can find out if people are delivering a product at the end of the day. But what you don’t know is what’s going on besides what’s up front. What’s going on the back end of the house? This allows employers to get an idea, you know, if somebody is sitting on their cell phone all afternoon and texting instead of doing their job like they’re supposed to. This would help a manager be able to monitor that, because we’re finding a shortage of labor. So, this is just another way to use tools to help us.

Now, it’s interesting. I’m in Atlanta, and we’re working with a group from Georgia Tech. What we’re looking to do is rebuild AI in such a way that the cameras are not—there are cameras that look like they’re monitoring customers coming through the front end. But what happens is, we’re translating that into sticks, if you want to think about it that way. So, it’s just X’s and O’s. But it helps a manager who may not be there. All of a sudden, they see the customers and the lines backing up. It gives them a chance to say, “Hey, who’s sitting in the back of the kitchen, when they should be out front helping people?”

So, it’s going to help people monitor the flow. You know, you think about fast food and stuff like that…it’s going to help them be able to monitor the flow, if there’s people that are just in the back of the kitchen that should be out front temporarily just helping them to get sales done. That’s one way to use AI. Like I said, I’ve looked at the prototype. It’s almost cute to watch, because it’s not people, but it’s just little dots. You can see the customers, and you can see the backup, but you can also see after they place their order and how they’re moving through the line. It’s another way just be able to use technology to monitor your process.

Kim Hartsock (13:27): That’s so interesting. Also, to combat the staffing shortage, I don’t know if any of you have been to a restaurant where you had a robot come and take your order. It’s a little moving robot with an iPad and you place your order—or being able to pay with a QR code. I think people are starting to embrace AI to be more profitable and efficient, as opposed to worrying that it’s going to take away your job. When we have these incredible staffing shortages, we’ve got to figure out ways to let technology help us there. It’s a very interesting time for some of that stuff.

Charles Bailey (14:09): No, I was going to add to that. Kim, you’re talking about the QR code. I’ve seen that in a couple of restaurants, and it is one of the best things in the world. Especially if you go to a restaurant, and it’s busy. You don’t want to have to sit there 15 minutes to wait for your check to come out and get paid and walk out. I mean, it’s instantaneous right there, and it saves the server time. So, the QR code is definitely a good way to go.

Kim Hartsock (14:32): Absolutely. I was going to say if you’re the restaurant owner, you’re getting the value out of your server. With the time it takes to deliver a check, then go get the credit card and deliver it back, that’s three touch points that takes that server away from serving. Definitely a good investment of dollars, you would think. So, I’d love to get both of your perspectives on the new Corporate Transparency Act. You know, what do clients need to be aware of in relation to this, and is there anything specific to the retail consumer industry around this?

Branden Crosby (15:06): I’m glad you mentioned that, Kim. This is a topic that is really attracting attention over the past few months. It’s been around since 2020. That’s when it first started from a discussion standpoint. But there there’s a lot of attention now, because it goes into effect January 1, 2024. This is going to affect a lot of businesses—pretty much all businesses—and the penalties for not complying are very significant. In fact, any LLC, corporation or partnership that was formed and registered by the U.S. state is subject to this provision. If it was an entity that was formed prior to January 1, 2024, they have until January 1, 2025, to comply. From what we understand, there’s a short form. There’s not a lot of data that they’re collecting, but it’s certainly something that needs to be done.

There will be a portal put up soon on FinCEN’s website that will allow for the entry of this data and allow for companies to begin this process. If you have a new entity that’s formed January 1 of 2024—they have 30 days after formation to begin this process, so the new entities are really going to have to keep an eye out on this. Hopefully, they’re aware of it. Hopefully, this will help them become aware of it if they’re not. But certainly, something to keep an eye out for. There aren’t many exemptions to this either.

You know, with a lot of tax laws, you get exemptions for various items, but this is something that they are really hammering down on and taking seriously. The only entities that we’re seeing that could be exempt are large operating companies that have more than 20 full-time employees and more than five million in gross receipts on the most recent tax return. Entities that are controlled by another exempt entity and then, there are also inactive entities which were formed before January 1, 2020, and have had less than $1,000 of funds sent or received within a 12-month period and no further business activity. So, this is going to affect a lot of people across the board.

Cyndi Warren (17:16): I think part of the process—and correct me if I’m wrong—but entities formed after 2024, they have maybe 30 days or something like that to comply. Right now, the process isn’t even open. Entities that we see forming early January, I don’t know if they’re going to have that process up and going, so it could be interesting as to how they enforce this and monitor that.

Kim Hartsock (17:47): So, Charles, maybe you can help the listeners understand and just break this down a little bit more. But what is a beneficial owner, and who needs to even comply with this?

Charles Bailey (18:01): Well, the first thing I have to say is: we already have our first litigation case over this new rule. There’s already been a loss, so we’ll see what happens. You know, it is something that we have to wait and see. But yes, there’s a couple of claims that have already been filed. But really, the whole purpose here is we’re just trying to understand who the beneficial owners are. Every company has at least one beneficial owner. Somebody’s got to be responsible. So basically, a beneficial owner is anyone who owns or controls at least 25% of the company or has substantial control over the company. Substantial control could include those who are senior officers, those who have the authority to appoint or remove officers, or majority of directors are considered as important decision makers. Beneficial owners are also people that have any form of substantial control. Substantial control is a broad and subjective definition. Also, one of the things about beneficial owners is on the ownership percentage. It includes ownership of stock equity, voting rights, convertible instruments, options and any other non-binding privileges. So that’s just a partial list of the beneficiaries, and that’s really what this is designed to do is to try to find out who the real owners are of the businesses.

Kim Hartsock (19:28): Branden, you mentioned this before that there were significant penalties if you didn’t comply with this. What are those penalties, so our listeners can be aware?

Branden Crosby (19:38): Yeah, it’s pretty wild. You’ve got civil penalties of $500 for each day that the violation continues.

Kim Hartsock (19:45): Each day. Let’s make sure we reiterate that.

Branden Crosby (19:49): That’s amazing, because you just think how significant that is for many of these small businesses. $500 a day over a week or two weeks—that really adds up, and it’s astronomical. But I think it goes to show how serious they are about this, so hopefully people take it seriously. They go on and apply when they need to, because the penalties could be even worse than that. There are criminal penalties, up to two years of imprisonment and a fine of up to $10,000. So, just want to put this out to our listeners, but take this seriously, listen out for any changes that may occur, and just be sure to jump on this pretty quickly.

Cyndi Warren (20:28): Well, here on The Wrap, we like to wrap it up in 60 seconds or less with that bit of information that we want to leave in the minds of our listeners. So, what would you guys share with us for that wrap up?

Branden Crosby (20:39): I think what I would say is for business owners to be more proactive than they’ve ever been before. They’ve got to keep their hands on the pulse. They’ve got to know what’s going on with their employees, with their food costs and with all costs. Be proactive, be hands on and really know what’s going on. So, you can help steer that ship when challenges come up.

Charles Bailey (20:59): I would suggest using technology as much as possible. We’re in such an age right now where we’ve got so much technology available to ourselves. Some of our restaurant owners are not young, some of them are a little older. So, they don’t always consider: how could technology help my business? You still see some of the things—been doing things this way for 20 years—and they don’t stop to think about automating things. There’s a lot of automation that you can do now in the restaurant space. We touched on it a little bit, but that’s just scratching the surface. There’s a lot more that can be used in terms of inventory orders. There’s just a lot of variables. What I would encourage people to do is figure out how to take advantage of technology. If you’re not sure, get on the internet and search. There’s enough information out there to tell you what technology is available for you.

Kim Hartsock (21:47): That’s awesome. Thank you, Branden and Charles, for being with us today. And thank you, Cyndi, for being my co-host. It was great to see all of you. Happy New Year, and we look forward to seeing everyone next year again for more episodes of The Wrap. Cheers!

Commentators (22:03): And that’s a wrap. If you’re enjoying the podcast, please leave a review on your streaming platform. To check out more episodes, subscribe to the podcast series or make a suggestion of other topics you want to hear, visit us at https://warrenaverett.com/thewrap.