The Reason the Shake Shack Chain Got A $10 Million Small Business Crisis Loan - And Then Returned It

Just as with the 2008 'Great Recession,'  corporations with ample resources and political connections are reaping benefits from Federal bail-out funds, while small businesses frequently end up with nothing.

At least one chain has shown it has a conscience, admittedly after very bad publicity, but the larger issue is that widespread unemployment is the real problem to be addressed. JL


David Yaffe-Bellany reports in the New York Times:

A section outlining which small businesses qualify for loans from the federal government allowed big chains like Shake Shack, Potbelly and Ruth’s Chris Steak House to get tens of millions of dollars while smaller restaurants walked away with nothing when the $349 billion fund was exhausted. “The big guys get bailed out, and the little guys don’t.” The country expressed outrage that a federal program intended to help small businesses was channeling funds to corporate chains with other sources of funding. Shake Shack, with 189 outlets and 8,000 employees said it would return the $10 million.

Buried deep in the 900-page stimulus package that Congress passed in March, a single paragraph has sparked an outcry from small restaurants as major chains and mom-and-pop places alike scramble to survive a devastating financial crisis.

The provision, in a section outlining which small businesses qualify for loans from the federal government, allowed big chains like Shake Shack, Potbelly and Ruth’s Chris Steak House to get tens of millions of dollars while many smaller restaurants walked away with nothing when the $349 billion fund was exhausted last week. On Monday, Congress and the White House were nearing a deal to replenish that fund with $300 billion in additional relief.

The inequity caused widespread outrage. Independent owners said it would create a post-pandemic landscape in which chains dominated and small, vibrant restaurants collapsed. Some lawmakers said the outcome had violated the spirit of the legislation.

“The big guys get bailed out, and the little guys don’t,” said Danny Abrams, who has laid off all 310 of his employees across six restaurants he owns in New York.

On Sunday, Shake Shack, with 189 outlets and nearly 8,000 employees in the United States, acknowledged that the Small Business Administration’s Paycheck Protection Program had been carried out unevenly, and said it would return the $10 million it had received.

But the potential new funding and Shake Shack’s return of its money may come too late for the thousands of independent restaurateurs across the United States who are grasping for a lifeline.

From the beginning, the federal loan program has been plagued by glitches, as overwhelming demand and confusion about how it would work slowed the approval process in many industries. Banks turned away some would-be borrowers because there were too many applicants. Other companies lost valuable time because their bankers didn’t know all the details about how the program would function.

In the restaurant industry, small-business owners who have been forced to close their dining rooms are concerned that the program’s fine print ended up helping large chains.

Under the terms, businesses that employ fewer than 500 people are eligible for loans, which will be forgiven if the borrower does not lay off workers or rehires them by June 30.

But a subsection of the legislation, under the heading “business concerns with more than 1 physical location,” states that certain types of businesses, including restaurant and hotel chains, with no more than 500 employees “per physical location” are also eligible.

Restaurant and hotel trade associations lobbied for that provision. On March 18, the National Restaurant Association sent a letter to Congress requesting a recovery fund specifically for its industry. But as drafts of the legislation started circulating, it became clear that Congress was not going to grant a restaurant-specific bailout.

So the group called members of Congress to advocate for a carve-out in the small-business program that would make all restaurants eligible for loans, regardless of size.

“There was no one in the industry that was calling against this at that point — everybody was in support of this carve-out,” said Sean Kennedy, the executive vice president for public affairs at the National Restaurant Association. “This pandemic is a tidal wave that is crashing against every restaurant, no matter how big, small or well funded it may be.”

Meanwhile, at lunches last month, Senate Republicans were asking one of the architects of the federal loan program, Senator Marco Rubio of Florida, who heads the small-business committee, why the funding did not extend to larger companies. He responded that it was meant for small businesses, and that he was negotiating its parameters with the Democrats.

During those negotiations, Mr. Rubio and several colleagues from both parties, including Senator Chuck Schumer of New York, the Democratic leader, agreed to expand the program to cover some hospitality establishments so more employers would have access to the loans.

But the program was not large enough to fund everyone, pitting companies of different sizes from various industries against one another in a race for cash. In an open letter on Sunday, Shake Shack’s chairman, Danny Meyer, and its chief executive, Randy Garutti, said the chain had decided to return the government loan after securing additional capital through an equity transaction.

“We’re thankful for that, and we’ve decided to immediately return the entire $10 million P.P.P. loan we received last week to the S.B.A. so that those restaurants who need it most can get it,” the letter said.

Potbelly, a chain of 400 restaurants, also received $10 million. And the parent company of Ruth’s Chris Steak House, Ruth’s Hospitality, which has more than 5,000 employees, landed $20 million by seeking loans for two separate subsidiaries. Representatives for Potbelly and Ruth’s Hospitality did not respond to requests for comment.

After those loans became public last week in securities filings, chefs, food critics and restaurant owners across the country expressed outrage that a federal program intended to help small businesses was channeling funds to corporate chains with other sources of funding.

“There was a lot of anger and frustration,” said Andrew Rigie, executive director of the New York City Hospitality Alliance. “We need to get the money into the hands of independent restaurant owners.”

Mr. Abrams, the restaurant owner in New York, said the episode recalled the 2008 financial crisis, when big banks were bailed out by the federal government while small businesses suffered. “It felt a little bit like déjà vu,” he said.

As soon as the loans became available, Mr. Abrams said, he sent the relevant documents to his bank, Capital One, to start applying. But Capital One was unable to process his application before the funds were exhausted. “It just doesn’t seem equitable,” Mr. Abrams said.Practically overnight, the pandemic has upended restaurants across the United States. Many large chains and well-funded restaurant groups have the resources to ride out a protracted shutdown. But independent restaurants, which make up about two-thirds of the American dining landscape, may not survive.

Some restaurants have tried to continue as delivery or grocery operations, but the economics of those models are difficult to master. Since March, eight million restaurant employees, or two-thirds of the work force, have been laid off or furloughed, according to the National Restaurant Association. And the industry has lost $30 billion, with an additional $50 billion expected to disappear by the end of April.

While industry leaders have urged unity, a division between the haves and the have-nots has quickly emerged. In contrast to struggling mom-and-pop restaurants, fast-food companies like McDonald’s and Burger King have continued to record decent sales at their drive-throughs.

The corporate muscle of those fast-food companies also put their franchisees in an enviable position compared with most small restaurants. Most U.S. franchisees at Restaurant Brands International, which owns Burger King and Popeyes, applied for the small-business loans, with help from “franchisee liquidity teams” that walked the owners through the process, according to Jose Cil, the company’s chief executive.

“The CARES Act is several hundred pages. These are complicated, technical regulations,” Mr. Cil said, referring to the federal stimulus legislation. “So our teams are quickly becoming expert at that.”

But industry officials maintain that the stimulus package is not enough to keep restaurants in business.

In a letter on Monday, the National Restaurant Association asked Democratic and Republican leaders in Congress to dedicate a recovery fund for the restaurant industry. The restaurant group is also calling for changes to the loan program that would allow borrowers to spend more of the funds on nonpayroll expenses and push back the date by which employees must be rehired for loans to be forgiven.

“The restaurant industry has been the hardest hit by the coronavirus mandates — suffering more sales and job losses than any other industry in the country,” wrote Mr. Kennedy, the group’s public affairs official. “For an industry with sales that exceed the agriculture, airline, railroad, ground transportation and spectator sports industries combined, a restaurant relief and recovery program is desperately needed.”

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