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Why Restaurants Are So Fucked

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Re: Why Restaurants Are So Fucked

#21

Post by cosmie »

nradov wrote: post #4
thinkingkong wrote: post #3

Restaurants are fucked but the underlying costs associated with real estate are insane. Where I live, treasured restaurants close at a regular cadence due to rent hikes. Nobody can afford to run a restaurant at the prices being charged here. The end result is a cocktail that is $25 or a pint thats $10. High real estate prices are essentially forcing every commercial space to become a chain restaurant unless they can…

The bizarre thing is that even before the pandemic I've seen popular Bay Area restaurants close down due to huge rent increases and then the spaces are still vacant years later. I don't understand what commercial landlords are thinking?

> I don't understand what commercial landlords are thinking?

Financial engineering/optimization. I'm not well versed in it myself, but from my understanding:

Commercial landlords can harvest a paper loss from a vacant unit. If you were renting a unit out at $100 per square foot per month, being able to take a $100 sq/ft/month write off from a vacancy may be more advantageous than dropping your rate to $50 sq/ft/month and getting it occupied. Particularly useful if you have a large enough portfolio to withstand the loss in cash flow.

Leasing a unit out at a lower rate can also have other implications on financing (and I believe valuations) for commercial real estate, by essentially re-establishing the cash flow potential of the unit less than what it was (and still is on paper, until you re-lease it at a lower rate).

Re: Why Restaurants Are So Fucked

#22

Post by SpicyLemonZest »

nickff wrote: post #19
talentedcoin wrote: post #18

People love food, but eating out at restaurants to the extent that happens in the modern world is a historical aberration. It’s not just other restos you’re competing with but a home-cooked meal too. I get the sense from the tone taken here that this owner is going to be in trouble down the line. It’s good to be passionate but their objectivity is clouded. The restaurant with the really expensive donair is indeed lik…

Home-cooked meals are actually the aberration. Back in the old days (before the 1950s), the poor didn't have kitchens, hence the proliferation of street foods such as pizza and their ancient Roman antecedents.

Although it should be noted that modern American regulations make it very challenging to run the kind of low-cost "random guy with a cart" stands that historically provided street food.

Re: Why Restaurants Are So Fucked

#23

Post by nickff »

SpicyLemonZest wrote: post #22
nickff wrote: post #19

Earlier quoted context omitted.

Home-cooked meals are actually the aberration. Back in the old days (before the 1950s), the poor didn't have kitchens, hence the proliferation of street foods such as pizza and their ancient Roman antecedents.

Although it should be noted that modern American regulations make it very challenging to run the kind of low-cost "random guy with a cart" stands that historically provided street food.

Very true, and I also read that income taxes were one reason for people doing things themselves, because income taxes discourage 'outsourcing' household tasks. The example used in that article (which I can't find right now) was that people paint their own houses more in places with higher income taxes.

Re: Why Restaurants Are So Fucked

#24

Post by nradov »

cosmie wrote: post #21
nradov wrote: post #4

Earlier quoted context omitted.

The bizarre thing is that even before the pandemic I've seen popular Bay Area restaurants close down due to huge rent increases and then the spaces are still vacant years later. I don't understand what commercial landlords are thinking?

> I don't understand what commercial landlords are thinking? Financial engineering/optimization. I'm not well versed in it myself, but from my understanding: Commercial landlords can harvest a paper loss from a vacant unit. If you were renting a unit out at $100 per square foot per month, being able to take a $100 sq/ft/month write off from a vacancy may be more advantageous than dropping your rate to $50 sq/ft/month…

That's not how corporate income tax works. A landlord can't take a write off for reduced rental revenue.

You may have a valid point on financing.

Re: Why Restaurants Are So Fucked

#25

Post by paypalcust83 »

jariel wrote: post #13
nickff wrote: post #12

This post misses the forest for the trees. The reason for the low margins in the restaurant business is the lack of differentiation. Their products are largely commoditized, so they have no competitive advantage or market power. Peter Thiel discussed this in a lecture for YC, where he said that you can work very hard to make the best restaurant in a city, but it doesn't give you much pricing power, because the second…

The issue is not 'why they have thin margins' - the issue is their inflexible operating ability mostly due to fixed costs, specifically rent. If restaurants had 20% margins they would still be facing collapse. Rent is a huge portion of costs vis-a-vis most other businesses that can be run 'anywhere' whereas restaurants need prime locations.

My great-grandfather was in the restaurant business back east, but my grandfather saw how unprofitable it was and became a mechanic rather than continue the family business. (He got fired once as a short-order chef in the 50's from a Howard Johnsons for cooking too well.)

Restaurants must relocate to cheaper areas like warehouses and shift to a delivery-first distribution model, which Uber, Lyft, and Google Express could help dispatch. It sucks from a customer-interaction perspective, but it's necessary. Other businesses like Pret in London were already using a hybrid centralized preparation with small, hyperlocal retail sales model.

If you want to make money, you can't think and do what everyone else is doing in all respects.

Re: Why Restaurants Are So Fucked

#26

Post by pixl97 »

nickff wrote: post #15
jariel wrote: post #13

Earlier quoted context omitted.

The issue is not 'why they have thin margins' - the issue is their inflexible operating ability mostly due to fixed costs, specifically rent. If restaurants had 20% margins they would still be facing collapse. Rent is a huge portion of costs vis-a-vis most other businesses that can be run 'anywhere' whereas restaurants need prime locations.

If restaurants had much better margins, they (or their owners) would have bigger rainy day funds. There are lots of businesses with large fixed costs.

There are few businesses with such large fixed costs and ample competition.

Re: Why Restaurants Are So Fucked

#27

Post by greedo »

thinkingkong wrote: post #7
AnimalMuppet wrote: post #6

Earlier quoted context omitted.

> High real estate prices are essentially forcing every commercial space to become a chain restaurant... How? Is rent lower for chain restaurants? Do they charge more than non-chain for the same food? And they still have the franchise fees on top of the same costs as the non-chain restaurants. How are chain restaurants surviving and others not? I'd expect what nradov describes: That the space stays empty.

They have way better efficiency on goods and marketing. Your local mcdonalds isn’t advertising on TV. They pay franchise fees but its not a 1:1 cost to benefit. Depending on the size of the chain, they can also negotiate discounts by buying at predictable and high volumes.

Your local McDonalds sure is paying for TV advertising, in two ways. One is through franchise fees for national advertising, and the second is through co-op advertising in a region where franchisee's pool their advertising dollars.

The only reason fast-food franchises are better commercial tenants is because they're usually better capitalized than bespoke restaurants. (McDonalds franchises also don't worry about rent since the parent corporation owns all the land).

Re: Why Restaurants Are So Fucked

#28

Post by ChefboyOG »

nradov wrote: post #4
thinkingkong wrote: post #3

Restaurants are fucked but the underlying costs associated with real estate are insane. Where I live, treasured restaurants close at a regular cadence due to rent hikes. Nobody can afford to run a restaurant at the prices being charged here. The end result is a cocktail that is $25 or a pint thats $10. High real estate prices are essentially forcing every commercial space to become a chain restaurant unless they can…

The bizarre thing is that even before the pandemic I've seen popular Bay Area restaurants close down due to huge rent increases and then the spaces are still vacant years later. I don't understand what commercial landlords are thinking?

Lease length also factors into this a bit. In NYC, for example, a lot of restaurant leases are 10 years long with an option to renew for another 5 at a new rate at the end. Each year, the rent increases by a percentage (3ish is common).

For a 30% increase, locked in for at least 10 years (assuming the restaurant survives), landlords are willing to let a property sit vacant for a while.

Re: Why Restaurants Are So Fucked

#29

Post by Symbiote »

Tepix wrote: post #2

Döner for $11? I‘ve ever seen one sell for more than €5 and €3.50 seems to be an average price here.

It looks like it's fancier than average -- bread from a special bakery, "high quality beef" and so on.

I wouldn't care for a fancy takeaway döner, I think other meals benefit far more from better ingredients etc. Evidently, others do appreciate it.

Re: Why Restaurants Are So Fucked

#30

Post by Symbiote »

troughway wrote: post #20

> Wolf Down (quick serve German Street Food) And yet looking at the picture attached I wondered "That layout looks like something cliche out of Ontario". Was not surprised to find out it's in Ottawa. Not that changing decor in the current climate will do much, but for heaven's sake, why do so many of these places recycle the same stripped down, soulless interiors in that province? To the article's point, doing any ba…

> there is a lot of dirty money laundering happening through these small "boutique restaurants".

I don't believe that -- why bother with a boutique restaurant when you can just run a crappy kiosk / convenience shop instead -- but forced closures cause an interesting predicament to anyone with a business like this: if their illegal income is continuing, how can they continue to report it when the front-business is supposed to be closed?

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