Why Restaurants Are So Fucked

1) most restaurants in US and high-end Europe that survive and thrive do so by having big margins on alcohol. Their margins are not single-digits. (edit: just saw other comments mentioning this).

2) Many restaurateurs don't have the skill or knowledge to run a restaurant, and yet they do so because it's often one of the few options left (if you can't land a high-paying job, and don't like a low-pay one).

3) What she describes in the article is very US-centric. Most of Europe, or Japan (where I am currently sheltering before returning to the US soon), have a very different restaurant landscape. Most are small mom-and-pop shop, they have very low ops costs, and can do not too bad in a time like this one. I spoke with a few owners recently (in Italy and Japan) and they all confirmed it. They mostly don't have personnel, or if they do, their relationship is flexible enough that they can quickly react to 2-3 months of 50-70% less business than usual.

4) For the long term, nobody knows what's going to happen. Are we ever going back to pre-covid levels? Don't know. Probably not. Some restaurants will close, sure, as well as car dealers, etc. Good restaurateurs will manage to find a way, IMHO.

You may notice that in Europe, Asia, the demographics of restaurants are noticeably different from the US. There are far more hole-in-the-wall mom-and-pop restaurants in those places compared to the US, running a small and seemingly profit-thin but subsistence restaurant for the neighborhood. Think of a suburban neighborhood in Madrid or Rome, where a small restaurant is just as common as a tabacchi / corner convenience store.

I believe (have not seen a careful study yet) that the rent-seeking / zoning policies of our cities in the US increase greatly the cost of running restaurants. And incentivize / prohibit anything but large commercial / chain places from surviving as a rule. It makes it very hard for small experiments or small-time mom-and-pop shops to survive and stay in a community for decades at the low profits those places are willing to accept. There may also be something about the small square footage of typical shops in such cities being unfavorable towards chain restaurants which seem to require a certain size (like hotel properties).

The landscape of our policies for cities, neighborhoods, plus the way they interact with our corporations, directly translates into the kinds of restaurants that we get as a result.

Bars however are a dream. Inventory control is simply tracking portions and comps. Outside of garnishes nothing rots or goes bad. And assuming tips are good, labor is no worry either. We had a saying: "In good times the bar business is good. In bad times it's even better because everyone needs to cry into their beer..."

Yes, I realise it is Ottawa and CDN, but I lived in Ottawa for over 10 years and these prices don't really line up for me. $2.50 for 125g of protein. That's $2 per 100g -- without labour. I understand going for high quality, but there is high quality and there is needless spending. I should introduce them to some good butchers... Tofu should be bought from the tofu maker in Ottawa (forget the name). It is awesome (and cheap).

And $0.50 for sauce? I don't know what sauce they are using and the amount they are using, but donair sauce is primarily yogurt, mayonaise and sour cream... (condensed milk if you are going for Halifax style, apparently...) The ingredients should be on the order of $1-2 per liter.

The "toppings" appear to be cucumber, red pepper, red cabbage and lettuce. $0.50. Looking at the amount there, I'm guessing it should be about half that price.

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 willing to work for nearly $0 because it's their passion.

I love the cojones in this post. The argument isn't "pay more so we can pay our staff more, so we can buy better ingredients, so our restaurants can be cleaner." No, it's literally "pay more so we have a bigger profit margin and as a side effect we might not go under when the next economic collapse happens."

The author literally wants society to agree to a massive price-fixing scheme where instead of them competing with other restaurants we all just agree to sacrifice some other part of our budgets so we can afford to pay more for the same dining experience we're getting now.

According to the census bureau in the last ten years spending at restaurants has grown twice as fast as ALL other retail spending. Fast-casual dining is experiencing a 9% yearly growth rate. There are too many people in the market. So the question is, where is this cut in the number of restaurants to create a 19% margin going to come from?

I didn't understand this. It may not be feasible to buy 100 cases of pop at a regular grocery store, but isn't Costco/Sam's Club set up for that?

I do think it comes down ultimately to real estate prices. Major metros in North America have gradually become unaffordable for the middle-class over the past 20 years. It's not surprising that it's the same story for small businesses such as restaurants. Businesses have to pay workers more (because housing is expensive) and they have to pay their landlord more (because commercial rents are high). All that profit margin is ending up in landlords' pockets.

[1] https://www.youtube.com/watch?v=3Fx5Q8xGU8k

A döner is between 2.5 and 5.0 EUR in Berlin (roughly 2.75 to 5.5 USD).

That's takeaway or eat in at a place with a few tables but w/o table service.

Meraba, which uses high quality organic meat from the region, comparable to the quality of the protein stated in the article, asks 4.5 EUR. A whole plate is 10 EUR.[1]

If order to your doorstep it's 6.5 EUR.[2]

[1] https://www.top10berlin.de/en/cat/eating-257/kebab-shops-230...

[2] https://www.lieferando.de/en/meraba

Started? You're always competing on price until you hit a certain status. Restaurants are low-margin if they offer a commoditized product.

They're also up against time. People lose interest in restaurants, and if they can't maintain enough business a few years after opening, they're not going to make it.

Edit: as the commenter below reminded me, it's actually more like €4-5 but my point stands.

If a restaurant has x% less business, they can buy x% less 'proteins' and x% fewer servers.

But they are screwed on the fixed costs, which is mostly rent.

The thing is, these are not normal conditions. Real-estate owners everywhere are as worried as anyone about their business.

If restaurants and other such businesses start collapsing - they will take a whole chunk of businesses with them - and maybe even risk the viability of some banks.

If one major bank has been doing stupid things, like Bear Sterns, and collapses, it could take the whole system down.

(Don't want to chastise but HNers could develop a stronger appreciation for how all of this stuff is connected and there are some really scary outcomes from this economic meltdown)

So - there might be a kind of reckoning.

Restauranteurs could legit approach landlords and say: "If my rents stay the same, we go bankrupt, you won't see a dime, and you will not rent this place for a year, and when you do, it will be for 20% less"

That's a credible premise.

In other words - the property is really worth a lot less.

So it's hopefully an opportunity for some hard bargaining.

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 likely to find itself in trouble ...

There doesn’t need to be a compromise on quality and taste either. Maybe presentation only. Won’t be able to get an instagram shot out of the cafeteria portion.

Analogous to that are food markets in South East Asian countries. Each stall just does one thing. You walk thru the market and just grab what you want. It’s like micro services of food.

If restaurants in general raise their prices, what’s to stop landlords from doing the same and raise rents to match?

As Hamilton notes, even before coronavirus restaurants were facing increasingly tough financial situations. I agree in principle that restaurants should raise their prices. There's really no other option. But it's a tough pill to swallow. Especially with the stagnation of wages. People aren't making more money and yet everything is getting more expensive. Of course if we raise minimum wage, this also hurts restaurants because they rely on cheap labor to keep their already thin margins.

Unfortunately it appears that delivery is part of the solution. Restaurants can do more volume with fewer staff and smaller spaces with a proper delivery presence. But the prospect of turning a full fledged restaurant experience into eating another meal from a plastic container just makes me sad. It's not the same.

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

It would be nice if we moved away from the big restaurants and moved towards smaller shops that are more kitchen than restaurant.

Restaurants should stop wasting money on signage, interior design, and fancy tables or dishes. Let's go back to simple, plain, and cheap.

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 certainly going to be buying a lot less Thai, Mexican, Chinese, etc. food and making it myself instead. It's almost as good if not better and I tweak dishes to make them how I prefer.

It is crazy how bad food quality in NYC for its price. It is so bad that I almost feel like there is a conspiracy between restaurants in the city that goes on like this:

restaurantA: "Hey you know, we can make good food" restaurantB: "Yes you are right, we can, but why should we? Why not just create mediocre food? If everyone of us are doing it, the customers don't have any other choice, yet we still charge them expensive price" restaurantA: "You are right, why don't I think of that? that's genius"

I just don't understand why in Asia food quality compared to its price are just much much better. At least for Asian food. Maybe I am bias because I am Asian and used to Asian food. But yes Asian food here in NYC also not great for its price.

But if the foods good, there's a way. The answer to margins when you've got a product that people want, is always the same: raise the prices. Value what you have, and market the hell out of it.

But what do I know.

Not joking there. The whole industry is begging to shaken up. People are always going to need to eat, but I'd argue that the avenues they have to get food on the table are tired and inefficient.

You have grocery stores, which have hardly changed since their "modern" incarnation over a century ago. Think of all of the inefficients around grocery stores--you have to travel there, wait in a bunch of different lines, pick out everything you need yourself, travel home, put a bunch of what you bought into a big, cold box, and then when you're finally ready to have a meal, you have to know how to cook everything yourself, and deal with the pain of cleaning up the mess you made doing so.

Food delivery seems like it should be more efficient--you don't have to waste time by going to buy ingredients and cooking food, but it's horribly expensive. That's because there's a lot of middle men in there--the delivery guy, the cook, the restaurant manager, the restaurant owner, the coders buying the app you ordered on, the marketeers who you learned about the app in the first place. All those people need to take a cut of cost of putting food into your belly.

Meal kits were supposed to be a middle point, but they've all pretty much failed, unable to bring the cost down much further than restaurant delivery. And people really just don't want to cook and clean up.

Fast, good, cheap. I think you can get all three if you focus on finding efficiencies.

1) Only do drive through or walk by pick up. People can pick up food on the way home from work.

2) Order ahead on an app. Maybe days in advance. That way, food is ready at a specified time and can be handed off as soon as the custom drives/walks up. And restaurants will know the exact amount of ingredients they need and don't need to stock extra.

3) Have a rotating menu of items that people could eat everyday. All of you working at Silicon Valley tech companies probably love your catering service, since you're getting different, quality options everyday. It's tough to living off a limited selection of unhealthy delivery options.

Key differences are - pita vs sourdough - street meat vs name brand meat - lower quality vegetables -served in a foil sheet vs a take out bowl - lower overhead since it comes from a cart usually operated by the owner - they use cans, not a dispenser system

Gourmet food is a luxury, and expecting people to pay higher margins during a time of wealth contraction will only work if she can change the narrative and position her German street meat as being entirely different than NY street meat.

I think she'll need to downgrade her product

A $20 kebab is not going to fly. The only other option is to optimize whatever costs can be optimized.

Unfortunately it's not looking good for people who are currently employed in the more manual roles. It was only a matter of time before that became the case in the food industry.

Profitability is low because consumers reduce visit frequency and money spent per visit as the prices feel unjustified for value served even when priced at meager margins above cost, this in turn puts pressure on owners to make more money per-item further alienating consumers.

The competition is on price only in commoditized markets, and even there margins vary based on demand and offer. If you have a gold mine, you have fixed extraction costs, but the price of gold is floating.

In the restaurant business, shops have different categories. A Michelin star, for example, allows you to be in a different "price bracket." Some of this, of course, is reflected in ingredients, location, and skills, but usually, a restaurant doesn't need to change location or chef to get an extra star, they just need to improve quality.

The "street food" or "comfort food" business does compete on price and generally uses marketing and location as a differentiator. You buy a cheap hot dog at the stadium because it's there. Competition for the cheapest street food is what she refers to, assuming that a niche is a whole market.

A market where there's too much competition on price means that there is more offer than demand. If several restaurants close, it means the number of restaurants and the number of people that need one rebalance, and this will mean higher margins for the remaining ones.

But realistically, you're going to get laughed out of the park. Cheating on longer term costs to gain competitive advantage in the short term is rampant and part of how capitalism works.

An example of this kind of thinking - "if I cut my price by 5% by not paying for 100 year catastrophe insurance, then I will have an edge over my competitors who are paying that 5% for 100 year catastrophe insurance."

This is actually how all industries are run in the modern era. To compensate, western companies generally have strong finance functions to find other ways to survive.

Public companies raise capital by selling shares. You can also take a loan, reduce opex, or rely on your savings. Relying on your savings is relying on your past. Everything else is, at least in part, drawing from your future.

It's the private SMEs that have the most risk in this model because they lack similar access to capital as publicly traded companies. If SMEs do not have substantial marginal profit, they are playing a very risky game.

Maybe the reason the margins are so low in the US is that everyone tries to rip each other off?

If all the providers of utility services (cleaning, water, electricity, ...) start to push the pricing limits, no wonder you’ll end up having no margin left at $11.

I’d rather make the kebabs myself every single day at that price!

There is too much NIMBYism and too many middlemen and archaic expectations in real estate for any mom and pop business to be viable.

40% of the population consists of introverts. UberEats lets us eat in the comfort of our own homes for a $5 premium. I go to restaurants far less as a result. Problem is, I bet restaurants have lost money on most of my orders given what UberEats/Doordash charges them so while I spend more on restaurants as a result, I make them nothing.

It's not like the industry as whole could decide to not compete on price, and enforce that somehow. There are regulations against this kind of behavior.

Whenever margins are high and competition is tough, somebody will try to compete on price, because it's the profitable thing to do.

It debases the thing. Why don't you sprinkle some whey powder or something over your Döner?

I know that train has left the station, but damn, why would you willingly remove yourself from what the food really is? Do you also drink ethanol instead of wine? Do you smears lipids on your bread instead of butter?

It's said that only 40% of restaurants last a year, and only 20% last 5 years.

If a restaurant has proven to turn a profit in normal times, it will likely be able to survive coronavirus. If not, it will be replaced by someone else who thinks they can run a restaurant (and is probably wrong). Business as usual.

I'm wondering if there is some personality differences at play here. The author loves food and probably eats out regularly. I like food, but I see it as more of a means of sustaining life than something to be enjoyed (I typically eat the exact same thing every single day). I only go out to eat about once a month. Am I an anomaly, or is part of restaurants' problem that a significant part of the population is not in love with food?

In South Korea and Japan, it's common to order and pay for your machine using a kiosk. When your food is ready, you pick it up yourself, and when you're done, you drop off your tray in the designated location. I'd imagine this saves on a great deal of labor costs.

Other than that, perhaps the rent is too damn high in the U.S. My experience watching countless restaurants and commercial properties become vacant storefronts and bank retail branches in Manhattan at least would suggest that.

Therefore, this makes it less likely that there is a paradise lost of high restaurant margins we can return to, and more likely that some fundamental parameters that make the economic equilibrium of restaurant margins really low.

A guess for these parameters include:

- High competition: there are dozens if not hundreds of different restaurants I could walk to in 10 minutes (living in a US city).

- Low barriers to entry: a good minority of the population can learn how to operate an okay restaurant.

- A lot of owners get "passion utility" out of running a restaurant -- this means they are willing to be paid less in cash.

- Lastly but maybe most importantly, incredibly price sensitive customers. Just like the retailing industry, individuals are incredibly brutal about price. We can exhort day and night about the bad practices of Amazon, Walmart, boycott country X, but at the end of the day price wins. The author here is making a "boycott low margins" appeal which doesn't seem practical.

Restaurants will re-equilibriate. Likely a bunch will go out of business sadly. If social distancing requires there to be fewer customers, and customers are more cautious and eat out less, the bright side of the thin margins is that the restaurants will just pass this cost onto the customers since the ones that don't will be out of business.

Since all restaurants will automatically cost more resources (square foot per customer, overhead) to operate, they will have a common force uniting their upward push in prices too.

[1] https://www.forbes.com/sites/sageworks/2014/06/22/us-restaur...

A lot of vacant real estate, cheap after-market equipment, desperate workforce, so you can get the best cooks and waiters for peanuts...

What locales have free garbage pick-up at home? This is the first time I've heard of such a thing.

Based on Yelp and google we have about 29 Indian restaurants here and 25 craft beer breweries.

There is not a big Indian population here. I love Indian food but 29 restaurants is absurd.

10 years ago we didn't even have ten Indian restaurants and no craft breweries.

I wouldn't doubt whenever you have a really long business cycle expansion you end up with far too many restaurants open.

What else does everyone practice almost every day at home that has higher margins?

Restaurants are competing with a baseline price of homemade meals. Most other businesses aren't competing like this.

So the question is more, can the restaurants survive the time in between? And this is not a question of margin, it is a question of fixed costs. The employee costs are quite reduced, as they are fired or on temporary leave. Here in Germany, the salaries are covered to large parts by the government and public insurance in times where there is not enough work for a business as a whole. This leaves the rent for the restaurant as the big cost factor and the rent is also the biggest cost factor which makes restaurants struggle in normal times. Which also kills all attempts an raising the margin as described in the article. And this isn't limited to restaurants only, the true reason small shops are disappearing isn't only online purchase, it is the real estate costs which keep rising until the shops and restaurants are operating at minimal margin. This is where in this crisis and going forward, the survival of restaurants and businesses is decided.

For the restaurants themselves, a lot can and should be improved to raise their margins. First of all, many restaurants are badly run. It is easy to cook and serve a burger, it is an entirely different challenge to run the business so that you make a profit. This is why some restaurants are in a constant struggle while others are hugely profitable. And of course, as with any lasting business, you have to put money aside in good times to survive bad times.

The post doesn't talk about beverages. At least here in Europe, the places often are just making even at the food while earning a lot with beverages. Especially as in the evenings, people don't leave the restaurant so quickly after the food has been eaten, but stay for some more drinks and conversation. This is why I always order a drink even when being out for lunch. When they serve me a glass of water for 2-3€, that is basically their profit.

But all of that goes to nothing, if all the profit is absorbed by the real estate costs. Short term, the landlords will have to waive quite a large part of their rent, or they are going to find out that a bankrupt restaurant pays no rent at all. Long term, the communities have to work at keeping costs reasonable.

Isn't this what Costco and similar wholesale clubs are for?

I'm living in a big city and the rent these restaurants have to pay is ridiculous.

All new buildings get used as offices.

I think it's mostly people who are artistic and creators and have a work ethic, working massive hours for below minimum wage.

This is not necessarily a bad thing, to create is a reward in itself. And at a societal level, we all benefit.

But it doesn't change, they are fucked.

Just asking people in the up and coming Depression to eat out more or pay more money won't work.

C19 has destroyed the restaurants, they won't come back for years, that's all there is to it. C19 has destroyed a large part of our wealth. Holding hands together and singing won't help.

There are ways to catch up, they are the same as 40 years ago. Like reducing environmental restrictions, reduce employee safety. C19 will continue to kill for decades, even if we get a vaccine or treatment.

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 back of the napkin (sorry) math on average rental pricing per sqft, number of employees and so on, would give you a ballpark number that is borderline insane, and would make you wonder how majority of these restaurants can afford to stay open (hint: they can't).

My theory, which is not a theory so much as it is fact, is that there is a lot of dirty money laundering happening through these small "boutique restaurants". I don't see this discussed anywhere.

Restaurants are an horribly inefficient way to eat compared to supermarkets, and they are a really lousy social environment, where you can only interact with people at your table, often in very inauthentic (aka "formal") ways.

Not much will be lost if only a few restaurants survive.