Is there a restaurant bubble?

by on July 6, 2017 at 12:47 am in Economics, Food and Drink, Uncategorized | Permalink

Mostly not, here is a good article by Maura Judkis.  Here is part of the chat with me:

What’s happening is something that some restaurateurs may not want to hear: Competition in an already-tough business is getting even tougher. Cowen has an analogy: “Say you went to Hollywood and you asked, ‘Is there an actors-and-actresses bubble?’ ” he said. True, there is an overabundance of aspiring stars who move to Los Angeles with dreams of making it big. They spend money, time and effort investing in their future. But for most of them, it will never pay off. Drama-school graduates know the risks, and still, they keep heading west, because they believe that they are different. With some hard work, they’ll be the ones to make it big. The overabundance of young ingenues will continue in perpetuity.

“You have too many people trying, but that’s going to persist more or less forever precisely because the reward is high,” said Cowen. “The world of fancier restaurants” — and casual restaurants, too — “has become more of a winner-take-all world.”

And how is this for a blasé response?:

There may be plenty of openings, but “the lower echelons of the business, they’re tapped out. You can’t find people [staff],” said Paul Guzzardo, a restaurant consultant and partner in several restaurants, including Leopold’s Kafe . He thinks that indicates a bubble, but Cowen disagrees.

“It has not been a speculative fervor,” Cowen said. “The laws changed, prices went up, some places had to adjust.”

The article is substantive throughout.

1 mkt42 July 6, 2017 at 1:43 am

Yes a good article, partly because the reporter consulted with a couple of economists. The market is not showing signs of a bubble, instead it’s showing signs of being a highly competitive market with largely free entry and exit.

However I’m not sure what Tyler’s referring to in this quote: “The laws changed …”

2 extramsg July 6, 2017 at 4:18 pm

“largely free entry and exit” — spoken like someone who has never opened a restaurant. 😉

3 Steve Sailer July 6, 2017 at 3:34 am

My nephew is a waiter in downtown LA at an expensive sports bar / restaurant near the Staples Center, home of the Lakers, Clippers, and Kings, various music venues, and the convention center. He said the waiters’ favorite type of customers are the hockey fans: big spenders, big tippers, polite.

My impression is that in the U.S., hockey fans tend to be successful business people and the like. The sport doesn’t televise as well as it comes across in person, so it mostly picks up new fans when old fans invite them to a game.

4 chuck martel July 6, 2017 at 7:44 am

A major difference between hockey and other popular team sports is that hockey attempts as much as possible to provide continuous action. Play stoppages are ended within seconds by a face-off and the game continues. Basketball is a free throw shooting contest. The genuine action in a football game is a tiny fraction of a whole afternoon or evening. Baseball moves at a glacial pace.

5 Sean July 6, 2017 at 8:31 am

Hockey relies more on gate receipts than television rights for their revenue. Subsequently tickets to games are very expensive. Those that attend games in person are likely big spenders and that likely has spillover into the neighbouring restaurants.

6 Roy LC July 6, 2017 at 12:48 pm

Hockey relies on gate receipts because the NHL has the most idiotic self defeating group of owners in professional sports.

7 Albert July 6, 2017 at 9:42 am

I’m pretty sure baseball doesn’t move at all, you’re wrong on that point.

8 Steve Sailer July 6, 2017 at 3:41 am

Restaurant meals have definitely gotten more expensive since, say, 2009. I can’t think of any reason to complain about that, however — it’s an overwhelmingly competitive industry — so I just wish everybody involved good luck and eat out less.

9 Art Deco July 6, 2017 at 6:35 am

I only eat out for cock.

10 ChrisA July 6, 2017 at 6:58 am

My impression is that restaurants have significantly improved in recent years in both the quality of their service and the food, or, to put it another way, the number of higher quality restaurants has increased. This is a good example of what productivity measurements miss – a restaurant meal is a restaurant meal according to productivity measurements, but if competition is requiring increased level of service at the same price, this will look like a reduction in productivity. It’s my view that increased ability using the internet to rank restaurants and hotels is what is driving some of the stall in productivity.

11 rayward July 6, 2017 at 7:02 am

The influence (dominance) of media and celebrity in American life has a lot to do with young people pursuing careers in media (and choosing related college majors). As for restaurants, I would point out that the founders of Outback Steakhouse continue to open restaurants (with new and different themes) even as the number of Outback Steakhouses, Bonefish Grills, and other theme restaurants that experienced past success is in decline. Do they continue to open restaurants because that’s all they know or is it because they know something about the restaurant business others don’t? Cowen’s explanation for the decline is that laws changed (?) and prices went up. Food is made from what grows on the farm, and farm prices (as well as supply) are notoriously unstable. Retailers (Bezos) can create a supply chain to reduce the instability in prices (and supply), but has anyone in the restaurant business even tried to create a similar supply chain? Indeed, is it even possible? It’s possible for fast food (e.g., MacDonald’s) but not for full service restaurants. My father was a chef and owned restaurants, and we lived a good life but one punctuated with booms and busts. Fluctuating prices (and supplies), fickle customers, often undependable employees, aside from that the restaurant business is great.

12 GW July 6, 2017 at 10:29 am

Look to a restaurant like Chez Panisse for an example of a small, quality operator with a relatively stable price development over time and a locally-sourced supply chain. It might be useful to think of Chez Panisse as a leading party in creating informal communities of small, high prestige restaurants sharing a, now, relatively mature, network of local, high quality and specialist produce and meat producers.

13 a counterclockwise witness July 6, 2017 at 2:52 pm

Restaurants are tough businesses to run, most going out of business. From the customer point of view, a restaurant is a tough place to go. There was a time of disinterest in America. The dominance of celebrity culture in America, provoked by the advertising platforms which duped their consumers into thinking a personal brand was more important than a favorite band. The time of disinterest in America is over. It’s been over since 1890. Called by Brandeis and Warren.
https://groups.csail.mit.edu/mac/classes/6.805/articles/privacy/Privacy_brand_warr2.html

Todays restaurant goers are performing, performing symbolic acts with a conscious full of facebook fads. Energy prices are also unstable. The production of a mineral like coal, once the primary revenue for First Energy in Ohio, is now supplanted by other minerals. That tax credits are given for Sulphur reduction in coal is a clear signal of the arbitrariness that government “monitored” energy companies face. The minerals under the ground in West Virginia are owned by families, and this is shocking to the rest of the world. The food porn found on Instagram is shocking to the rest of the world. If the food, or the friends, or if nature, if these things were enough, there would be no need to take pictures of them. But pictures provide a record, not for the food or the friends or of nature, but the pictures provide celebrity with its own culture.

14 Ted Craig July 6, 2017 at 9:23 am

“You have too many people trying, but that’s going to persist more or less forever precisely because the reward is high,” said Cowen. “The world of fancier restaurants” — and casual restaurants, too — “has become more of a winner-take-all world.”
Tyler, Tyler, Tyler. You still need to work on your marketing skills. Your answer should have been: “There is no great stagnation, but I would say the average is over for fancier and casual dining restaurants.”

Always be closing.

15 Colin July 6, 2017 at 11:23 am

Ripple was the kind of warm, welcoming place that bred regulars like rabbits. It was both upscale and casual, and not overpriced. It won awards and was fondly reviewed. It was filled with people until, gradually, it wasn’t.

Went with my parents and another couple to Ripple a few years ago. I found it to be overpriced with small portions, and I think everyone left the restaurant hungry. Per comments on this DC blog we were hardly alone: https://www.popville.com/2017/06/ripple-closing-cleveland-park/

16 Viking July 6, 2017 at 1:03 pm

I bet many restaurant’s close because they are under capitalized. If they owned the buildings, the rent increases would not cut into profits. The concept of a lease for a restaurant is ridiculous to me. You might have to spend high tens of thousands or hundreds of thousands in decoration and furnishing, and in 10 years, the building owner can stick his hands in your pockets if you’re really successful. The cost of relocating would be overwhelming.

17 extramsg July 6, 2017 at 11:05 pm

How is adding to the start-up costs by adding the cost of owning a building going to help with under-capitalization? The issue of rent vs own only comes into play after 5 or 10 years, generally. By then, most restaurants have either made it or not. And the reason they are going to close isn’t under-capitalization, but not keeping up with trends and staying “fresh” to customers.

18 extramsg July 6, 2017 at 11:35 pm

What we have here is a failure to communicate. While Tyler’s definition of a “bubble” is toned down from the others, I still think we’re mostly looking at an equivocation. Clearly economists have one way of defining a bubble while people in the industry have another.

I don’t think people in the restaurant industry, like myself, are worried so much about a catastrophic crash on the scale of the housing market in 2008 or the stock market in 1929. I think the worry is just that the market is saturated and some of the costs are going up rapidly, such as rents and labor. I think there’s a sense that the market is being driven by non-business factors, too, such as the popularity of chefs and food on TV and social media. On the one hand, you could just say that an already competitive market with low margins is just getting more competitive. But I think there’s a legitimate worry that such a saturated market with high costs could perform like a mini-bubble, especially in a recession. With a lot of restaurants running thin and restaurants having traditionally high start-up costs compared with other retail or knowledge industries, a recession could be pretty ugly. And with the minimum wage going up rapidly in lots of major cities, the ability of the industry to rebound could be hamstrung.

The one good thing about these overt dangers is that I think a lot of smarter restaurant people are being less cavalier with their growth strategies than they were 5 years ago. Personally, I’ve sold 4 of the 5 restaurants I owned 5 years ago and my projects going forward are less ambitious in scope and more fiscally safe. That said, I still see a lot of big spending buildouts and rapid turnover in the industry.

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