Something bad is happening to Israel’s restaurant sector.
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Last Tuesday, after a three-day farewell party filled with visitors, the much-admired Cafe 48, owned by chef Jonathan Borowitz, closed its doors after four years.
Cafe 48 joins the list of restaurants that have shut down in recent weeks, like Tel Aviv’s Sergos, the 10 Idelson chain, which operated in Tel Aviv and Holon, and Stix on Ibn Gvirol Street.
The restaurant and cafe business is one of the riskiest businesses around, with a very high turnover rate, but the last two months have been a particularly rough patch. Industry observers say the worst is yet to come.
Since June, according to Dun and Bradstreet, the number of restaurants at great risk of closing - in other words, having a one in four chance of going bust within the next 12 months - has risen significantly from 4,375 to 5,162.
The risk rate for restaurants and cafes in August was 45% higher than in the rest of the economy, according to Tzahi Baraki, the head of Dun and Bradstreet’s Israel economics division. The rate of restaurants and cafes in the high-risk category rose from 25% in June to 29.5%.
“We tried to do something good, but we couldn’t manage with the difficult situation,” said Tal Carmon, one of the owners of 10 Idelson, which closed its five branches two months ago. “The war was the final blow for us,” he added, referring to this summer’s Operation Protective Edge.
Carmon acquired the chain with his partners less than a year earlier and expresses sadness that a landmark of Tel Aviv closed under his watch. “I know that it wasn’t our fault, but it is an unpleasant thought in general to live with,” he said. “The war started, and in one day our sales dropped about 70%. Each day like that we had to bring a lot of money from home, and at a certain point we couldn’t cope with it anymore. Running five branches with 60-70 workers costs a lot of money.”
He said that in retrospect it was fortunate that they did not wait for the war to end. “I’m in touch with a lot of people in the business, and I hear that the situation has not returned to the status quo ante because people have less money to spend,” said Carmon. “We would have dug a hole worth hundreds of thousands of shekels more.”
Carmon, an account manager by profession, bemoaned that he and his partners had lost a lot of money.
“One thing is for sure: in my next stage of life, I will stay far away from restaurants and anything associated with them,” he said. “That’s what I would recommend to others.”
Chef Yonatan Borowitz is now busy baking cakes at home. His loyal customers will be able order deliveries of his signature crack pie in the coming weeks. Borowitz says the future of restaurants in Tel Aviv depends in no small part on the Sarona complex, which began operating in March and officially opened in June. The Tel Aviv market became oversaturated with restaurants when it opened, according to him.
“There’s no doubt, the finances of the business contributed greatly to my decision to close,” said Borowitz. “There’s too much supply, and the number of diners is diminishing because of the depressed economy.” He referred to the “Sarona effect” as a significant factor. “In one moment a quarter more sitting places were added and the city, which was already saturated, became even more so. They didn’t learn the lesson from the Tel Aviv bus station, where most of the businesses are no longer functional, and they opened another location.”
Sarona is just the beginning. Sarona Market, with 8,000 sq. m. and 85 food-related businesses, will open in the coming month and the city expects to add 100,00 square meters of commercial space in the vicinity of Sarona by 2018.
“A restaurant is an economic microcosm, and we feel the slowdown in the industry very quickly,” added Borowitz. “I could have kept the restaurant going, by scraping together money from here and there or pushing off payments, but I simply didn’t want to go on in this atmosphere.”
The investor got cold feet
Tel Aviv isn’t the only restaurant scene hurting. Chef Moshe Bason, who operates Jerusalem’s Eucalyptus, which over the past 28 years has served such illustrious guests as Shimon Peres, Vanessa Williams and Jason Alexander, may move to a smaller venue due to economic considerations.
“People my age are usually on pension,” explains Bason. “Don’t get me wrong, I love my job, but I canceled my payment order to the electric company before the High Holidays so I could pay my workers. Luckily, they were fair and agreed to spread my debt over 12 payments. In one moment, we went from being on top of the world, where we’d be booked for days in advance, to an empty place, and you don’t feel like going to the restaurant.”
Bason adds that people don’t appreciate how much tourism affects Israel in general and Jerusalem in particular. “So maybe they didn’t get hit by mortars like nearby Gaza, but sales dropped 80% in July-August. He said his business is based 90% on tourists, 40% of them from abroad. Tourism has not fully recovered, so his sales continue to lag in double digits compared to last year.
“I had a potential investor who got cold feet during the war. Given the shaky situation of the city, I am now weighing giving up this place, even though I love it.”
‘We’ll get by this period’
The situation in Caesarea is not much better.
“Our sales are on average 20% lower compared to last year,” said chef Amos Sion, one of the owners of Helena in the port. He said the tourist situation had not returned to normal.
“We lack business tourists who would host colleagues from abroad, as well as private tourists,” he said. “Still, we are celebrating 10 years of operation for the restaurant. We’ve gone through numerous security operations and difficult stretches in the past and we’ll get by this period, as well as others like it.”
Restaurant owners in the center of the country say that the duration of the war in Gaza was particularly problematic for people who had recently made big investments and had not yet had time to recoup losses. With the war over, there is an excess of restaurants. “There will always be successful, trendy restaurants where people pay 500 shekels a meal, but the industry in general is headed toward contraction,” said one owner.
Compensating hotels, not restaurants
Officials at the Israeli Restaurants and Bars Association blame the government for not compensating restaurants situated beyond the designated 40-km from Gaza zone for losses incurred due to Operation Protective Edge.
“The State of Israel, and the finance, economic and tourism ministers always talk about the importance of small and mid-sized business, but in practice they are abandoning them,” says Shai Berman, the association’s CEO. “It’s all lip service. The government decided on across the board compensation for the tourism industry beyond 40 kilometers from Gaza, meaning the hotels, but they ignore us, even though restaurants account for 14 billion shekels of the 40 billion shekels tourism contributes to the state.”
He said chef restaurants, which depend on tourism, walk-in restaurants and Arab restaurants suffered the most.
“We saw 20%-80% declines in sales,” said Dotan Baruch, one of the owners of Blender, which specializes in marketing for restaurants and culinary businesses. He said the situation got serious with Protective Edge and has continued through the High Holiday season, which contrary to conventional wisdom, is not a boom time of the year for restaurants because many people are abroad and the restaurants have to close at certain times.
“So, while it’s true there was some recovery after Protective Edge, it wasn’t anything euphoric or like a big boom, like we saw after previous military operations, rather just a trickle,” said Baruch.
He stressed that the restaurant market is extremely competitive, with only the strongest surviving over time. “People still go out to have a good time, but there is more price awareness. Restaurants have to offer better prices, because of both the economic situation and the competition,” said Baruch. “Restaurants are offering more deals on wine and alcohol, which have higher profit margins.”
The growing trends are restaurants that are one notch above fast food joints offering more popular prices, as well as chef restaurants offering fairly priced business lunches, according to Tamir Ben-Shahar, of the Czamanski & Ben-Shahar consulting firm.
Not everyone reports a rough reality. According to “Master Chef” winner Avi Levy, who owns the Hamotzi and Beit Hakavan restaurants in Jerusalem, “all the restaurants were hit hard by Protective Edge, but there’s been a nice awakening the past month, especially in Jerusalem, because of the Selichot period,” referring to the evening prayers recited in the month prior to the Jewish New Year. “People come and go, and the evenings continue until two at night.”
Still, several observers say the worst is yet to come, and expect many restaurants won’t survive the winter, when sales seasonally decline.
“Restaurateurs stretched their credit lines to the limit, and we’ll see the big hits come after the holidays,” said Carmel Broder, a food industry consultant. She said Protective Edge hit during the busiest period when restaurants “develop reserves to get them through the weaker parts of the year.” Now, they won’t have those reserves for the winter, which will lead to a big wave of closures, she says, “starting with the center and passing through cities hurt by the operation, like Yavne and Rishon Letzion.”