Supply shortages, rising inflation, higher food costs and labor shortages, along with the COVID-19 pandemic, are challenging the food services industry today. It’s likely these challenges will subside eventually — but not this year.

Restaurants and bars have shown they are a resilient bunch. In the face of these challenges, they adapted by changing their business models. They moved food services off-premises. They even sold alcohol to go. They adapted to a new environment and those that survived are better for it.

The food service establishments that were already in a strong financial position prior to the pandemic became stronger during the pandemic. “If you were in a good position before, you’re in a better position now because the weak folks have largely left the industry,” said Zach Kuperman, senior vice president and the National Restaurant Practice Leader for broker Hub International.

Smaller operators were hit the hardest simply because they didn’t have the scale to survive, according to Kuperman. Single unit operators, those operating a restaurant on the corner in Austin or on the corner in Los Angeles or wherever, didn’t have the ability to pivot to an online takeout delivery program, and it was harder for them to make it through the toughest parts of the pandemic, he said.

Roughly 90,000 restaurants have temporarily or permanently closed since the start of the pandemic, according to the National Restaurant Association. While that estimate is high, as many as 61% of independently operated restaurants fail within three years of opening even in normal economic conditions, according to some reports (2005 analysis from Ohio State University).

What’s left is a strong and resilient restaurant industry and the operators who remain in business face less competition.

“The pandemic was positive for the restaurant industry in one way because it forced about 10 years of innovation into two years,” Kuperman said. “If you were thinking about doing off-premise (services), you immediately pivoted to it in a month. If you were thinking about using third-party (to deliver food and beverages), you immediately did that. All those areas where you could find ways to use less labor or change your model, you did.”

The food service industry feels good about its prospects in 2022. While the industry lost $186 billion in sales from 2019 ($864 billion) to 2020 ($678 billion), the sector grew to $799 billion in 2021 and anticipates reaching $898 billion in sales this year, surpassing pre-pandemic sales levels, according to the “State of the Restaurant Industry Report” published by the National Restaurant Association in February.

At the same time that sales are up, costs are also up for both labor and supplies. That means 2022 profit projections, when adjusted for inflation, will remain below pre-pandemic levels, the association said.

Challenges and Opportunities

The adaptations that restaurant and bar operators made over the past two years have altered the restaurant risk landscape permanently and that’s not a bad thing, according to Kuperman.

“A lot of that off premise [service] is not really going away, it’s clearly here to stay,” he said. Whether the food and beverages are delivered through third-party delivery providers, such as Uber Eats, or ordered directly via an operator’s website for pick up, the convenience of off-premises serving is a growing revenue source for restaurants today. Even restaurants new to the idea are growing in take-out dining and today they count on that revenue stream, he added.

Heidi Strommen, senior vice president, Primary Hospitality Programs, for Distinguished Programs, agrees. She has seen a number of higher-end eating establishments increase their revenue through takeout business.

“There are more restaurants and more specifically higher-end restaurants who now have a takeout business who never did before, and they have figured out that it is actually a stabilizing revenue stream for them,” she said. “Even some of the higher-end restaurants that have traditionally thrived only on the on-premise dining experience can offer some pretty compelling takeout options, and they want to keep that going,” Strommen said.

They are not doing the same level of off-premise service as during the pandemic shutdowns but they’re keeping the service as a part of their business going forward, Strommen said.

Another adaptation that changed due to COVID — outdoor dining.

“A lot of restaurants that had small outdoor dining space, or no outdoor dining space, expanded it, or developed it,” she said. What they found is that people like eating outdoors, COVID or no COVID. “So we’ve seen a lot of restaurants that have been able to expand their capacity by having these outdoor spaces … that’s been another where I think is a pretty permanent change for a lot of restaurants.”

According to a recent survey by the National Restaurant Association, consumer demand for alcohol to go and outdoor dining will continue with nearly four in 10 consumers saying the availability of outdoor seating would make them more likely to choose one restaurant over another similar one. Roughly half of U.S. restaurant operators think the availability of seating on a sidewalk, parking lot or street will become more common within their segment this year. Seventy percent of Gen Z adults (age 21-plus) and 62% of millennials say the option of including alcohol with a takeout or delivery order would make them more likely to choose one restaurant over another.

Another change — restaurants moving to no dining on premises at all, including higher-end operators using “ghost kitchens,” Strommen said.

Ghost kitchens are a restaurant without any on-premise dining options. While ghost kitchens existed prior to COVID, like other off-premise food service, ghost kitchens ramped up during COVID.

“It’s a kitchen with the business model completely built on delivery, and usually exclusively through third-party delivery services,” she said. “It’s the kitchen staff and whoever is fulfilling the orders and handing them to the delivery service … that’s the extent of the staffing that’s needed, and you don’t have any customer traffic in or out.”

Ghost kitchens can be an attractive option for people looking for convenience, with meals delivered to their door. “That’s a pretty nice option for a lot of people and we’ve seen some pretty sophisticated chefs enter this model,” Strommen said. “Some of those that have been successful have gone into franchising, as well, so there’s a lot of growth potential.”

Ghost kitchens can range from just one location to multiple locations with larger business operations, she said.

Ghost kitchens lack one exposure that often produces a claim scenario in the restaurant world, too, according to Strommen said. “That would be people on-premises, tripping and falling,” she said.

Trips and falls are a common claim in restaurants but in the absence of customers that risk is significantly reduced, she said.

On the other hand, ghost kitchens see heightened risk in cyber, she added. “There’s definitely a need for cyber coverage in ghost kitchens because their entire business is being conducted through an app, or over the internet.”

However, Strommen noted, in reality all restaurants need cyber coverage. While more restaurants and bars are buying the coverage, there are still too many that don’t buy it.

“I’m amazed by how many restaurants still don’t buy cyber coverage … unless you have an old-fashioned cash register and only take cash, every restaurant has this exposure,” she said. “It’s just very naive to think that you don’t have the exposure and that you can regard this as an optional coverage. No restaurant should think of cyber as an optional coverage.”

The National Restaurant Association found that more than eight in 10 restaurant operators say that the use of technology has helped provide them with a competitive advantage, especially during the pandemic. They report that many of their members plan to ramp up investments in technology this year.

“Many operators will devote their resources to online or app ordering, reservations, mobile payment, or delivery management, in addition to back-of-the-house technology,” the association says.

Technology may help some newer, start-up restaurants and smaller independent operators secure insurance.

Pathpoint, a digital E&S technology platform, recently launched its new restaurant offering for non-admitted coverage for restaurant owners.

“We spend a lot of time with agency clients and market partners to figure out what products to focus on bringing online first,” said Alex Bargmann, Pathpoint’s CEO and co-founder. “Adding restaurants is just the start of some of this hard work paying off for our partners.”

According to Bargmann, smaller, independent restaurants are commonly declined through admitted carriers for various reasons. “From the amount of alcohol they’re selling to past claims history … it’s a long list of reasons,” he said. Pathpoint’s restaurants product is built for these types of risks.

Like all Pathpoint offerings, the restaurant product is delivered through Pathpoint’s online platform, with Pathpoint serving as the surplus lines agent and handling all servicing and compliance on the back-end. Pathpoint’s restaurant offering is available in all U.S. states — but not in D.C. — and covers any restaurants operated by concessionaries, including BYOB establishments, restaurants that don’t serve alcoholic beverages, and those with alcohol sales less than 75% of total sales. Appetite includes general liability from $500,000 to $2 million and property TIV up to $2.5 million.

Labor and Supply Shortages

Not unlike the rest of the U.S. economy, restaurants and bars face tough conditions when it comes to labor shortages and supply chain challenges.

While the food service industry gained back 1.7 million jobs during 2021 for an end-of-year total of 14.5 million employees, many restaurants remain severely understaffed, and this will continue to constrain industry growth in 2022, according to the National Restaurant Association.

“Seven in 10 operators across all major segments say their restaurant currently does not have enough employees to support customer demand and most operators expect their labor challenges to continue through next year,” the association reports.

The report also revealed that 96% of restaurant operators experienced supply delays or shortages of key food or beverage items in 2021 and expect these challenges to continue in 2022.

“Labor is now more expensive than it ever was, but so too are commodities,” Hub’s Kuperman said. The cost of chicken recently was at an all-time high, he added. “Chicken usually has been shielded from high pricing, which normally runs at 25 basis points of food cost, but it was running at 43-44% for some of the large national chains two months or three months ago,” Kuperman said. “That makes it hard to make money when food commodity pricing goes up.”

And many restaurants struggle to run a full house with tight labor conditions today. Roughly 50% of restaurant operators in the full service, quick service, and fast-casual segments of the sector expect recruiting and retaining employees to be their top challenge in 2022, according to the National Restaurant Association.

“I still regularly go to restaurants and they’re not seating all the tables, no matter how long their wait is and it’s because they can’t hire people to serve those tables,” Kuperman said.That labor shortage impacts risk as well. “I’m definitely seeing a trend in higher workers’ compensation claims.”

However, so far the workers’ compensation insurance market remains one of the more competitive areas of the insurance market in this space. Kuperman attributes some of that trend to higher wages, which translates to more premium but with fewer workers to insure.

“Let’s say 30% of top line sales is payroll and if you have $3 million in sales, that leaves about $1 million in payroll, just on a simple explanation,” he said. In today’s higher wage market, the restaurant is now paying payrolls of $1.2 million in this scenario, where it used to be $1 million.

“So now it’s the same man hours being worked, but it’s more exposure in terms of payroll to the carrier. In theory the carriers are getting more premium.” If they had a $2 rate for per $100 in payroll before the pandemic, they still have a $2 rate per 100 in payroll, but now they’re getting $1.2 million in payroll instead of $1 million, but there’s no more risk to them. “The employees aren’t doing more work, it’s just they’re being compensated higher.”

Other areas of insurance have seen more rate pressure in the sector, Strommen said.

“Certainly, for a bar, liquor liability is an issue,” she said. “For a restaurant, if it’s truly a restaurant and not straddling that line (between bar and restaurant) like some do, I think that there’s enough options where there’s liquor included in the package policy.”

The most change in insurance market conditions has been in the excess liability line, she added.

“There’s been more change and more hardening in the excess line, which of course is across other industries, as well. That’s just been an area where we’ve seen a lot of rate being taken because of increased claims settlements and social inflation,” she said.

Fortunately, she said, a lot of restaurants recognize that the days of not carrying an umbrella policy, or only carrying a $1 million umbrella, are behind them. “If they haven’t they should because they’re really not adequately insured if they’re not buying more limits on their umbrella.”

But overall, the insurance market for restaurants is pretty steady right now, she added.

That’s good news for operators looking at a 2022’s projections.

“Most restaurant operators are optimistic about 2022, and there’s still pent up demand,” she said. “People want to get out there and eat out.” While nobody knows what’s going to happen with the next COVID variant, it looks like it’s going to be a really good year for restaurants, she added.

“We’re seeing a lot of our clients expanding, adding locations again, or reopening locations that they have closed,” Strommen said. “I think a lot of people are optimistic, including myself, that things are looking up for restaurants.”