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Why Restaurants Are So Fucked

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Re: Why Restaurants Are So Fucked

#151

Post by chii »

PaulDavisThe1st wrote: post #117
8f2ab37a-ed6c wrote: post #58

Earlier quoted context omitted.

Or, who's going to pay $15 or $20 for a sandwich? Most people will pass.

Why will they pass? What's the calculus? "I could make it myself for less" ? "It used to be less" ? "It shouldn't cost that much " ? Isn't it more likely to be true that they will pass because they've become accustomed to crazy low prizes for prepared foods?

why should consumer over pay for anything?

If another restaurant can make a profit by increasing efficiency and keep prices low, they win over one that doesn't. And restaurants have no real business moat - recipes for most things are known, and it's mighty hard to invent something totally new.

Let's imagine that all restaurants raise their prices like the article claims. Suddenly, the margins at 19%. Let's also assume that consumers are willing to pay, but if they find something of similar quality but cheaper, the will move. Then one self-interested restaurant owner could simply lower their price by a bit, and they will make more money than their competition.

And so all restaurants have to do the same. So the margin of 5-9% is what you end up with.

TBH, as an investor, if you're given a 9% return on investment, i think they would be ok. It's not great, but it's not the worst. 19% margin is too high: most junk bonds are returning something like 8-10% (sure some are like 20%). Is running a restaurant riskier than junk bonds?

Re: Why Restaurants Are So Fucked

#152

Post by JackFr »

praptak wrote: post #125

The author says that restaurants just started competing on price without stating why. Maybe there is just fewer people who have the money to eat out?

Yeah, there is an assertion without evidence in the article that there was a golden age of higher margins in the past.

Re: Why Restaurants Are So Fucked

#153

Post by LaEc »

nrp wrote: post #90
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…

I know I'm being pedantic, but the best restaurants in the biggest food cities have pricing power because they effectively become Veblen goods. Benu, Coi, Quince, and so on can pretty much charge what they want to. They will continue to be booked out a month in advance, and the exclusivity itself becomes a draw. The line a restaurant needs to cross to achieve that differentiation is apparently a second Michelin star.

Those are not examples of true Veblen goods but rather goods which use price as a signal of quality. True Veblen goods are things like staple foods for the very poor where the increase in price eats so much of their income that they can only buy more staple foods.

Re: Why Restaurants Are So Fucked

#154

Post by culturestate »

fh973 wrote: post #118
culturestate wrote: post #104

Earlier quoted context omitted.

I think their point is that most McDonald's franchisees in the U.S. don't need to be concerned about sudden, drastic rent increases because they aren't beholden to a third-party commercial landlord - McDonald's is their landlord, and thus is unlikely to boot them out just to lease the space at a higher rate to e.g. Burger King.

That's interesting, and suggested by the movie. However I wonder how that works in Europe for inner city locations. Here in Germany both in large and small cities, I can't recall any that I can imagine being owned by McDonald's.

> I wonder how that works in Europe for inner city locations

I don't have any specific insight into the EU, but in the other global markets I'm familiar with (mostly China, Hong Kong, Singapore, and Japan) locations are either owned by McDonald's directly or franchised by large corporations that have significant bargaining power with (and sometimes are) landlords.

The China/HK franchise, for example, is operated by CITIC (a Chinese SOE) and Carlyle.

Re: Why Restaurants Are So Fucked

#155

Post by alephnan »

supernova87a wrote: post #123

Unless you're a really special restaurant with significant differentiation capabilities and people come to eat at your place irrationally, here's a tip: Restaurants are never the ones making the money. They enable others to make money. Usually, landlords. And generally, be cautious about going into a business where people want to do it because it's their passion. It means you're going to competing with people who are…

There’s also lower barriers to entry which makes the landscape more competitive

Re: Why Restaurants Are So Fucked

#156

Post by torgian »

I wish opening a business was easier in the states. You want an office location or want to sell something? You have to rent a commercial place. You can’t operate out your front door.

Meanwhile, in Asia, many cafes and bars and other types of industries are run downstairs from their living room....

Re: Why Restaurants Are So Fucked

#158

Post by mekanicalsyncop »

dehrmann wrote: post #127
PaulDavisThe1st wrote: post #116

Earlier quoted context omitted.

And yet this is not (so) true in Europe, where (1) people eat out less but (2) people pay more for restaurant food. What's the difference? Is it really just too many food vendors thinking that the $1 happy meal is their competition? Or what? EDIT: a better formulation, from a reply I wrote below: I'll restate it somewhat differently: eating out in Europe more accurately reflects the full cost of everyone involved mak…

1 and 2 can both be true and margins can still be low because of higher rent and/or labor costs. > Is it really just too many food vendors thinking that the $1 happy meal is their competition? Maybe if you're a Burger King, but most restaurants aren't really competing with fast food. It's more like the Italian place is competing with the Sushi place in the same price bracket (I'm guessing, but 3x-5x more than fast fo…

It used to be 3-5x more than fast food.

A burger with a meal + a drink @ Wendys is like $8+. The price of fast food has risen quite a bit over the years.

I can get a burger and fries that's 10x better at Friendly's, Ruby Tuesday's or a half a dozen other franchises for about $10-12 and the only sacrifice I have to make is that I'll have to drink water instead of soda.

Re: Why Restaurants Are So Fucked

#159

Post by kevindong »

creato wrote: post #145

I think at least the more casual/lower-end restaurants are fucked because a lot of people probably learned how to cook in the last few weeks and realized that it isn't hard to make food that is pretty good, and it's a lot cheaper and easier to do when doing it regularly. I'm sure the "fine dining" restaurant business will pick back up again, but I think the medium tier restaurants will be hurting for a while. I'm cer…

After cooking almost every meal for the last month (in comparison to before when my office would cater every lunch and I'd usually do take out for dinner), I've come to appreciate that yes: ingredients are expensive and cooking is laborious. At the lower-end of the industry (At the lower-end of the medium-part of the industry ($10-$30/meal), I think the prices are a ripoff. For instance, I've been making a lot of ramen (akin to what you find in dedicated ramen shops a la spicy miso tonkatsu ramen with a soft boiled egg) lately. I spend probably ~$6~8 for the ingredients for a bowl (not incl. ingredients that I buy but end up spoiling before I can use them) that I previously wouldn't have blinked twice to spend ~$20 on at a ramen shop (incl. tax/tip). Yes it takes me a solid 15-25 minutes to make it myself, but my subway ride to/from the restaurant takes about that same amount of time.

At the higher-end of the medium-part of the industry ($30-50/meal), things become more debatable since flavors _should_ skyrocket.

I have no qualms about paying for the ingredients for food. But I don't really care if the restaurant is a proverbial hole in the wall where you order and pick up your food at the counter. I'd prefer a store where the food is comparable to another store but at half the price and 0% of the frills of table service.

Re: Why Restaurants Are So Fucked

#160

Post by chii »

URSpider94 wrote: post #44
cosmie wrote: post #21

Earlier quoted context omitted.

> 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…

Everybody keeps repeating that landlords can write off rent not received as a tax deduction. You can’t, and if you think about it for a minute, you’ll see it doesn’t make any sense. Imagine a landlord with 10 properties that rent for $100 per month. That’s $1,000 per month rental income, or $12,000 per year. Assume 10% tax rate, the landlord clears $11,000 after tax. Imagine now that half of them are vacant. The land…

if the properties weren't leveraged, then yes.

But if you leveraged to buy the property, then you deduct the interest payment from the rental income. In the case of a vacant property, the interest cost will get deducted from another source (other rental income perhaps).

Then, come tax time, you net out the rental income. If they do it exactly right, it could net out to zero. And so pay no taxes since they did not make any money.

On paper this sounds bad. But because the expectation that property grows in value, they gain capital growth. This isn't taxed until sale time, but capital gains tax is very favourably taxed in most juristictions. Not to mention depreciation over time (a paper loss tbh) can deduct taxation.

After a few more years, they sell the property, using the old (high) rental income value as the valuation figure, pocketing the capital growth while paying little in taxes from the rental (which goes into the cost of debt).

This is why rents would remain high - you need high rents to value the property as high value.

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