Eduardo Vargas on Lockdown's Impact on the F&B Industry

By Ned Kelly, June 28, 2022

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Eduardo Vargas is a two decade veteran of Shanghai's F&B industry. As Culinary Director & Partner of Azul Group, he currently has six restaurants in operation: Colca at Hengshan, Colca Eatery at North Bund, Azul at Shankangli, Azul Italiano at North Bund and Azul Italiano and Xouk at 1000 Trees. In addition, Azul Group are in the midst of constructing Bhacus, a new restaurant on Wuxing Lu which should be ready in August of this year.

We caught up with him to talk about the lockdown and its impact on Shanghai's F&B scene.

Let's get the most painful question out of the way first: What toll did Shanghai’s citywide lockdown take on your venues?
The impact of the citywide lockdown is unprecedented and devastating. All venues were closed from late March to June 1, with only Colca Hengshan allowed to offer delivery and takeaways in the month of May, 2022.

From June 1, many venues were still not allowed to offer dine-in services due to the mini outbreaks of COVID cases.

Have you had to let any staff go?
Sadly, we had to let go of staff who were on probation. It was a painful decision, but we really had no choice.

We do recognize that the key to the success of any business is still its people; we have retained and taken care of all our key management personnel and permanent staff. In fact, we paid them wages that are way higher than the regulated minimum salary of RMB2,590 per month during the lockdown.

Eduardo Vargas in the kitchen

And what about the effect on you and your staff's mental wellbeing?
The lockdown was certainly a very dark moment for many people in Shanghai; many people were not used to dealing with isolation for an extended period, especially without a timeline on when the lockdown would end.

There was also a brief period when food supplies were in real shortage; and whatever food that was available was heavily marked up. This created some anxiety and some of our staff had to survive on instant noodles for two weeks. On this matter, we organized food packages to be sent to affected staff.

Next, some COVID positive staff and close contacts had to be quarantined at the fangcang hospitals. We formed a WeChat group with them to offer support and ensure that they were being taken care of.

With all this, we fully understand why some of our migrant staff and an expatriate decided to leave Shanghai for good after the lockdown.

How long do you think it will take the F&B industry to recover from the effects of the shutdown?
It all depends on how restrictive the policies are. There is no money to be made for us if we can only do delivery and takeaways.

Once dine-in is allowed, we are confident that we will be able to quickly return to profitability and positive cash flows, as there is pent up demand and customers are looking forward to dining out and to have a pleasant dining experience.

However, we hope that the jerky restart since June 1, and the inconsistent policies on al fresco dining, indoor dining, etc. is short-term and not extended.

If the policies are unfavorable, and we trip along the way – with brakes being applied intermittently – then the road to recovery will take much longer, as the F&B industry still has to deal with many challenges, including inflation resulting in increases in food costs and the shortage of employees as many workers have decided to leave Shanghai.

What percentage of restaurants do you think we will see shutter for good?
I estimate about 30% of restaurants would not be able to survive this crisis, especially those that are newly open, as they are not able to draw on past reserves.

With this crisis, the bigger you are the greater the impact. As such, some large F&B groups may also have to downsize and close some venues, especially the less profitable ones.

Many restaurants have also not been successful in getting rental reduction from their landlords. Tax reductions and subsidies are also not attractive enough for restaurants to continue operating.

Azul Italiano

Have you made any changes to your business model as a result of the recent lockdown?
Before the crisis, we were in an expansion mode; we took on new spaces at 1000 Trees and Wuxing Lu for Azul Italiano, Xouk and Bhacus in 2021, and had plans to open two to three new restaurants annually.

The uncertainties brought about by COVID has resulted in many significant business risks which are beyond our control. Everyone is fearful that extended lockdowns may be re-introduced should there be further outbreaks.

We have therefore abandoned the search for new venues (unless an offer comes along that is too good to ignore) and will concentrate on nursing our existing restaurants back to profitability.

Now that the city is opening up, aside from dining-out /ordering takeout, what can customers do to support your venues?
Life needs to go on… good food with family and friends is part and parcel of life. We sincerely wish for life to return to normal; for Shanghai to be restored to its glorious days, and for our customers to embrace life once again. Eat out more often to support Shanghai’s embattled F&B industry. 

Azul Group has also always been good at hosting events – we hope that customers will hold events at our venues once it is safe to do so.

[All images courtesy of Eduardo Vargas]

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