Hungry for Customers: 2015 Was Very Bad Year for Israeli Restaurants

Thinking of opening an eating establishment? These numbers should give you food for thought.

A waitress walks past empty tables at the Mul Yam restaurant in Tel Aviv Port.
Daniel Bar-On

Dreaming or even planning to open a restaurant in Israel? You should probably reconsider. The Israeli restaurant trade ended the last two years with a 12.5% drop in sales – 6.5% of which came in 2015. At the same time, the number of restaurants closing in the past 12 months rose by 11%, says the Israeli Restaurant and Bars Association (which collected the data for TheMarker).

In 2015, some 3,700 restaurants, bars and cafés shuttered in Israel, the highest number in recent years. The restaurant industry has always been characterized by a high failure rate, but the total number of bars, cafés and restaurants had still grown in most years as more people opened new ones than those that were closing. This year was the first since 2012 that the number of closings was higher than openings, of which there were only 3,100 in 2015.

In 2014, which was also a bad year for the restaurant trade, some 3,000 were closed, but a similar number opened in their stead, leaving total numbers about the same.

Revenues from the restaurant, café and bar industry dropped to 10.5 billion shekels ($2.7 billion) in 2015, down from 11.2 billion shekels the previous year, reports the restaurant association. (The figures for 2015 are estimates based on data collected for the year up until now.) In 2013, total turnover for the industry was about 12 billion shekels, but Operation Protective Edge in Gaza during the summer of 2014 sent revenues tumbling.

“This is a combination of the security situation, which hurt incoming tourism, accompanied by an economic slowdown,” says restaurant association CEO Shai Berman. “Both of them significantly lowered the incomes of many restaurants. At the same time, a lot of labor legislation – such as raising the minimum wage and National Insurance contributions – significantly increased the expenses of restaurant owners and made it even more difficult to deal with the drop in sales.

“If 10 years ago wage costs accounted for 25% of business revenues, today they are 40% and more,” continues Berman. “Just during the present Knesset, 190 proposed laws have been filed on issues related to labor relations. Some of these proposals are acceptable to the industry, but most are populist and intended just to score points for Knesset members.

“The government, meanwhile, does not take into consideration that restaurant owners cannot meet these laws without receiving relief from other directions. I would expect [the government] not to discuss laws concerning labor relations without having MKs calculate the costs of these proposals for employers, and whether business owners can meet them,” adds Berman.

Berman says that, as expected, the biggest drop in revenues was in Jerusalem – as well as other cities with a mixed Jewish-Arab population, such as Nazareth and Acre, where owners report revenue drops of anything between 50% to 85% since the latest outbreak of violence began in October. This drop is even being felt in Tel Aviv, where business has fallen by 10% to 20% on average in recent months, although this was partly caused by work to the new light rail line.

Coffee shops slip – bar one

Cafés and coffeehouses endured their worst year since the financial crisis of 2008, with revenues shrinking by 3% to some 4.75 billion shekels – down from 4.9 billion shekels in 2014. From 2008 through 2013, café revenues grew by some 200 million to 300 million shekels each year. But in 2014 , because of the summer war in Gaza, revenues only grew by about 100 million shekels for the entire year. Estimates are that this year’s terror wave cost the café business about 350 million shekels in lost revenue.

Even without the attacks of the last three months, the café market would have shown no more than a 4% rise in sales – mostly because of the natural growth in the number of households in Israel, says Tamir Ben-Shahar, CEO of the retailing consulting firm Czamanski & Ben Shahar. At the same time, coffee shop chains have continued to open new branches in the last year, meaning that average monthly sales have fallen by between 10% to 20% at existing branches, he adds.

The number of private coffee shops (those not owned by a large chain) fell for the first time in years. At the end of 2015, there were 1,109 privately owned coffeehouses in Israel – down from 1,180 at the end of 2014 (a 6% decrease).

The number of branches of the large chains actually grew at the expense of the small coffeehouse owners (from 714 in 2014 to 816 in 2015). But most of this growth came courtesy of the Cofix chain – the discount chain that sells items for only 5 shekels and which opened a large number of branches throughout the year. Without Cofix, the chains would have increased by a mere 30 stores in 2015, only a third of the average they grew at in previous years.

Mega-restaurants out, street food in

In recent years, restaurant owners have felt the economic slowdown quite severely, and expensive restaurants have suffered the most compared to cheaper ones (or bars that also offer food). Some owners, who understood the rising demand for reasonable-priced fare, have made a number of changes to adapt to the new situation. A few, who have seen restaurants full in the morning but emptying out in the evenings, have extended the times that customers can order breakfast. Quite a few have even started offering brunch, which often includes an “all-you-can-eat” buffet for about 75 shekels per person.

In addition, the trend for the opening of “mega-restaurants,” at a cost of millions of shekels, has abated. Instead, restaurant owners have chosen to open small, intimate places, a decision that also reduces their risk.

High-priced restaurants are dying out, too. Instead, chefs have been opening more reasonably priced establishments offering upgraded street food. Many restaurants that have been unable to offer food at reasonable prices have been forced to close their doors. “Two or three years ago, large, flashy restaurants were opening – but today that almost never happens,” says Dotan Baruch, a co-owner of Blender, which specializes in marketing for the culinary trade. “A lot of the trendiest places that opened in the last year were restaurants from small investors with experience in the industry, who opened a small, smart place that had something to say. These are more accessible price-wise, offering a mid-range experience,” he adds.

Restaurant owners understand the need to attract a lot of people in order to recoup their investment on a mega-restaurant, and often it simply doesn’t pay off, explains Baruch. “The public is not stupid. They know what raw materials they’re being given and if there’s a basis for the concept they are being sold. It is much more difficult today to open something vague and unprofessional, and succeed. That is why the large restaurants that do open mostly belong to groups of experienced restaurateurs, who are opening more businesses. Today, when a restaurant opens, you see an attempt to differentiate with the aim of creating a buzz. As a result, fewer bistro restaurants that appeal to everyone are opening, and there are more restaurants with a specific ethnic cuisine,” he adds.

If you want fancy, go overseas

The troubles facing the upmarket restaurant sector today are just a worsening of the trend that began in the summer of 2011, says Shalom Maharovsky, who closed his famous – and expensive – Mul Yam restaurant in the Tel Aviv Port earlier this year. He believes the watershed moment was the social protests against the high cost of living. Until then, it was fashionable to go to expensive restaurants. But afterward, people began acting more modestly, which affected those who were charging 250 shekels and more per person for a meal, says Maharovsky. The media backed the restaurants that were offering low prices, thus creating a preference for restaurants that offered simple fare such as kebab and hamburgers over filet and lobster, he adds.

The worst came in 2015, when the continuing drop in revenues met the growing regulation and labor laws, notes Maharovsky. This caused a number of restaurants to go out of business, especially expensive ones. Today, there is no longer room for more than two or three such high-priced eateries, he says. “In the 1990s and 2000s, there were dozens of expensive restaurants in Israel, but they closed down. Even the handful of expensive restaurants that opened in the last year were planned three years ago, not recently. There is no longer a place for it. People who want to sit somewhere with tablecloths and excellent service, and not on the sidewalk listening to Umm Kulthum, will have to fly overseas – like they did 20 years ago,” he concludes.

In addition to home cooking-style food and lower prices, another trend that has developed in recent years is of chefs who have left more problematic cities – in terms of restaurants – such as Jerusalem and Acre, and opened new ones in Tel Aviv. While the White City hasn’t been immune to the problems, the damage has been much less than elsewhere.