Credit PHOTOGRAPH BY PETER MARLOW / MAGNUM
If you live in New York City long enough and appear to be successfully employed in an industry that Bernie Sanders dislikes, you will be asked at some point to do three things: sponsor a table at a vanity fund-raiser, become a “producer” of a Broadway play, and invest in a restaurant. I had no trouble declining the honor of hosting a benefit or helping a “Hedda Gabler” back to the stage.
I did the restaurant.
And while I am not dumb enough to have imagined I’d make much money as a passive, partial investor in a New York City restaurant, I was dumb enough to think that I could probably earn my money back-ish, while at the same time helping some decent young men fulfill their dream. (Also, it seemed more fun than investing in a municipal-bond mutual fund, which cannot, thanks to the killjoys at the S.E.C., give investors free beers.) But of the many failures of logic and foresight of that investment, which I made in 2010, the one that stings the most is not realizing that so few restaurants in New York make money precisely because too many restaurants in New York have investors like me.
My status as a one-forty-second owner of a seventy-seven-seat restaurant has not been a complete disaster. The restaurant survived seven years on a competitive stretch of NoHo, in Manhattan, and it looks as if I’ll lose only a third to half of my investment. The two decent young men who opened the restaurant remained decent throughout, if numbed by how hard it has been to support their families with a business that has grossed, consistently, two million dollars per year.
And being Mr. One-Forty-Second-Owner has provided an amuse-bouche of glamour, primarily because my friends didn’t know how little I owned or the size of the investment (which was the cost of a car, not of a house). Nonetheless, the mafioso power play of being seated before the waiting schnooks during the restaurant’s first year was long forgotten by the seventh year when a table was available for me and seventy-six of my closest friends. My Barbra Streisand dreams of being lifted up by twirling waiters singing “Hello, Gary!” every time I entered the restaurant moved within a few years to embarrassment when the original staff had turned over and I wondered how to remind the new staff that I was Mr. One-Forty-Second without looking like an ass. I failed, one way or the other, pretty much every time.
I would go on—about the guilt I feel when I eat at other restaurants, about a self-imposed obligation to pick up the tab for friends at “my” restaurant, even about the stomach aches from royally gorging on free extra entrées after already eating the dishes I paid for—except no wants to hear complaints of how glamour has become a burden (except, inexhaustibly, from Kanye West). But in my underwriting of the investment I priced much too high the perks of being Mr. One-Forty-Second. Which wouldn’t have been so bad had I understood anything about how the restaurant business in New York City works.
That business, more or less, stinks. New York restaurants are at the intersection of the low-margin world of food businesses like grocery stores (low margin because so many compete in the all-out war to sell food) and taste-predicting nobody-knows-anything businesses like Hollywood. I spoke to one of the two owners of the restaurant, who wished to remain anonymous in case he decided to keep his hand in the restaurant business. He provided me with the Manhattan math, from the seven-year profit-and-loss statement. 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.
Two things are striking about this math. First, even though half of what you paid, including tip, went to the people working at the restaurant, no one got rich from that half, and almost no one got health insurance. (As the chef David Chang howled earlier this year, “Food’s too cheap, tipping makes no sense, cooks are broke, and it’s damn near impossible to earn a living in this effed-up business.”) Second, that 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.
The harsh bottom line: three per cent operating income isn’t that short of the definition of success in New York City restaurants of five to ten per cent operating income, depending on whom you ask. And even that piddling percentage, achieved by few restaurants, is under assault from all sides. There are rising New York rents: if 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. There is economic justice, with a rising minimum wage. (“We’re for it,” the co-owner told me. “Our customers are for it, but we weren’t able to pass along the costs.”) And, related to that, there are inconstant, unsympathetic customers like me. I know restaurant economics, and I still get offended by a sixteen-dollar starter salad.
These assaults made me wonder whether it’s ever possible to profit from a New York restaurant investment. The co-owner is haunted by the advice from a grizzled restaurant veteran, early in his own career: “You can make money in this business, but not if you’re honest.” He wonders whether he was being advised to craftily gouge customers or just steal. He 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.
For another perspective, I talked to Andrew Yang, the principal investor of a successful restaurant, Danny Bowien’s Mission Chinese Food. Yang—who comes from a restaurant family—brought some necessary context to the complaint that restaurant investing is otherworldly difficult. “Like any business in New York City,” he told me, “you need to have a product that is above and beyond—better than everyone else’s. 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.” In his case, that meant a name-brand chef and a unique cuisine, one not easily replicable and one that lends itself to the more subdued rents of Chinatown and the reasonably priced ingredients of Chinese food.
All that makes sense, even if was a bit like an N.B.A. coach telling an aspiring one, “To win, son, just sign LeBron James.” Yet I’m not sure I would have listened to Yang’s advice even I had heard it seven years ago. Restaurant investing tempts because it allows one to be part of a project that is taken seriously in places like the Times. You can’t own one-forty-second of the next Zadie Smith novel. Restaurant investing is also tempting because of its relatively low entry price, compared with, say, backing a movie. And it seduces because of a category error: I thought I knew something about the business of hospitality, just because guests at a dinner party once said nice things about my panzanella.
But the biggest temptation might be the paradox of New York restaurant supply and demand—a paradox that feels beatable. That is, New York City, with all its pastrami-and-pizza-hungry tourists and residents fleeing their pocket-size kitchens and young people too busy taking phone pictures of one another to cook, generates enormous demand for restaurants. There are twenty-four thousand of them in the five boroughs. That demand should, one imagines, set restaurant-meal prices at the level that affords some baseline health for the suppliers of those meals. And not all New York restaurants can advance a new culinary hybrid—microlocal and Angolan!–or have a celebrity chef. So New York needs restaurants like the one I invested in.
Yet 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. Landlords, with enough dreamers to fill their spaces, can command nightmare rents. If restaurants had to be good business ideas, and attract sophisticated investors who mercilessly demanded a profit, there would be fewer restaurants. They would be less cool. The food would be less good.
Which would stink for the rest of us. Manhattan restaurants seem to be the original example of the business model taken to its extremes by Uber and others in Silicon Valley, of investor capital subsidizing, semi-permanently, the customer experience. And now that I’ve subsidized, to a minor extent, about a quarter-million New York meals, I’m selfishly all in favor of that model to continue. So, please, disregard all I’ve written. My next meal’s on you.
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