Back in 2000, in the pages of his debut book, Kitchen Confidential, Anthony Bourdain wondered aloud why anyone would put themselves through the often excruciating, money-sucking process of owning a restaurant in New York City.
“What causes such a destructive urge in so many otherwise sensible people?” he wrote. “Why would anyone who has worked hard, saved money, often been successful in other fields, want to pump their hard-earned cash down a hole that statistically, at least, will almost surely prove dry?”
Bourdain goes on to describe the parable of a retired dentist who hopes to invest in a restaurant so that he can feel like Humphrey Bogart in Casablanca. Impatient and ignorant about the business, the dentist’s restaurant has an “evil cloud of failure” hovering around it from the start, shuttering on Sundays, cutting back staff, and doing away with lunch before finally closing for good.
Sixteen years later, as the five boroughs have swelled with some 24,000 restaurants, dentists, lawyers, doctors, and businessmen just can’t seem to help but invest in these alluring yet perilous business ventures.
Now, in an essay for the New Yorker last week, a managing director of a private-equity firm named Gary Sernovitz has given fresh insight into exactly why his seven-year, 2.38 percent stake in a NoHo restaurant was all-but doomed from the start. In the piece, Sernovitz describes a landscape where restaurant’s are setup to fail, unable to recoup expenses and hold the attention of a hopelessly fickle client base.
Through interviews with one of the restaurant’s primary owners—as well as Andrew Yang, the principal investor of Danny Bowien’s successful Mission Chinese Food on East Broadway—Sernovitz sheds new light on the financial and mathematical realities each new restaurant must overcome in order to survive in New York.
The majority of a customer’s bill goes toward operating expenses.
“If you as a customer generated a hundred-dollar tab, about thirty-seven dollars went to the staff (plus the twenty or so dollars you tipped); twenty-nine dollars went to buying the food and beverages that became your meal; fifteen dollars went to the landlord; six dollars went for supplies (such as new forks) and maintenance (hello, plumber); five dollars went to bank fees, insurance, and workers’ comp; five dollars went to other costs (utilities, permits); and just under three dollars (two dollars and eighty cents, to be exact) was left over for operating income. For the record, that is less than was paid in credit-card fees.”
It takes years for restaurants to pay back building expenses.
“[T]hat three dollars or so in operating income isn’t even really profits. Operating income is needed to pay back the costs to build out the restaurant. Paying those costs was supposed to take about three years in the case of our restaurant. (It never happened.) Only after that come profits.”
Rent and service fees are becoming impossibly steep.
“[I]f our restaurant’s rent, which was twenty thousand dollars per month for about twelve hundred square feet, had consumed only ten per cent of revenue—a restaurant’s target, per the conventional wisdom—its operating income would have tripled. There is monopolistic pricing for modern conveniences, like credit-card fees and OpenTable, which charges an annual fee and two dollars per reservation—only eighty cents shy of the restaurant’s own operating income for the hypothetical table spending a hundred dollars.”
A restaurant often needs a celebrity endorsement to survive.
“[The owner] suspects that the only business model that works anymore is for a strong brand or celebrity chef that keeps customers flowing to their old restaurants by constantly opening corporate siblings (or peddling cookbooks on TV), even if none of the restaurants themselves are terribly profitable.”
Every aspect of a restaurant must be ahead of the competition.
“Like any business in New York City you need to have a product that is above and beyond—better than everyone else’s,” Yang told Sernovitz. “You need all the details to get it right, the right execution, the right package, the right branding around it, and you need to have a clear competitive advantage in each.”
Restaurants and their investors are partially to blame for their own problems.
“I’ve come to conclude that the restaurants New York needs are doomed, financially, to fail. That’s because amateur capital backed by magical thinking and a desire for fun distorts the economics for everyone. New restaurants, with too-easy access to financing from people like me, invest too much in design, tableware, food, and service, driving up every customer’s expectations of every restaurant in a cyclone of unprofitability.”
[via New Yorker]