Why we’re still paying boom-era prices: A Perth restaurateur explains

“After the boom I expected prices to fall but instead quite a few well-known eateries closed their doors, which would seem to suggest that they actually were just making a small profit,” one reader noted.

WAtoday spoke to a Perth restaurateur whose family has been in the business for about eight years and owns an Innaloo burger joint, as well as an Italian restaurant in the Nedlands area.

The man, who wished to remain anonymous, was frustrated that media covered restaurants underpaying staff and the penalty rates debate, but not the pressures on small business.

For love not money

He said most costs were fixed — the biggest was labour. A hospitality business needed people front of house taking orders and at least two in the back; a chef and dishwasher.

Younger staff are cheaper but didn’t have the etiquette or ability to handle certain situations and then the service would fall short of customer expectations, so it was a mistake to try to cut costs there.

There was no wiggle room on electricity or gas and very little in insurance, marketing and equipment.

Ingredient costs were high in Perth and simplifying a menu could only save so much. Raising prices was the only way to make money.

And hours were long, with owners shackled to the day-to-day running of the business, ordering and ensuring food safety standards were met.

“A lot of young people and first-timers think it’s easy and it’s a good living and then they get in and realise how hard it is and they get burnt out,” he said.

Sweet but sad sign at Oxford Street Books. 

Sweet but sad sign at Oxford Street Books. 

Photo: Supplied.

“You go through all this work to manage this enterprise and after paying everyone else there is very little left.”

He said the only people making real money in the restaurant business were franchise owners. Franchisees invested hundreds of thousands of dollars to open a franchise somewhere, and wore all the risk in exchange for the goodwill associated with that brand.

“The businesses make their cash through selling the franchisees the ingredients and a cut of the profits. You’re essentially buying yourself a job,” the insider said.

He said rent was a major issue.

Landlords had lost track of the relationship between the landlord and the tenant and the need for the business to be healthy.

The massive upswing of the boom meant many people might have been caught out and set a 10-year lease on a particular rent.

“Then as things have fallen off they may have seen a decline and some have failed immediately after things collapsed,” he said.

“There are limited opportunities to negotiate your rate. And in the past four years customers have tightened their purse strings.

“A lot of landlords have kind of ignored the economic situation and kept rates going up sometimes beyond CPI. Everything is stacked against the entrepreneur.”

Leederville's strip.

Leederville’s strip.

Photo: Supplied.

The industry source said landlords held all the power and protections.

A business owner might need $60,000-$90,000 in a fund as a bank guarantee, which they could lose if their business went under.

One-sided contracts that lumped all risk to the business operator meant many had lost homes when their businesses went under. Some supermarket landlords even had predatory practices such as demanding access to profit and loss statements.

“Landlords think operators are making a lot but they don’t understand the hours going into it. They think the resource economy is picking up so why should I reduce my rent?” he said.

He said the loss of small business diversity, particularly in places such as Leederville, meant lost vibrancy.

“It’s one of Perth’s best-known eating spots and there’s little barrier for a new entry,” he said.

“Small business operators in that area compete for the same foot traffic and the area is constrained by the amount of parking available. If you own property there you know there’s always someone who will walk in, pay too much, set up a business, run for two years then fail.”

Damian Stone is “Principal and Chief Problem Solver” at Y Research, which looks at trends underpinning WA’s property market.

Rents: the bigger picture

Mr Stone said market rents for most commercial properties in Perth had fallen dramatically since the peak of the boom, driven by higher vacancies and strong competition for tenants.

CBD office rents that were nearly $1000/sqm during the peak could can now be leased for around $400/sqm, equal to 2005 levels.

Some CBD retail rents had fallen by nearly 50 per cent over the past 5 years,

Any businesses paying boom-time rents were likely to be fulfilling leases signed five to 10 years ago.

“Property owners are aware of the challenging market conditions, with many believing the last few years have been the toughest they have experienced,” he said. “As a result, a significant number of owners have worked with tenants to renegotiate rents.”

He agreed that consumer spending had dropped, and yet many businesses had fixed long-term costs.

“With most businesses closing rather than choosing to relocate, it would suggest that the underlying business while profitable in the boom, may be unviable in the increasingly competitive retail market of expanded shopping centres and greater online choice,” he said.

“As a result it would suggest that we are likely to see more closures of local retailers despite the economy improving and potential lower rents.”

Strip retail is changing in Perth

The Beaufort Street strip.

The Beaufort Street strip.

Photo: Supplied.

Mr Stone was unsuprised by stores closing in retail strips. He said while rents might have been a contributing factor, it was also symptomatic of changes in Perth’s retail strips.

Strips typically started by offering independent retailers, primarily food and fashion, not found in major shopping centres. As these strips matured, independent retailers were priced out and replaced by more national chains.

This had happened along Beaufort Street, Mount Lawley, Bayview Terrace, Claremont, and Rokeby Road, Subiaco.

It was now underway in Leederville.

Rents were governed by supply and demand. There were limited vacancies in Leederville and there had been limited retail development over the past 15-20 years. National operators were able to pay higher rents, which were still significantly cheaper than shopping centre rents.

And the type of stores that were closing were indicative of another shift.

“Strip retail in Perth is becoming the domain of food and beverage tenants ranging from take away food outlets, cafes to small bars,” he said.

“In a competitive retail market, food and beverage spending has held up.

“Retail strip property ownership is typically owned by small private investors, not major property companies. It is in the interest of each small owner to maximise the return of their asset”.

Ku De Ta: the tip of the iceberg

“We have seen a number of hospitality closures over the last 12-24 months across the CBD and inner city suburbs,” Mr Stone said.

“We are likely to see more for a number of reasons, aside from market rents.

“There is significantly more choice across Perth in 2018 than previous years. More than 40 per cent of retailers in the CBD are food and beverage tenants.

“There are more than 200 cafes in central Perth, more than 200 restaurants and more than 100 bars and nightclubs.

“If you feel like something particular from staples like Korean BBQ or Mexican to more exotic choices such as Venezuelan or Egyptian, there is a place for you.

“[Yet] since the peak of the boom there are over 10,000 fewer office workers in the CBD, combined with lower hotel occupancy, this means fewer customers for a coffee, lunch or after-work drinks”.

Source: https://www.watoday.com.au/national/western-australia/why-we-re-still-paying-boom-era-prices-a-perth-restaurateur-explains-20180724-p4ztdq.html

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