How Hell's Kitchen recovered from a near-death experience

On the day after Labor Day, the downtown Minneapolis restaurant Hell's Kitchen, which attracts office workers and conventioneers through the week and Instagram-savvy foodies on weekends, closes for an annual staff picnic. This year, the staff cheered especially loudly for co-owner Cynthia Gerdes.

Unbeknown to diners who crowd Hell's Kitchen for lemon ricotta hot cakes, Juicy Lucifer burgers and homemade peanut butter, the restaurant teetered on the edge of profitability at this time a year ago. Gerdes called top managers Kjersti Granberg and Jessica Cram to her house in late August last year, something she had never done before. "I was saddled with worry and thought maybe I was getting fired," Granberg recalls thinking.

Instead, Gerdes laid out the situation — the restaurant's profit margin had fallen to 2.7 percent in July 2017 and 1.1 percent in August — and asked them to lead changes to bring it back. Granberg put her head in her hands in relief.

"We were crying tears of joy," she said. "There was always a part of us that thought we've got these ideas but we felt stifled a little bit. This opened up the opportunity."

After seeing one of her favorite restaurants, Rudolph's Bar-B-Que, close this summer after 43 years at Franklin and Lyndale, Gerdes decided to share the tale of Hell's Kitchen's near-death experience, saying she hopes other owners will learn from her mistakes and customers won't take their favorite spots for granted.

The restaurant industry is notoriously volatile. Independent outlets like Hell's Kitchen that outwardly appear successful can disappear quickly and with little explanation.

When Ward 6 restaurant in St. Paul closed a few months ago, the owners left a note on its front door and website that said in part, "Life in the restaurant biz is hard, and for a small restaurant that tries to do things the right way (as we see it), the margins (and margin of error) are very, very small. There is only so long a restaurant can go on without making money, and we have come to the end of that road."

Gerdes, who is 65, founded and ran the toy store Creative Kidstuff for 24 years until selling it in 2006. Four years earlier, she and husband Mitch Omer, along with business partner Steve Meyer, opened Hell's Kitchen in a compact space on 10th Street. The restaurant quickly became a popular brunch destination. In 2008, they moved Hell's Kitchen one block over to 9th to underground space previously occupied by Rossi's Steak House. "Rossi's is going to Hell," a Star Tribune headline read at the time. In 2012, they opened Angel Food Bakery & Coffee Bar next door.

Omer, who created the homemade peanut butter and many other recipes for the restaurant, died in 2015 at age 61. Gerdes and Meyer have led the business since. But like many owners, they concentrated more on hospitality and food than the business. "I used to go months without looking at financials," Gerdes said.

It's a common mistake, industry analysts say, and hard to correct because the easy fix of raising menu prices is unappealing. "A restaurateur may not want to risk scaring away customers by raising prices, but then margins get thinner and thinner, and labor prices go up," said Darren Tristano, founder and chief executive of Food Service Results, a consulting firm in Chicago. "Employees often think the owners back up a truck to gather the money. In reality, if they're making a nickel on every dollar they're doing OK. If they're making a dime, wow."

Hell's Kitchen produces about $8 million in annual revenue. Experience had taught Gerdes that restaurants shoot for 10 percent profit after spending 30 percent of sales on food, 30 percent on labor and 30 percent on rent and operations. But when she took a look at what was happening in the summer of 2017, she realized spending at Hell's Kitchen was out of control and the future would hold higher costs for health care and wages. She projected costs would rise $250,000 over each of the next four years just to meet the city's new minimum-wage law.

After the meeting at her home with Granberg and Cram, the three women brought together five other managers, all women, and Meyer to examine every aspect of the business and every penny of spending, including each ingredient in every recipe.

Money-losing products and initiatives went away. Housemade ketchup disappeared; so did pulled-pork sandwiches, which drew few orders but took a lot of work to make. The restaurant's beloved peanut butter recipe — "The best peanut butter we have ever sampled, anywhere" food writers Jane and Michael Stern declared a decade ago — was not changed, but its source for peanuts was. Staffers held blind taste tests on peanut options to make sure quality wasn't compromised.

The marketing budget was trimmed by $178,000, including opting out of an electronic billboard in the Minneapolis Convention Center that cost $25,000 a year and ending podcast sponsorships that cost nearly $50,000. Marketing duties that were spread among nine people were consolidated with one, Gerdes' son Nate. He devotes a lot of time to social media, being careful to follow up on reviews within hours of the post. It's important, especially for indie restaurants, to maintain at least a 4-star rating or higher. Hell's Kitchen's online ratings range between 4 and 4.5 stars.

The restaurant's staff of 180 was trimmed to 160, chiefly through attrition and by adjusting start times to better match the flow of customers, producing a wage savings of $170,000. Another $60,000 in savings came by opening 30 minutes later, at 7 a.m., and closing five nights a week an hour earlier, at 10 p.m.

In a gamble, the committee decided to eliminate deliveries through Bite Squad, an online service that started in Minneapolis and now operates in much of the country. The relationship generated about $300,000 in annual revenue for Hell's Kitchen, but managers discovered they were losing money on those orders because they bollixed up the flow in the kitchen.

"When we dropped Bite Squad, the entire kitchen breathed again," Gerdes said. The restaurant recently added its own delivery service called Hell on Wheels that's only available to destinations downtown and requires a minimum order of five meals.

Last October, Gerdes wrote a memo to the restaurant's entire staff describing each cut. "None of this is confidential or secret," Gerdes wrote in the memo. "I tell you everything because my business is your business. Let's get flying and keep our company strong and vibrant."

In sum, the group found savings of $800,000. Since October, the restaurant's monthly profit margin has ranged from 6 percent to 10 percent.

The restaurant maintained a high level of benefits, including health insurance for all full-time employees, something only about 10 percent of restaurants offer. Employees also get paid vacations and annual raises.

"We were afraid they were going to shut down," sous chef Christian Vasquez, who has been with Hell's Kitchen for 10 years, said. "But we felt loyalty to Mitch and the other owners. We wanted to put the business right and keep it going."

Few employees left other than through normal attrition; about one in five staffers leave each year.

"I was terrified," said Adrian Gorder, a server who has worked at Hell's Kitchen for four years and feels a deep camaraderie with co-workers. "This place fosters a feeling of family like no other place I've been."

Cram said the challenge made her thankful rather than fearful. "All of us at Hell's Kitchen have lived a lot of life. I joke about all of us being hooligans gone right," she said. "We dig our heels in and say 'How can we fix this?' This is our baby."

At the staff picnic this month, employees hollered and applauded when Gerdes and managers spoke. They hugged and high-fived her as she presented awards that recognized accomplishments and quirky fun. The "Best Hugger" award went to bartender Alex Higgins, while the "Lord of the Bloody Mary Bar" award went to lead host Nathan Hughes.

He also took the "Spirit of Mitch," named for the late Omer. It came with two cash prizes, one to keep and one to pay forward as Omer would have. "Cyn shows me that she's not just the boss but that she's ready to be there for people who work for her," Hughes said.

Gerdes said she has started to think about edging into retirement but doesn't think she ever wants to completely sell her portion of the restaurant. She may sell 20 percent to 40 percent of her share to managers, employees and maybe even customers.

For the moment, she has her eye on 2019, when new competition arrives just around the corner from Hell's Kitchen in the former Dayton's department store, which is becoming a mixed-use project with a food hall that Gerdes' friend, celebrity chef Andrew Zimmern, is helping to design.

"Every day I worry that we won't have a good day of business, but we're squarely on solid ground," Gerdes said. "We wouldn't have had the employee picnic if we weren't."

John Ewoldt • 612-673-7633