There's a Massive Restaurant Industry Bubble....

I thought this was a good article. I do think there is major problem in the restaurant industry due to over supply and increased costs. I do not think the delivery apps are taking money away from Restaurants, personally if I use one it replaces cooking and hopefully it is providing another revenue stream for restaurants I like.

You can see and feel this happening in NYC with recent closures of Betony, Luksus, Pearl & Ash and Soto. And I know many restaurants are struggling big time. Yet Restaurants keep opening. I get asked if I would like to invest in a restaurant on average once a week. My answer is always no thank you.

And I think my gig is tough! Mel & I walked into AQ once years ago after a few glasses at Terroir, had a lovely meal. Hard to imagine their run won’t even see 60 months.

Touched on, but not detailed, is this whole 21st century staying-at-home-is-best thing affecting so many industries. Want to open a movie theater these days? These delivery food apps are Netflix, and even if it’s just 10% (which I doubt) it’s devastating. We can’t shave 10% in my industry - at the hospital or provider level.

You are absolutely correct in a single digit margin business any small decrease in revenue or increase in cost is significant. In big cities your cost structure is not variable because rent is your biggest expense and it is locked in. Sadly it reminds me of another single digit business that I have experience with nursing homes. The biggest expense is rent or real estate and the margins are so small that any increase in expense (nurses) or revenue (reimbursement) can quickly bankrupt you. In my industry (finance) the #1 cost is personnel so we just pay people less or fire them in bad times.

Paying an extra $40 for the waitstaff soliloquy about who curated the genetically traced parsley is not my ideal of value, nutrition, or entertainment.

That area of San Francisco they call mid Market and the South of Market area adjacent to mid Market, saw so many restaurant closures this year. Matt Semmelhack’s 2nd restaurant, Bon Marche, along with Cadence, Oro and Volta also closed. It’s a part of SF city planners and real estate folks have been talking about for years as being the next great neighborhood. It’s been a big draw for large tech businesses like Twitter, Square and many others, but for restaurants, especially those that depend on dinner service for survival, not so much. Those thousands of mid Market tech workers don’t hang around for dinner, or if they are working late, their company probably provides them with meals.

I’m surprised the article brought up labor costs, but didn’t mention SF’s current $15 an hour minimum which is going to $18 in a couple of years. Maybe I missed that.

I personally don’t subscribe to the food delivery apps stealing customers from sit down restaurants. If I want an excellent meal cooked for me, I don’t want to order it and have it ride around on the back of a scooter for 60 to 90 minutes in chilly SF, and then have it served to me in a cardboard container. Cooking at home is a much better option if I want good food but don’t feel like going out.

Great link and extremely relevant to many small, young, US wineries.

Places like the ones that are described in the story can’t be overlooked for their role in the expansion of small wineries producing wines from lesser known varieties and regions. As those restaurants exploded onto the scene, so did many small wine projects that had found incredible support. To some producers, this type of restaurant is a substantial part of their revenue, and if not a large part of revenue, many have provided the introduction and experience that then get people to sign up for wineries mailing list. — I’d have a hard time counting the signups we received from Pearl & Ash over the years…

It is heartbreaking to see a lot of these places on the brink. I hope resurrection leads to greater creativity and profit for everyone.

Great post Hardy, I did not think of the relationship to smaller and newer wineries but you are absolutely right.

This is relevant to all industries. I live in a vibrant suburb of NYC. There is a town center filled with both national stores (The Gap, Banana Republic, etc.) and Mom and Pop shops. Over the past few years there have been several factors that have caused many of these stores to go out of business and our downtown area is filled with vacancies. More vacancies than I can ever recall. Although I don’t have any inside info, my guesses as to the causes of these vacancies are as follows: High rent. Online shopping. Over zealous enforcement of parking meters. And finally, slow recognition of the problems and their consequences and even slower action to rectify the issues.

I’ll add my 2 cents on a couple more factors contributing to the restaurant industry’s struggles:

1. the ready availability of broadcast and online programming/material for those who aspire to replicate “Top Chef” quality cuisine at home
2. the increasing availability and awareness of top tier cooking ingredients via farmers markets, specialty purveyors (both brick & mortar as well as online) and grocery stores improving their selections/suppliers

Bummer. Had an amazing meal at AQ last year.

We rarely eat out, so we are probably contributing… We both cook better than the vast majority of the eateries around our home. The one guilty pleasure we jump for though is sushi. We do have a number of local chefs that do a nice job and we frequent them occasionally. Dayton is not the place that is opening tons of new restaurants but last night we did drive by a fairly new one that closed.

I suspect that some low-rise, retail-oriented properties will be razed, in favor of small-scale multi-family housing, convenient to commuter stations.

Yep. Happening everywhere, just look at NJ Transit or LIRR. Any stop on either you can see small- and large-scale apartment buildings going up. Fewer local stores, more apartments to allow people to commute into Manhattan. This is what’s bringing Newark back to life, you can see all kinds of people who work in Manhattan now renting in Newark and higher end stuff is getting developed.

Greater access to culinary school-level education, top ingredients, & high end cooking equipment all have some marginal top line effect on the industry. Where this really shows is in restaurants opened by chefs/investors who have little-to-no business education, just like any industry with compressing margins - especially those in the single digits.

So many of these smaller places do not understand the marketing/finance/accounting aspects of their own livelihood and many (most?) cannot afford someone who does this for them competently on a full-time basis.

The most successful smaller restaurants I know have owners with a very strong understanding of their food costs, have some grip on social media, and can rattle off table turn averages off the top of their head.

I think the days of a chef-owner with some experience ‘in the big city’ opening an avant garde (for the area) farm-to-table restaurant with friends/family funding and surviving for more than 1-2 years are coming to a close. I’ve certainly seen less of these types of places open in Boston (whereas they were pretty commonplace 4-5 years ago), replaced by either larger national chains or local restaurant groups that can spread the lean times over their other, more established places.

It’s the economy, stupid! It’s too easy to cut back on going out for dinner by one night a week or a month to save a few bucks and just cook it yourself. After what I have recently paid for some restaurant meals, It’s tough to justify when I can go to Costco, buy prime grade roasts and lot of other fresh stuff and make dinner for me, my wife, my two sons, my daughter in law and my grandson for a total cost barely reaching one good restaurant meal. AND I can open as much of my own wine as I want without worrying about corkage. Parking is free. The oak to slow smoke the roast was from my back yard so it even helps with clean up. No one is going to hurry me along so they can turn over the table.

I have to agree with this. My husband and I used to eat out 2-3 times a week, driving from San Jose to San Francisco at least twice a month. But San Francisco is no longer as comfortable as we get older, and the restaurant scene is frenetic. Places open before they are ready and close without notice. Prices for semi-casual places wind up $75-100 per person for food I can make better myself. Now we drive to high end grocers and cook at home, dining out maybe twice a month. AQ was one of my SF disappointing and overpriced meals, and represented much of my complaints about the city’s food scene.

This. Regardless of whether you stay in and cook, or go out, for most of us hitting a restaurant like AQ is going to cost well upward of $200 for a couple to just eat dinner. How often do restaurants like this think people do that? AQ, and many, many restaurants in its class, are special occasion places for us. OTOH, local restaurants where we can be out the door after a nice meal for $60-100 get our business a lot more often.

wow - this article is getting some real traction. i’m seeing it everywhere, which i think is a good thing. however, it’s a pretty bad article, unfortunately. The reason it’s bad is because it paints a picture that isn’t new at all (one of the most often-cited articles on the subject was authored in 2005 and discussed the why and how 30% of restaurants go out of business within the first year) AND over-focuses on external factors; running a restaurant has always been a very difficult proposition AND failure is more often due to internal factors (lack of capitalization, operational failures, etc.). however, yes, in certain urban areas, the rents have gotten to a point where menu prices MUST go up to make up for this. Also, yes, the employment calculus has changed (and will continue to do so). All that means is that parts of the business model must adapt (get rid of tipping and invest more on hiring and training, like every other business?).

Disclaimer time: I’ve started a company that aims to give restaurants better information and insights on an area where there’s usually not a lot of good data, and we’re already seeing massive cost savings and areas for material growth.

In the R&D phase of my startup, I interviewed over 150 professionals in the NYC area and just listened; asked them what works, what doesn’t, what are the challenges, etc. The overwhelming theme was the acknowledgment that they needed to do a better job at operations (everything from purchasing, to hiring, to training, optimizing costs, etc.) (but!!) AND that they felt they were flying blind. They know something is broken, but they don’t quite know how to fix it. It’s not at all surprising; it’s rare that SMB experts or analysts go into the restaurant business, especially the places we talk about on this board and love. No, it’s the talented chefs and sommeliers, people that love the art and want to make something really cool and hopefully successful. But it gets really difficult really quickly after the immediate rush when the honeymoon phase is over; they have the stamina and desire to succeed, but often just lack the resources.

the Golden Age isn’t over, it’s just starting. Think of all the emerging areas where 10 years ago you’d never think had decent places, where they now have many. People are eating out more, especially young (and for the first time ever, spending more out than on groceries), they care more about food and wine, it’s culturally important to them, etc. Focusing on any one or several restaurants, as done in this article, and painting a doom and gloom scenario isn’t really valuable in attempting to figure out what’s really happening.

Lots of interesting views that all appear to be contributing. My vantage point is from someone who lives in NYC and travels extensively to mostly big cities. I still come back to oversupply.

Interestingly I had a dinner at a new small restaurant in Manhattan called Lalo and to Hardy’s point above they had a very small wine list but had many newer producers including Dirty & Rowdy, Maitre De Chai and Low-Fi.

Maybe some Twin Cities folks can chime in on this. When was there in October, all I heard was how many great, new innovative restaurants had opened. Now a couple months later, many are goners. What happened? Not enough customers I guess. Some stayed open only months, not years.