The Status of Iowa’s Restaurant and Beverage Industry

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[Henderson] From changing habits to economic headwinds. Many Iowa restaurants and bars are feeling the pinch. We'll talk about those issues with two industry insiders on this edition of Iowa Press.

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[Announcer] For decades, Iowa Press has brought you political leaders and newsmakers from across Iowa and beyond. Celebrating more than 50 years on statewide Iowa PBS. This is the Friday, September 12th edition of Iowa Press. Here is Kay Henderson.

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[Henderson] For this edition of Iowa Press, we have set a couple of places at our table for people who set places for hundreds and thousands of Iowans every year. They are Scott Carlson. He owns a restaurant in West Des Moines called Gilroy’s. He also owns that craft beer tent that people see at the Iowa State Fair. And along Ragbrai, the whole route. Right.

[Carlson] The whole route twice a day. Every day. 

[Henderson] Wow. Wow. And then also, you own a very popular restaurant that's just closed in Des Moines called Americana. Americana. Correct? 

[Carlson] Correct. Just past Sunday. Closed.

[Henderson] Thanks for being here.

[Carlson] Thank you for having us.

[Henderson] And Jessica Dunker is making a return visit. 

[Dunker] Yeah. 

[Henderson] She is the president and CEO of the Iowa Restaurant Association. 

[Dunker] Yes. 

[Henderson] Joining our conversation are Stephen Gruber-Miller of the Des Moines Register and Erin Murphy of the Gazette in Cedar Rapids. So we wanted to start just kind of getting the lay of the land from both of you folks. And Jessica, I'll start with you. What is the state of the restaurant industry in Iowa right now?

[Dunker] We are struggling and we're struggling for a number of reasons. Obviously, post-Covid, people came out. They supported us. They really wanted to get back out. But as the economy has continued to be questionable, people are clutching their money and they are. We are seeing foot traffic drops for the first time in my career, which is over 40 or over 20 years in the industry. And so we're very concerned. Last year, our report show that 48% of Iowa's restaurants were not profitable in 2024, and half of them are saying, we don't think we're going to be profitable in 2025. What does that mean? That means that you're seeing reduced menus. You're seeing increased menu prices. And the big worry is that we've hit the threshold on what consumers will pay, and that we'll see that foot traffic continue to drop. So we are very concerned about the state of the industry.

[Murphy] Okay. Dive into some of the reasons that that might be. But Scott, let's go to you too. And even I'll ask you, even though I'm disappointed that this is not containing any product from your craft beer tent, which would have been nice, but.

[Carlson] Maybe it is.

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[Murphy] I better assure the viewers for mine at least, it's definitely not. From your perspective, what's the state of the restaurant and the craft beer industry?

[Carlson] Yeah, and just to kind of talked about it just now, but, you know, everything this this industry has always been a tough, passionate industry, right. Creativity. You know, trying to set yourself separate from your competitor. And you're trying to attract customers to your door. But, you know, probably for the last 12 to 15 years, the pie hasn't gotten bigger, right? So we're just taking now slices of that pie, you know, for our own business. And we're not getting more customers, you know, to make that pie bigger, that becomes really concerning. And during that time, post COVID, everything got really expensive. You know, beef, chicken, dairy, insurance, gas, labor, everything that we do. We're so labor intensive and product intensive has gotten to be incredibly expensive with inflation. So as we charge the customer more and raise the inflation rate more, we're getting hit on the inside and we cannot keep up like we're not able to even raise our prices to get to where inflation has hit us internally. And we were probably a razor thin 3 to 6% profit margin, you know, 2 or 3 months ago, I would say most people are now below five happy to hit four. We're in good years. You know, you might be able to hit ten. So now we're getting so far away from those good years that people are having to struggle to, can we make this work? Can we grow our business? You know, is it is it worth working 50, 60 hours a week, you know, to make it an income that we can live on?

[Gruber-Miller] So we talked about Scott, your restaurant Americana closing in Des Moines. What are some of those which of those factors kind of led to that closure for you?

[Carlson] So all of those things I just talked about and then downtown Des Moines is a little different, right? You know, you know, people say there's two kinds of cities that are in the country right now, cities that left COVID quickly and cities that left COVID slowly. I would say Des Moines was on the slower end, but not slow. And the ones that left slowly are really struggling nationwide.

[Murphy] Can you explain what you mean by that?

[Carlson] You know, the cities that didn't reoccupy, right, that people aren't back downtown working. You know, the cities that maybe have a harder time, you know, how do we have what's our future look like? What's the vision? You know, what city, what our city leaders and city managers saying to improve their culture. And I would say, right, right now, Des Moines, unfortunately, is a little listless, right? It's not like we're not trying to do things. We just don't really have a direction we're going yet. And so with, you know, you know, they talk about maybe 20% of the offices reoccupied. Those are numbers that are, I think, hopeful. So, you know, pre-COVID we had 70,000 people working downtown. Now we might have 17,000, you know, that are that are down there. So that means business lunches, business cocktail hours, new employee recruitment. You know, Americana I bet we had one a week of from some corporation of new employees, 30 at a time that are coming downtown or a retirement party or an executive meeting or an executive celebration or a new business celebration, I would say 80% of those, maybe even 90%, have disappeared over the last 3 or 4 years. You know, post COVID. And so with big scale, we have a big footprint, you know, at Americana, we were built to entertain. Right. And so if there's no one to entertain, it's harder for us to stay profitable. Luckily, we still had brunch, right? That was a big on Saturday and Sunday. But that's only two days, two day parts a week out of the 14.

[Dunker] And that's what Gen Z goes to. And that's part of the that's another part of the problem is the changing consumer habits that we're seeing. When you look at all the people who like to work at home, they're probably working at home on Monday and Friday. And the days that people were normally going out were certainly Friday. And then Gen Z folks, they go out during the day, but they're all working from home. And so we're really seeing that the face of the consumer in our industry is changing, and our industry is reflecting that with closures and downsizing.

[Gruber-Miller] Yeah. And Scott was saying, you know, Americana in downtown Des Moines is a little different, but we are seeing restaurants elsewhere in the state close. Are there other factors that are different that are causing those things?

[Dunker] You know, it's all at the end of the day the restaurant business is a business, and business is being impacted statewide with many of the same factors. One of the kind of interesting consumer factors that we have been talking about, and we talked about was the Ozempic effect. And 4% of the U.S. population right now is taking a GLP-1 that is actually impacting our business and is as kind of offhanded or a silly fun fact or whatever as that might sound. It's not when you take 4% of our potential customer base away, they are spending less money, they're eating less, and they're spending their money on the GLP-1s and not going out. Well, that's kind of a prevalent theme related to how people are choosing to consume food. So as previously mentioned, foot traffic has been down. Correct? Correct. So and that's true everywhere.

[Henderson] So when you say foot traffic has been down and that it hasn't been growing for however many years, you saw that. Is that because we don't have the population or is it because of the changing nature of how people interact socially?

[Carlson] Right. I would say both to answer that question. So do we have the population? You know, the answer is, of course, we're a little over a million people, I think, in the state of Iowa. But there are and this has been going on for about 15 years. So this is a pre-COVID issue. 15 years ago, there was too many seats and not enough customers, right. So we already hit that kind of critical mass of, you know, too many restaurants and customers. So you have to be very creative, right, to become successful. So we have seen that foot traffic, traffic drop just just by that sheer, you know, sheer, sheer fact alone. But now post COVID and kind of and I really say post COVID like a year and a half past COVID, right? We had a really good year the year afterwards when people were kind of jonesing to get back out. But after that, people then just started to do different things. We all learned to cook at home again during COVID, right? We all learned to, you know, do DoorDash and Uber Eats, right? And just kind of change the way we behave? And, you know, somebody told me once that, you know, if you go to the Betty Ford clinic, they want you there for 90 days because that changes habits. And behaviors. You know, COVID was a lot longer than 90 days. So people changed the way they interact with socialization. And it's not like it's going to go back, right. Once it changes, it changes after that length of period. If you believe the Betty Ford Clinic. So it's been difficult to see how how do we manipulate what we do to attract more customers. And it's become more and more difficult to do that.

[Dunker] In addition to DoorDash and cooking at home, we have seen the folks that are acting like restaurants, but you've not traditionally thought of as restaurants really evolve. If you look at convenience store offerings for prepared food, when you see those national restaurant numbers where they share record numbers, those record numbers include that that prepared food and convenience stores. That's a huge part of what's driving our growth from a numbers standpoint, but is not driving the growth in what we traditionally think of as the restaurant industry. So the competitive factors of convenience through convenience stores, through grocery stores, through everyone doing more and trying to be a restaurant makes it difficult, right?

[Murphy] Scott, you touched on being able to attract workforce, retain workforce. One of the things that just happened recently at the federal level that a lot of people are talking about, is the no taxes on tips for workers. Is that going to be it's not in effect yet because it's something they have to claim next year. But is is it is that a tool? I doubt you see it as a silver bullet, but is it at least something that you think might be able to help?

[Carlson] You know, I think all good news is good news industry, right. And so and it does work this year. So but you're right it's not immediate. It's not like they get it off their check.

[Murphy] The relief. comes next right.

[Carlson] So when they you know for this year they can go all the way back. You know and claim. retroactive $25,000 of their income under a certain threshold if they, you know, if they make under a certain threshold which is fairly high. No, I think that's going to be really great. I think, you know, that front of the house staff, the, you know, the people that kind of that you see socially, it's going to take them until probably next April, though, to see it, to feel it. Right, because they should get a, you know, a nice return, which will then kind of make them feel like they've gotten a little bit of a bonus. But yeah, it's great by the way. They work hard and it certainly should show a little fruit, you know, kind of in the spring of next year.

[Dunker] Yeah. If I could add to that, we have been meeting with our federal lawmakers talking about it because they're curious about the industries reaction. And there there are a couple of things that are need to be really clear, and that is that no tax on tips. It does make employees happy. And so that's good for us. But it doesn't actually offer any financial benefit to owners. And that's an important clarification to make is that it does help the people who are in a traditionally tipped field. Owners can't take tips. So so they aren't actually in any way helped with their own tax burden. Also, it was rolled out with lovely language, no tax on tips, but the devil's in the details. And so we are in the industry having to explain to restaurant workers why they didn't see the immediate they heard had gone into effect immediate, and they were looking at paychecks saying, wait a minute, this isn't supposed to be. And it's like, no, no, no, no, you actually have to go back. You'll have a claim on your tax form. Then you'll see your happy refund at the end of the year. But we still have to withhold that so that education component that has been an interesting and delicate thing for restaurant owners, I think, to have to explain. And same with overtime too. Yeah, thankful for it. But as always, it's not as simple as okay, that's not going to be withheld now.

[Gruber-Miller] Yeah. So we talked a little bit about cost of things rising. Right. We talked a little bit about inflation. Talk about that. But then also tariffs at the federal level. And if those make food or other items that restaurants need more expensive, Scott maybe just start.

[Carlson] I can touch on it and Jessica probably can talk on it too. I also said the National Restaurant Association, you know, to represent Iowa on the national level. So we actually talk about the tariffs more there than we do in the local market. And what we're seeing is, you know, the cost of things, right? Ovens, refrigeration, stainless steel, you know, the things that we actually use for installation, it's very expensive to build a restaurant. So what you're going to see is as people start to build new restaurants, it's going to be much more expensive than it was just a year ago. And then you start to see the soft goods, you know, lemons and limes and avocados from Mexico. Any, any kind of European wine coming across, you know, the country, any kind of uniforms and fabrics that we're buying, you know, for. Sounds crazy aprons, you know, and T-shirts and towels and things that we go through hundreds and thousands of, you know, in the restaurant. So we're starting to see it kind of hit us. And tariffs, tariffs are interesting because they continue to shift. Right. So it may be more expensive last month than than less expensive this month and then more expensive again the following month. So it's hard for us to kind of get our finger on it. And we're always about maybe creating a menu for maybe nine months to 12 or 15 months. So we'll adjust our pricing of what we have in front of us. And if that changes over the next three months, it's hard for us to redo that menu and then redo it again three months and then redo it again three months later. And so by the time we actually readjust it nine months from now, we have to raise our prices pretty dramatically just to stay above or, you know, kind of nose, nose height with, with inflation.

[Gruber-Miller] Jessica, anything you can add to that.

[Dunker] Yeah. Perishable goods are always the tip of the spear when it comes to things like tariffs. And so obviously food is a perishable good. And so what happened when the tariffs started getting announced is the food distributors did start to raise prices in anticipation of the tariffs. So on particular items that we simply don't there is not going to be a coffee other coffee tree grown in in a lovely field in Harlan. Right? I mean, there are just things we're going to have to import. And so we did see a pretty immediate impact, especially some of our ethnic restaurants and international restaurants that differentiate themselves on doing something that isn't typical American cuisine. I think about a Peruvian restaurant here in Des Moines. She needs octopus. Well, you know, that's something that's that gets imported when you talk about avocados. Mexican avocados and Peruvian avocados are not the same thing. Do you know who knows that the Mexican and Peruvian restaurants. And so it really has impacted us in that way. When I was in Clinton, about 2 or 3 weeks ago, the very this is the very first time I'd seen that a baker there showed me where they had a tariff charge, just like they used to do COVID charges on the bottom of a food invoice. So we are, as always, we're always the tip of the spear on economic issues. And tariffs are no exception because of the quick turnaround in the products that we receive and use.

[Henderson] I'm wondering if you both can speak to the idea of maybe pooling purchases. Is that something you can do as an independent? Obviously there are chains that do that quite well. Cases the the pizza place, you know, forward purchases, cheese in bulk.

[Carlson] Right.

[Henderson] Is your organization, the restaurant association creating pooling organizations to help people buy things as a collective rather than individually to deal with some of these costs.

[Dunker] That isn't normally the role of an association. So that isn't something that I see us working on or doing. I do feel like our food distributors are trying, you know, we've got some some wonderful Iowa based companies. Martin Brothers, for example. And I think they really are trying to anticipate and and purchase they, you know, they watch the commodities markets and do those things way out. I think we have to just ride the storm on this one. Unless you have something to add.  

[Carlson] And to answer your question, you know, we've actually tried an association to do some things legally. We can't do some like we would love to have an association insurance program in the state of Iowa. It's not legal, right? You know.

[Henderson] Is it in other states?

[Carlson] I do believe in some states. It is states.

[Dunker] Yeah, yeah, we do have.

[Henderson] Will you be asking legislators to change that? 

[Carlson] Well, we are an insurance state. So Principal and you know Nationwide and Walmart, they have a little bit higher lobbying power than we do, you know on that kind of stuff. But but those are the things that we wish we could. Right. Because those are certainly very expensive for us to do.

[Dunker] And I don't want to become an insurance agency. We could do that. We could add that as a line of business. But I don't want to be an insurance agency.

[Carlson] Trying to get group buying, which actually we kind of do a little bit with our distributor, but we don't want as an association. I'm not putting my association hat on. Even the Iowa Association, we don't want to start to pick favorites. Right? Hey, this supplier will work with us if we buy from them. Yeah. So it becomes very difficult because we try to work with everybody. It's in the state. We certainly appreciate our local folks a lot, but we don't want to exclude the ones that are national too, just because they're so large, you know, and that kind of stuff.

[Dunker] So yeah, we could certainly run into some conflict of interest issues there that would get. us get us into trouble. So it's not every man for themselves, but we certainly because you can't price fix as an organization either.

[Carlson] So but in our association we have one of our members is an energy buyer. Yeah. And so in the state of Iowa, you cannot bulk energy by electricity because wind energy is here and it's expensive right now. So they don't want us to look elsewhere to buy that energy. They want to buy it here in Iowa. But gas is fairly bulk buy and you can buy that. So we actually work with one of our, one of our member partners. You don't have to use them. We do use them where they actually buy gas cheaper than MidAmerican energy can buy it. So we use them and buy it from from them. And dekatherms, you know, things like that. So we do have some of those things within the association that we can use.

[Murphy] Jessica, I wanted to come back. You touched on this earlier. The breakfast, the trend of Gen Z and loving brunch. And this is a sinfully anecdotal question. I don't have any data. 

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[Murphy] But I see a lot of new breakfast restaurants opening up. Is that is that a response to that trend?

[Dunker] It really is. You know, we we have to be looking at generational behavior shifts and we have to adjust our business models accordingly. It's one of the reasons brunch was was the hit at Americana. And we are seeing that Gen Z goes out less, that Gen Z goes out, when they do go out, they love to brunch, but they're not necessarily out drinking and cohorting in the way that maybe Gen X people like me. 

[Carlson] Or even just earlier generation. 

[Dunker] Yeah, yeah.And so it it is it actually is a trend that we are seeing behavioral shifts with Gen Z that we are accommodating. And one of them is brunch. They like to brunch. So we will produce brunch.

[Carlson] And they don't drink as much which you know they drink -- so we've made more nonalcoholic cocktails. You know, for them. But. Some wine you might have 2 or 3, you know. So it's it's a little harder and you don't charge as much for nonalcoholic because there's no alcohol in it. So there's a little less profit on that side. And also they don't go out as late like she was hitting. We used to be open at two in the morning or two till two in the morning. We might serve even up till one in the morning. Some food. I would say the restaurants now close at ten. So it's a four hour different gap of not really having many customers in the restaurant. We still pay the same rent, same energy, you know, same insurance for all that stuff.

[Henderson] So how does that affect your ability to hire people? Because, you know, I've known people who said, I'm going to pick up a shift tonight at the restaurant. 

[Carlson] Right. 

[Henderson] Are they going to get up at 4:00 and help you open and make eggs?

[Carlson] Right, right.It is hard. Right. And I would say employees have different wants and needs. Right. And so I think our industry by the way I'm going to give us a plug. We're super flexible. So if the person only wants to work 30 hours a week or 20 hours a week and make a certain amount of money and they want to have weekends off or do things during the week, they can they can have their hobby or their or their passion skill. And the restaurant can fills their income need as well. So we are super flexible that way. But you're right. Do they want to come at four in the morning? If they don't, the answer is no, right? They're not going to come even if we ask them to come. So we have to be a little more sympathetic to their needs. Partly closing down early has opened up a little more night shift. You know, savvy people. Because if you can get home by 1030 instead of 230 in the morning, you know, you can actually, you know, have a different kind of lifestyle. So that has helped, you know, kind of people come into our industry that want to work nights. Now they don't have to work as late.

[Dunker] Pre-COVID, I would have sat here and had a completely different conversation about consumer trends because millennials looked very different when they were in that hotspot group that we were trying to accommodate. We we often joked about how they would pay $15 for a cocktail, but they wanted two for $5 food and how they wanted things, how they wanted to do things their way with their dog. I'm sorry if you're a millennial.

[Gruber-Miller] I am. I'm trying not to take it personally.

[Dunker] But you know that they wanted to be able to go somewhere. They always wanted their dog on the patio, and they wanted to to stream what they wanted. They wanted the food the way they wanted. And they were willing to pay an arm and a leg for alcohol and not necessarily for food. And this is when we were fighting all of these ideas of groupons. And, you know, why do we constantly have to discount our food? That consumer behavior became drastically changed during COVID, and now we're looking at the energy of Gen Z and they're even worse. I mean, I from the standpoint, I mean, from the standpoint of just from the standpoint of, you know, culturally, they're not gathering, they're not getting out.

[Henderson] Is it because they're on social media?

[Dunker] I think it might be. I think they got had to stay home and they've not come back out. And so they do come out and and have coffee or brunch. But you know, it's a worry after 911, you know, we're sitting here looking at 9/11. And after 9/11 we worried as an industry that people wouldn't come back out. And they did. And they came back differently. And they came back quietly. But they wanted to gather. They wanted to be together. And so you saw things like martini bars pick up, and you saw some of those kinds of things. Then we saw more individualization with the millennials, and we had to accommodate that. Well, now we are generationally looking at folks that we have to remind them to gather. And that's a different and that's a different dynamic. And we're glad they're coming for breakfast. Right. Unless I'm -- 

[Carlson] No, I think I think you're right. And I think you just got to be more creative. I would say they also want more experiential experiences. Right. So hence brunch. Right? I know, I know, it sounds crazy, but brunch is an experience, especially at Americana. Right? You get to get up. It's bottomless champagne and bloody Marys. We had a lot of different. I mean, you saw our Bloody Mary bar it was, you know, 20ft long of different things you could put in it. Right. And then we had the all the mixers you could do for the, for the champagne mimosas. But then we also you got, you got up to get your food right. So you interacted when you went to get your food. If families brought little kids, guess what? They can get up 30 times and get a strawberry one at a time. And no one even notices they're there because everybody's moving around. If you were in a restaurant and that kid got up three times and you were having a sit down breakfast, you'd be like, where's the parent? Right? But in that, in that atmosphere, they can go and be kids a little bit, right and move around. So we realized part of that experience is what they were craving. They wanted something different. Right. And there's restaurants out there that are producing that. And God bless them, they're doing a great job. Right. You know, we've had to reinvent ourselves on what becomes popular too. So there are bright spots out there, but it's got to be more creative and experiential and creative is expensive, right? So you got to make sure you hit the mark. Americana did with brunch, so it worked. But if you if we didn't have that kind of volume, it would been too expensive to do for very long.

[Henderson] We've got 30 seconds left, folks, so, Jessica, what's the most popular item on a menu?

[Dunker] Well, the most profitable is beer. And so by all means, go out, especially if you're of age and a Gen Z and order a beer and some French fries, because that is always a profitable item for the restaurants you care about.

[Carlson] True story. True story.

[Henderson] What's your favorite item on a menu?

[Carlson] You know, I'm a protein guy, you know? So if you give me a ribeye, I'm pretty excited. You know, if you give me a steak, I like it.

[Henderson] Well, we'll order one up, but not right now because we are out of time for this episode of Iowa Press. Thanks to both of you for being here today.

[Carlson] Thank you for having us. 

[Dunker] Thank you. 

[Carlson] Cheers.

[Henderson] You can watch every episode of Iowa Press at iowapbs.org. For everyone here at Iowa PBS. Thanks for watching today.

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[Announcer] Funding for Iowa Press was provided by friends. The Iowa PBS Foundation.

Banking in Iowa goes beyond transactions. Banks work to help people and small businesses succeed, and Iowa banks are committed to building confident banking relationships. Iowa banks your partner through it all.