Over Fed and Underpaid

From the street vendors around the world to the explosion of fast food venues all over the United States, people do seem to like to eat out. More kids in college seeking snacks and meals away from boring dining halls, hard-working Americas lunching at their desks. No longer “brown-bagging” it but ordering from the local eatery downstairs with the ubiquitous office menu. Food trucks parked outside construction and factories sites add to the fray. Well, Wall Street noticed.

“Since the early 2000s, banks, private equity firms and other financial institutions have poured billions into the restaurant industry as they sought out more tangible enterprises than the dot-com start-ups that were going belly-up. There are now more than 620,000 eating and drinking places in the United States, according to the Bureau of Labor Statistics, and the number of restaurants is growing at about twice the rate of the population.” New York Times, October 30th.

Great business opportunity, right? Except too much of a good thing is… well… too much! Combine the restaurant fast food expansion trend with changing tastes – Millennials, those little devils, are shying away from beer-belly-fat-laden franchises and moving more towards fresh and healthy – you might think that it’s not about oversupply but the kind of food that is being sold. Maybe, and great restaurants usually (see below) survive and often thrive.

But what may appear to be a celebrity chef in a uniquely-named restaurant… or referencing the same name – a tiny owned and operated standalone operation – might just be at the heart of yet another Wall Street financing effort. Whatever else is said and done, beyond the traditional volatility of restaurant creation and operation, is a simple fact: “The glut of restaurants has increased the pressure on individual restaurant owners. Industry sales are up nationally, but growth has slowed to the lowest rate since 2010…

“Customers continue to spend a large share of their food budget in restaurants, but they’re spreading the money across a larger number of establishments, so profits are split into smaller individual pieces. Yet the industry — particularly chain restaurants — continues to expand, a strategy that both masks the problem and makes it likely that more places will falter.

“Sales at individual chain restaurants, compared with a year earlier, began dropping in early 2016, analysts reported. A majority of restaurants reported sales growth in just four of the last 22 monthly surveys from the National Restaurant Association. Before that, most restaurants had reported growth for 20 consecutive months, from March 2014 through October 2015, the survey found.

“As Americans work longer hours and confront an ever-growing array of food options, they are spending a growing share of their food budget — about 44 cents per dollar — on restaurants, according to food economists at the United States Department of Agriculture Economic Research Service.

“But while consumer demand contributed to the restaurant boom, it was changes on Wall Street that really fueled the explosion. Chains like Del Taco, Papa Murphy’s and others began attracting money from private equity firms, and banks like Wells Fargo and Bank of America saw lending opportunities in the restaurant industry.” NY Times.  Banks and investors thrive on deal flow. As long as there are places to park cash with a rate of return built in, Wall Street will always push for more… and more… and more. Fully owned and operated or franchisees. And “more” is not always in anyone’s best interest other than Wall Street investors and commercial lenders.

“Franchisees pay for the right to operate a McDonald’s or a Subway, following rules that dictate everything from what type of taco to sell to where to buy iceberg lettuce. They take on the risks and costs of running the restaurants, in exchange for the marketing muscle and name recognition these big companies provide. While every Dunkin’ Donuts or Taco Bell may look the same, dozens and sometimes hundreds of independent owners can operate most of the restaurants within a single brand.

“But some franchisees say they’re being pressured to open too many stores as food companies push for new revenue streams. Buying an existing restaurant, for example, may mean agreeing to build 10 new ones… ‘They want us to sign aggressive development agreements,’ said Shoukat Dhanani, the chief executive officer of the Dhanani Group, which owns hundreds of Burger King and Popeyes restaurants. ‘I didn’t see that even five years ago.’

“The shuttering of restaurants could have a major impact on the labor market. Since 2010, restaurants have accounted for one out of every seven new jobs, and many restaurateurs complain that it has become increasingly difficult to hire and retain workers. In Muscogee County, Ga., a former textile center, the Labor Department reported an overall decline in employment of 2,000 jobs since 2001 — but a gain of 2,700 restaurant jobs.

“Those positions could be in jeopardy if sales continue to fall and force more restaurants to close. Over the summer, the parent company of Applebee’s announced it would close more than 100 locations. In 2016 Subway, the nation’s largest fast-food chain by location count, closed more locations than it opened, the first time in its history that had happened.” NY Times. But weight… er wait… there’s more. Add the skyrocketing real estate market, and the situation gets a lot worse.

When the famous Carnegie Deli in NYC closed last year, it was clear that there was even more going on. Every time I ever went there it was packed, no matter what time I went. But that deli went out of business. And this is not an isolated case. While the super-expensive restaurants in major cities, where getting a booking means you know someone, prosper by charging egregious sums for chi chi food, they are at the top of the food chain (sorry), those absurd real estate prices are beginning to hit a tipping point where down the middle restaurants, no matter how good their food might be or how crowded their venue appears, can no longer afford to survive in most of Manhattan and San Francisco. Customers for those mid-level restaurants are definitely price sensitive; once they pass that dollar limit, business drops like a stone. Manhattan is the poster city for this phenomenon.

“It’s so bad, even an executive from one of New York’s most successful restaurant groups tells chefs to leave: If there’s a home-bred restaurateur that New Yorkers believe can succeed in this climate, it’s Danny Meyer. But even his chief development officer at Union Square Hospitality, Richard Coraine, thinks New York is over, telling the Times, ‘People are leaving to find their dreams elsewhere.’ And where does he advise chefs to go if they want to make a restaurant work? Los Angeles, which is truly depressing to New Yorkers who lately have become all-too-accustomed to watching friends move west.” AOL.com, 10/27/16. Can Boston, Seattle and Los Angeles be far behind? Where do those chefs go? Kitchens with no seating that only do delivery and take-out… with a much cheaper rental footprint? Even more food trucks?

Transitions are hard, really hard, for lots of us. But change will not stop, the economy will sooner or later tank those real estate prices, but then the economy as a whole will drop. We used to have to make “an adjustment” once a generation, but that was then…

I’m Peter Dekom, and our social, economic and political systems seem to be devoid of good answers or simple solutions for all of these seminal economic shifts… everywhere all the time.