California Restaurants on Verge of Going Under With Excessive Mandates, Higher Costs | Brian Back

I've sent an open letter to Gavin Newsom, the governor. Not only have we seen the cost of almost everything go up exponentially in the last few years, in addition to new regulations, new mandates, they come with a cost burden. We recently had to switch from compostable plastic cutlery to bamboo cutlery. Just little things like this might have some minor environmental benefit, but they end up coming at an additional cost. If I were to match our increased costs with menu pricing, we would be forced to charge like $40 for a cheeseburger. We can't explain that to the customer. My guest today is Brian Back. He's a restauranteur from Northern California. Brian started his restaurant so it can become an asset for the community and bring people together. Today, he's here to tell us what's happening with restaurants across California and the challenges you're facing with laws and regulations and rising costs. We also talked to John Kabatack, who's the president of MFIB, who has seen a number of restaurants and restaurant owners in his portfolio of members who are facing challenges in California. I wanted to do something that was neighborhood scaled. I wanted to do something in my community. I wanted to have a place where family could be generating tax revenue and building community. I was naive until I opened this business that the state could come in and just pull the money out. It was a little bit shocking. I'm Siamak Khorrami. Welcome to California Insider. Brian, it's great to have you on. Welcome. Thank you, Siamak. It's great to be here. Brian, you wrote an open letter to the governor. You are a restaurant owner in the Bay Area and you requested some help. Can you tell us what you're going through? I, in 2018, opened a beer garden and barbecue restaurant out of an abandoned gas station and mechanic shop. We upcycled a property that was kind of sad to look at and was not generating any tax revenue and turned it into a restaurant, community gathering place. In that time, we've obviously seen quite a bit happen. We had a pandemic and we've had inflation woes and we've had, unfortunately, a climate where we've lost hundreds of restaurants in the Bay Area and more throughout the state of California. And so these issues that I've confronted as a restaurant owner, as a small business owner, mom and pop scale, I've written in an essay form, I've communicated with my local media, local politicians. I've sent an open letter to Gavin Newsom, the governor, on more than one occasion. Unfortunately, I've run into dead ends. No reply from the governor's office. I've had limited discussions with my local senator. There's actually an office of the small business advocate in the state of California, but they were basically told me they couldn't help me. And what are these issues that you guys are facing? Can you tell us, the average people, what's going on? Sure. I mean, not only have we seen the cost of almost everything go up exponentially in the last few years, especially coming out of the pandemic, I think that small businesses get a lot of lip service of, yeah, we support small business. We have small business month. But where the rubber meets the road in terms of policy, what we're seeing is a, not even a slow drip, but a fast drip of new regulations that are coming down the pipeline nonstop. In the super majority where anyone with a pet project can get what they want passed, legislation that has noble ideas, we want to provide this, we want to do this for the environment, et cetera, there's the new administrative layers and regulations imposed on small business become overwhelming. And so someone of my scale as a restaurant to try to make something happen with a small staff, eke out a living, it's become overwhelming and impossible. And the state has, in my experience, been very aggressive and very punitive and not responsive to the issues that we're facing. Was there a moment for you when you figured out that the policies are kind of getting away, going far? And you agreed with some of these policies, right? Yeah. Originally I was, especially when it came to some of the environmental innovation happening in California and green building mandates and that sort of thing, because what I wanted to do with the property where we have the restaurant was to really upcycle a former gas station, a sort of monument to the fossil fuel industry and turn it into a community gathering place. And I wanted to do these green building initiatives and I wanted to have something that was a great asset to the community. And so I came in with very noble ideas. Just the permitting process around doing that became so overwhelming and cumbersome that it became a serious financial liability for me. So I couldn't do the things that I wanted to do because it took me three years to open what was already an existing site. The building, we didn't change the building and start from scratch, it was just upcycling it, putting in some new utilities and that sort of thing. I had to deal with so many difficulties in that process that came at such a severe financial cost to me that by the time that I opened the restaurant and launched my small business on Main Street, I had no cash. And that's not how you want to open a restaurant. No cash cushion, sacrificing some of the ideals that I had, not being able to invest more in my employees, in my community, in my business. And that was very difficult. Having gone through all that, I admittedly had a little bit of a chip on my shoulder, a little bit of resentment towards the permitting authorities in the county, in the town, in the state. And then came COVID right around the corner and we went through all that and then emerged from that. We slowly built this business up and it made incredible memories and I've had great experiences. There's times when I'm there and I'm looking out across the beer garden on a beautiful spring day and there's a band playing and the employees are making jokes and the customers are laughing and chatting and you see someone celebrating a birthday party and you see a little league team and you think, oh, this is great. This is the vision. And so there's moments like that where I really do find deep appreciation for what we've built. But unfortunately, there continues to be a very aggressive and punitive approach from state authorities. We just got targeted for a sales tax audit, for example, even though our restaurant earns less annual income, far less than the median house price in the community we serve. It's bewildering and challenging. And you mentioned that as these things piled up together, different regulations come in and they're piling up. Can you explain that? How does it impact you guys? Because it seems like these incremental laws are passing. Well, business of my scale, a mom and pop scale, it means that I'm the one who's doing the payroll. I'm the one that's doing the bookkeeping. I'm the one that's doing the compliance with the state, ordering inventory, you name it. Endless paperwork on the back end. Every time a new rule or initiative is passed, it creates another administrative layer, something more that I have to do. So if you're working 70 hours a week and all the time that you're not working in the restaurant, you're working on the restaurant, to have anything more is just, it becomes the point where it's near impossible to do it with the resources that you have. And then the cost of things, too. I mean, everything that we see with new regulations, new mandates, they come with a cost burden. We recently had to switch from compostable plastic cutlery to bamboo cutlery. Just little things like this. They sound little and trivial and might have some minor environmental benefit, but they end up coming at an additional cost. We mentioned Prop 12, retirement obligations, you name it. It's just every month there's something new that we have to do that creates a new administrative layer and a new cost. Are these state mandated laws? Yeah. The other states, some are county as well and local, but a lot of it's from the state. To understand if this is a trend in the state with restaurants, we talked to John Cavitak. Can you give us some examples of these regulations? I know there's a lot of them. Can you give us some thoughts of what these regulations look like? Sure. I was with the California Restaurant Association for about four years, but we talk to our NFIB members all the time, many of them restaurateurs, many of them small businesses, and they're just facing a wall of problems. First of all, we have, again, in addition to the minimum wage, which continues, our policy makers continue to feel like it's never enough to raise it high enough for small business owners, which hurts the very employees. But we've got a ton of other regulations that small business owners must have to deal with. California right now already requires employers to offer their workers upwards of 15 to 16 different employee leave programs. That's the most in the country. With each of those, my friend, comes a cost. Each of those comes a cost. So the employee leave programs from family medical leave to recent ones that were assigned by the governor that now require ones for additional members of the family. It's just, when is too much, too much? So these employee leave programs are another big problem. We also have found that small business owners must abide by so many local ordinances, health and safety requirements. Nobody wants a workplace that's not safe, but I think we're now finding them heaped on with so many requirements at that level. And then to your point, I think they also live under the specter of fear. Shakedown lawsuits, retail crime, retail theft, that is now affecting a lot of restaurateurs. We saw an In-N-Out burger in the Bay Area that had to shut down because people were breaking into vehicles and things around that parking lot. It's just too unsafe. So it's just, I think, what we call death by a thousand cuts. And many of these small business owners are dying by a thousand cuts or more. And then what happens if you don't follow these? To offer a story that is illustrative of the situation that we deal with, at the end of January, January 31st, I'm going to file and pay my quarterly sales tax. So I do all the work in QuickBooks, all the accounting, I go to all the delivery apps, I find out the amount of money in sales tax we owe, and I'm going to file and pay. But the power goes out at the restaurant. It's raining. And this happens on a regular basis. Whenever there's rain or high winds, the power goes out, my internet goes out, I'm not able to pay sales tax. I'm making sure that customers are safe, that our employees are safe, we shut down the restaurant, we cut off the power, we get everyone out of there, and I go back and do sales tax within 48 hours. I file it and pay in full. And then a few weeks later, I get a letter in the mail from the state saying, you owe a thousand dollars in penalties and interest for not paying your sales tax in time. And I say, okay, well, I go on to the website and I formally make a motion to try to be relieved of that penalty because the power went out, it's out of my control, you can check the records, you know, PG&E's power outages, you can see that I was unable to do it. Even though I did that, a week after that, the state came into my business's checking account and pulled that thousand dollars out. They just went into my bank account and took the money. It's a legal order. This is just in weeks of the penalty. And so, you know, I contact the state, I say, what's going on? They'd also sent letters threatening that if you don't pay this money by a certain date, we will take away your liquor license, our beer and wine license. So they're doing things like that, all compounding within a few weeks of just an incident that was out of my control with the power going out and not being able to pay sales tax on time, even though I did that within 48 hours. So that's just kind of an example of what we are dealing with. And when we see, when I see a letter come from the state in the mail, I'm like, I get worried. I cringe. I worry, what's this going to be? It's unfortunate. So in this case, they didn't really listen to you or their reasoning. They just took the money out of your account. That's right. I was naive until I opened this business that the state could come in and just pull money from your account. When I'm trying to make payroll, when I earn well below a living wage in my community, that they can come into your account and just pull the money out is a little bit shocking. Folks, you've probably been hearing me talk about WireEFI for a while now. 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Now let's go back to the interview. Do you think it's reached to the point where are you worried more about what's going to come next, or is it already, this piling up has already reached the maximum limit where a lot of people like yourself may not be able to operate anymore? I think you nailed it there. We've lost already so many restaurants in the Bay Area. We've lost so many small businesses in the state. People that are leaving with their livelihoods crushed, going to other states, trying something different. My feeling is that it has reached critical mass. I do think we've kind of reached the worst of it, but I don't see that the turn in that ship around is going to be easy or quick. So I do hope, I really do hope that things get better from my perspective. As a small business person that has worked and contributed to the state for 20 plus years in economic development and generating tax revenue and building community, I've gotten to the point where I'm not able to do it anymore. It's just become too much. I'm spending most of the money that we earn in like debt obligations to the state. So it becomes a sort of economic serfdom. I think that this sales tax audit really sort of, it just sort of broke my will, unfortunately. And I don't really know what's next, but I do think that trying to do what we've been doing has sadly become unsustainable. Now you seem to have started this business with a big vision for the community. Can you tell us what was the vision you had for this restaurant? In 2014, my beautiful daughter, Annabelle, was born. And at that time, I'd been a small business entrepreneur, done previous work in different industries. I'd grown up in hospitality. I wanted to do something that was neighborhood scaled. I wanted to do something in my community. I wanted to have a place where, for example, I coached my daughter's basketball team. At the end of the season every year, we have a celebration at the restaurant. That's when we had a music festival a few weeks ago. It was for women and music, and my daughter got to perform at it. So I wanted something that was neighborhood scaled to build community, to really not have to commute an hour a day back and forth to the city, and to try to just have something neighborhood scaled that had impact in one-on-one, one customer at a time. So that was very tangible and hands-on, and that was the vision. Do you think the state leaders, the people you have been talking to, do you think they may not understand the value of these small businesses, or do you think they just don't know the impact of the laws they're passing on you guys? I do believe that there's got to be some disconnect in terms of understanding of what it really means on the ground. Probably not a lot of the policymakers have had small businesses before, like at this scale. Or, you know, I think a lot of the policies are noble ideas. We want to create better conditions for labor. We want to have environmental innovations. I think in their minds they're really doing good, but I don't think they understand the true administrative costs on businesses of our scale, whether it comes to what kind of to-go boxes we're using, to employment costs, to... So you have to have specific to-go boxes? Yeah. Everything has to be compostable, and there's new legislation around cutlery, for example. You can't just give out compostable plastic anymore now, it has to be bamboo. So you have to be careful what you give out? Yeah, you do. You're not even allowed to give out condiments anymore, you have to ask customers if they want it. We have new requirements now for certifications that all the employees have to have around responsible beverages and safe serve for food certification. And some people might want to ask this, why don't you charge more? Can you do that? Yeah, that's a great point, and we unfortunately have customers that come in and are frustrated at the restaurant for the prices that we have increased. If I were to match our increased costs with menu pricing, we would be forced to charge like $40 for a cheeseburger. We can't explain that to the customer. They will look at your menu pricing, walk out the door upset, and go on to Yelp and say this place is overpriced. We see that a lot. And we've increased our prices significantly since inflation, but trying to find that balance is very tough. Because you would lose the customers, is that... That's right. Even though we are not raising prices enough to match our increased costs. You can't do it. So if you want to turn off the flow of customers to the restaurant, or decrease the amount of customers, higher prices will do that. So John, Brian is telling us that it will cost $40 a cheeseburger for his customers if he was to raise that cost to actually what it cost him with the raw materials and the labor and all the regulatory things that he has to go through. Can you tell us, is this real? It's simple math, because he's only got so much of a budget and what he counts on coming through the door from the customers and what they pay, and what they bring him in his cash register, right? He's either got to make a decision to let Karen and Steve and Judy go, or scale back their shifts, further hurting their productivity, or more likely doing what Brian had to do, which is boost his menu price to try and hopefully get those customers to pay more. The hard part is, many customers out there that are walking through doors like Brian's or other places, many of them are minimum wage employees and their families themselves. So it's this absurd cycle that you're actually raising the prices in a lot of these minimum wage establishments, but a lot of those customers are actually minimum wage employees themselves on a very limited income, and now having to make decisions about where they spend the money to help provide for their family. So I don't blame Brian, but it's that cost issue right now where there's so many different layers. They have no other way to recourse, really, at this point, but to raise prices or make the more difficult decisions of letting people go or scale them back. So it's simple math, but it's scary math, and unfortunately, people like Brian are becoming more and more of the people that we're hearing out there. In this business, there's a few that have just kind of found the right formula in the right place at the right time and have good fortune and kind of have a good run for a few years, and then there's the other 80% that are struggling right now. Every restaurateur I speak to is dealing with this, what I call a cost and compliance epidemic and having a tough time in figuring out how to make it through. The thing is, I can imagine, for example, in my restaurant, a time a few decades ago when what I am doing and what we are doing would have been enough, enough to eke out a humble existence, to have a middle class or even upper middle class existence with being able to afford decent housing and to just be able to maintain a lifestyle around the amount of business that we do. We have customers that love the restaurant. In the spring, summer, and fall, we have a lot of traffic that comes through and a lot of appreciation for it, and it seems like there was a time when that would have been enough, and nowadays, it's just not viable, unfortunately. Do you think regulators are seeing this, or do you think regulators are not seeing that these restaurants like yourself are not able to continue if they continue adding more and more? They have to be seeing it from a data perspective when they see the businesses that are closing and those that are leaving the state. My hope is that there will be a point where the tide can really turn, but I'm not seeing it on the immediate horizon in terms of what's happening in Sacramento. Before we continue, we would like to thank Shen Yun for sponsoring this channel. It takes you back in time to the magical world of ancient China with a unique blend of brilliant dancing, beautiful costumes, and legends coming to life. Go to Shenyun.com to find out the schedule and theater information. It's a lifetime experience you don't want to miss. It's so inspiring. It makes me want to go dance. Breathtaking. I was very impressed. I'm taking my program, and I'm going to mention it on the news because I think it's a great performance and people should see it. What I loved about the show was the authenticity of it. It was taking me on a journey. Exceptional. The technique involved, the thousands of hours of training. People just float. Everything was exact, and then they worked to the exact moment, and it was beautiful. You go away feeling with a smile in your heart from it. Have to come. Life changing. Make sure you see it. Don't wait. Get your tickets now. If tomorrow the governor and the state leaders decide to make a pivot and help people like you and your community, the restaurant owners, what can they do? What are the few things that they can do that will change the whole dynamic? I think number one would be to re-evaluate the tax policies, and that's a big one because obviously you have it in multiple places. You know, you have property taxes, sales taxes, income taxes, payroll taxes, all of which are extraordinarily high. And so when it comes to businesses, small, main street, mom and pop businesses, to re-evaluate that tax burden would be one. Secondly, would be to unravel a lot of the regulations and administrative stuff that there are required of small businesses. I think they should have a council of actual small businesses that come in and talk to policy makers and provide insights and say, this is what it's really like. This is, I see what you want to do here when you want to create this new mandate, but here's the reality on the ground of what's going to happen, or some way to stay in tune with all of these things that are happening at once. I think there's a tax burden and then there's a regulatory burden. It's a cost and compliance epidemic, and I think you really need to just start unraveling it. It's so massive that it can't happen overnight, but I think if there's a new sort of direction, then I think that there could be change, but it's a lot. Brian, you mentioned that you spend about 70 hours a week on your restaurant. What do you do? What is your day like? It's interesting. It's nonstop, it's constant, and it is a balance of the working in the restaurant and working on the restaurant. Any given day can find me running down to the local bakery and picking up rolls, to a new CO2 tank for the beer taps, to spending a few hours working through administrative stuff, doing maybe my payroll. But I'm working almost every waking hour, and when I'm not, I'm trying to spend quality time with my family. That's, I think, a balance that a lot of small business owners have, but when you are the one responsible for so many aspects of the business, I don't have a team of attorneys, I don't have accountants, I don't have folks that can help me find the workarounds. You really literally end up doing everything from top to bottom. You're not getting vacations as much, you're working often on holidays, on weekends, nights. It's a very demanding, demanding schedule. Brian, are you going to continue with your restaurant based on what you're seeing and the experience you've had so far? Well, we're right now at the point where, you know, the spring is here and the summer is here, and it's a good season for us and that sort of thing, so I always get a little bit of optimism, but the fact of the matter is that I don't plan on continuing. I'm looking to move on and try something else. The sad truth of it all is that I would, going forward, I would not plan to open a new business in California right now, and I think that this particular business and the restaurant that we have is unsustainable, you know, without major changes. Now Brian, do you have any thoughts for Californians? My hope is that we will, you know, going forward, really value these Main Street assets and small businesses and support them. In my community, there's a formula retail ban, which means you can't have a McDonald's or a fast food place or a chain of any sort, so what you have left are these mom and pop scale businesses, and I hope that we can really figure out as a state how to support these businesses because they're so vital. If I were asked by a young entrepreneur about opening a small business in California right now, I would tell them delicately that it's not the right place and the right time, sadly, and it really pains me to say that because I've done my due diligence working in small business entrepreneurship in the state for more than 20 years. So my message is that we have to make our voices heard at the state level so that policy makers will get to the point of, instead of resignation, of saying, well, that's just the way it is. It's going to be more along the lines of what can we do proactively to really help support these businesses, and then as customers that are going out to eat, if they can afford it, to really see and value those businesses and understand that oftentimes there's a lot going on behind the scenes that you don't see when you go to a restaurant, and a lot of work and a lot of tireless work. Excellent. We hope that things will get better for the restauranteurs. Brian Beck, owner of Waze Station, it was great to have you on California Insider. Thank you so much, C-Mac. It was great to be here. I appreciate it. We have an exciting news for you. At California Insider, we created a new product. It's called California Insider Opinion. This is where our insiders and experts across the state are actually telling you what's going on behind the headlines. 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