Why Independent Restaurants Are Closing
New York City restaurateurs like to tell an old joke: How do you make a small fortune in restaurants? Start with a large fortune!
The restaurant industry is a penny business. You must constantly find ways to save money and stay competitive while maintaining the quality of cuisine and service that guests are accustomed to, or else you'll find yourself broke, out of a job and laying people off.
Those who operate restaurants work nights, weekends, and holidays. Pressure to perform is always high and profit margins are almost always small. The industry attracts people with a driving entrepreneurial spirit and a passion for cuisine, hospitality, and making people happy. While celebrity chefs grab headlines, for most folks, running a restaurant is much more grind than glamour.
According to the National Restaurant Association, there are more than one million restaurants in America. In New York City alone there are more than 26,000 restaurants, according to the city’s Department of Health. I haven’t met the owners of all restaurants, but from the many I know that have learned to be successful, it is not enough just to be a great chef or a hospitable host. A successful restaurateur must be a true businessperson, through and through. While there is not one recipe for success in today’s highly regulated and competitive marketplace, successful restaurateurs are just as laser-focused on their restaurant’s financial model as they are on the food.
A traditional financial model for many New York City restaurants in the past had been to target food and beverage costs at 30% of sales, with labor at another 30%. Operating expenses were 20% and occupancy costs were 10%, leaving the restaurateur with a 10% profit.
In today’s highly regulated business climate with increasing regulatory burdens, the increased wage and benefit mandates are pushing restaurant labor costs towards 35%. Sky-high commercial rents have resulted in occupancy costs that exceed 10%. Coupling together labor and occupancy costs, it is easy for a busy restaurant’s margin to dwindle to 5%, or less. In today’s litigious business environment, an innocent violation of a complex labor law often results in a large financial settlement that pushes a restaurant’s profit and loss statement into the red.
Consequently, independent mom-and-pop restaurants appear to be closing up shop. In the city of New York, the decline has been 8% over the past four years while chains have increased their footprint. When local spots shutter, communities mourn the loss of their beloved neighborhood café and begrudge that parts of their city are starting to look like a strip mall. Plus, they lose jobs and tax revenue.
These regulatory and market pressures on independent restaurants have influenced the growth of the “restaurant group.” Unlike a chain, with many locations featuring the same concept, the group operates multiple unique, high-quality restaurant concepts under one umbrella company. The restaurant group hires in-house human resource departments, financial teams, marketing professionals and others that allow them to operate in the highly regulated and uber-competitive marketplace. The group also provides more perks to retain employees, and opportunities for professional growth within the company, which is vital right now as chefs and restaurateurs bemoan the labor shortage, especially among jobs like line cooks. But make no mistake, even the most successful restaurant groups face significant challenges and will often shutter one restaurant while opening another.
The growth of the restaurant group is also fueled by chefs with rock star status and restaurateurs who have become the golden children for investors and developers of hotels and commercial properties. Food and beverage establishments - once a money- losing but necessary amenity to feed hotel guests - are now the driving force behind many hotels. In New York City, you will often see more New Yorkers eating and drinking at hotel restaurants and bars than visitors.
Commercial and residential developments want to give their properties an edge by landing a renowned restaurant as an anchor tenant that will curate the culture, set the vibe of the property and attract residents and other commercial tenants. This arrangement gives restaurateurs the edge because developers will invest capital to help build out a beautiful restaurant and support its operations at a level often unattainable by an independent restaurateur on their own.
Many seasoned full-service chefs and restaurateurs, as well as first timers are also entering the fast casual segment, which is best described as applying chef driven cuisine, welcoming hospitality and top notch service, within a smartly designed space. These restaurants source locally and think globally. They accommodate our fast pace, cell phone, social media schedules. And from the perspective of a restaurant's financial model, they require less real estate, a smaller workforce that's more susceptible to being digitized by self ordering kiosks and other technology, and they are ripe for replication and scalability. This combination has kept customers lining up and the investment dollars flowing to the fast casual segment.
The restaurant industry is evolving, and there’s a strong argument to be made that there are more high-quality restaurants around the country now than ever before. Ironically, it’s occurring during a time when achieving financial success in the restaurant industry is more challenging than ever.
If you’re like me and want to support local restaurants, then I encourage you to dine out often. If you’re a government official and care about local businesses and jobs, I urge you to reduce regulatory burdens, such as allowing cure periods for petty violations, instead of immediately levying expensive fines. Abolish fees like New York City’s inequitable commercial rent tax. Limit major financial liability in minor lawsuits so they stop crippling employers who make small mistakes. Let tips be shared among servers and kitchen workers who are prohibited from sharing gratuities, which will help reduce the disparity in their wages, as both are vital to delivering the overall dining experience. Finally, support incentives for restaurants that hire within their communities and invest in industry informed workforce training programs that will prepare people from all walks of life for professional careers in the restaurant industry.