Israeli Restaurants Feel the Squeeze of Rising Wages, Close in Droves

Chef-driven restaurants suffer the most and move downmarket to fast food as the tax on foreign workers and employer contributions climbs

The Mahneyuda restaurant in Jerusalem. "Organized chaos" is chef Assaf Granit's description of the successful eatery.
Emil Salman

The restaurant business in Israel has a low survival rate even in the best of times, but 2017 has been a particularly rough year as the new tax on foreign workers and a higher minimum wage have raised costs.

The number of restaurants in Israel declined 1.5% from 2016 to 13,750, while turnover dipped 0.8% to 20.2 billion shekels ($5.8 billion), according to figures obtained by TheMarker from Israels restaurant and cafe association.

The phenomenon of more restaurants closing than opening began in 2016, and the new ones tend to close faster than in the past, in many cases surviving just six to 10 months. Jonathan Food Club of the celebrity chef Yonatan Roshfeld shut its doors after just 10 months; Luca e Lino, another high-profile eatery, gave up after eight months; and Al Noor Caf, once touted as one of Tel Avivs hottest new restaurants, was out of business after nine months.

Well-established restaurants also caved in to the poor business environment. Raphael of celebrity chief Rafi Cohen closed its doors after 16 years, while chef Shaul Ben-Aderets Tel Aviv restaurant Kimmel ended a 25-year run. The Red Chinese restaurant quit after no less than 40 years.

Were seeing the industrys business model collapsing, said Shay Berman, CEO of the restaurant and cafe association. The restaurant business was always hard, but the last two or three years weve seen it get much worse, mainly for chef restaurants, which lose money even when theyre doing brisk business.

Berman said many celebrity chefs were opting to open restaurants abroad. Idan Spivak, a restaurant publicity consultant, said the problem with chef restaurants was their sophisticated menus that involve a lot of expensive ingredients and bigger kitchen and waiting staffs.

Meanwhile, people are moving more toward simpler meals and lower prices, he said.

Red tape

The biggest blow to the industry in the past year was the imposition of a tax on foreign workers, which is equal to 20% of their gross salary and was imposed retroactively. In addition, the minimum wage has risen, the mandatory employer contribution to pensions has grown, and the criteria for obtaining a restaurant license have toughened, he said.

Moshe Tyler, who owns the Hasushia, Frangelico and Papa Johns chains, traced the sectors decline back to the 2011 protests over the high cost of living. He blames the celebrity chef Eyal Shani for responding to the protests with lower-cost offerings of pita sandwiches.

People realized they could spend 100 shekels for an evening instead of 1,000 or 2,000 at a restaurant, he said. Until the protests, the suppliers would raise their prices and wed pass them on to our customers, but in the last few years we havent be able to raise prices because today there are more restaurants than theres demand for.

Shani isnt the only top chef to move down market in response to the trends. Many are offering what amounts to fast food at low prices and opening food stands.

Theyre doing it in response to the shortage of manpower in the industry and the higher cost of employing foreign workers. Fast food doesnt require so many cooks and waiters, just a small team to operate the stand, said Spivak, the consultant.

Wary banks

Tyler said banks were also clamping down on lending to finance the opening of new restaurants, which has also forced restaurateurs to pare back how much they invest opening a new outlet. Just two or three years ago the cost of a new restaurant was typically 1.5 million to 4 million shekels; today the average investment is just 500,000 to 700,000, he estimated.

Most banks today arent lending to the sector, and when they do its on a significantly smaller scale and thoroughly vetted, he said. We, for example, have slowed the rate at which we open new restaurants and open them only after weve conducted endless market surveys and feasibility studies.

Cafes have also been taking a hit. A survey by Zoom-In for the restaurant association found that the number of cafes belonging to chains with 10 or more locations had dropped 1% this year after growing 6.4% in 2016.

The bottom line is that in 2017 profitability has eroded a lot at the cafes, said an industry figure who asked not to be named. The reason is rising costs, mainly labor costs because of the rise in the minimum wage and the tax on foreign workers. The difficulty of finding labor has pushed wages higher.

He added that many franchisees of the biggest chains were struggling, so franchisers are often lowering the royalties they charge. Shopping-mall operators, he complained, werent helping by refusing to adjust rents.

Whether this will lead to higher prices for diners and coffee drinkers is an open question. Berman, the CEO, said prices were already rising by a single-digit percentage, but others said owners didnt think customers would pay for big increases.

Everyones afraid to raise prices, both because they honestly think people will have a hard time paying them, and because they fear public and media criticism, said one cafe executive. In the meantime, theyre raising prices here and there, but the way things look, in the end theyll really have to raise them.