The truth is that restaurants incur exorbitant costs and have very small profit margins. What is not surprising is that one of the biggest costs for restaurants are outrageous rents that continue to increase exponentially. As such, restaurants are struggling to make money. This is best seen in New York City where many of our favorite establishments, including iconic institutions, are closing their doors.
According to Zagat, 2014 was a brutal year for restaurants in NYC, with 162 opening and 80 closing; 2015 had 119 open and 53 close and in 2016, the number of independent restaurants in the city fell 3%, according to the NPD Group.
Just last year, we’ve seen beloved New York restaurants relocate including Union Square Cafe, Nobu and Four Seasons Restaurant. Other hallmark restaurants that fully closed were Da Silvano (after 40 years of operation), Spice Market (after 12 years in business), one Michelin-star Soto (after nearly a decade in operation), Recette, 69 Bayard (a restaurant that has been around since 1970), Telepan (after 10 years of operations), Blue Ribbon Bakery Kitchen (which has been open since 1997) and the list goes on. Undoubtedly more restaurants will close in 2017 and it is already happening: Eater has announced that Tom Colicchio’s 15-year-old CraftBar will be closing on April 30th after a 50% rent hike, and Annisa, a West Village favorite of 17 years will be closing down due to a doubling in real-estate taxes.
Most restaurants decide to close after their lease ends to avoid the ludicrous rent hike. According to Charles Passy from the Wall Street Journal, if restaurants choose to renew their lease after it ends, they may have to face up to 300% increase in their rent. If they choose to relocate for better rent terms, the cost of the move is still very expensive. Chef and owner Giuseppe Bruno of Sistina, a contemporary Italian restaurant previously located in the East village, estimated he has spent about $1 million dollars on his relocation to the Upper East Side in an interview with the Wall Street Journal. Additionally, according to Drew Nieporent of Nobu, the move from Tribeca to the new location will cost several millions of dollars.
While rent has always been a big part of a restaurant’s operating budget, these latest rent hikes have now become the main pitfall for chefs and restaurateurs. “Rents, when combined with everything else, make this a very difficult time to be a restaurateur. The risk is that we are losing what makes this the culinary capital of the world,” said Kevin Dugan, regional director of the New York State Restaurant Association in a talk with Food Republic.
In an already tough occupation with arduous hours, often seven-day work weeks (even on holidays), rent hikes are the last thing operators should be dealing with. Rather, the focus should be on the guest, the food, and the experience.
But what are the options available to operators? How can our beloved restaurants save themselves? How can they combat the elements of the market that are out of their control? Here are two main thoughts.
Look for a profit share agreement.
Richard Kent, a veteran of the New York City real estate industry, and brother of The NoMad’s Executive Chef James Kent, advises current aspiring restaurateurs to “look for places with fair landlords who will provide them with an agreement that is beneficial for both parties.” A profit share agreement is a possible option to explore. A restaurant can give a percentage of profits added onto a rent price lower than market share, which will ensure they are not paying a crazy amount that will kill their business. He recommends that “restaurants should pay $100 to $200 per square foot to be a success.”
Look at the data.
Another more long-term solution is to install updated technology that provides aggregated data analysis and allows restaurants to control costs and identify areas of surplus and improvement. These kinds of innovative software will ensure that restaurants operate in smartest way possible to combat the rising rent, labor, and food costs in the industry.
Whether it is a great real estate deal or employing innovative technology in the restaurant, The New York Time’s Karen Stabiner provides a general formula that restaurants should follow to achieve profitability. She says, “a healthy restaurant aims to spend about 10 percent of its sales revenue on rent, utilities and other occupancy costs; 30-40% on labor, including payroll taxes and benefits; and 30 percent on food and beverages.”
Rents will inevitably continue to rise and what the hospitality industry as whole needs to do is think smarter about the way they operate and take control of their business. What’s more, it is not only rent that is a high cost but also labor and food costs that are on the rise (something we will touch on in future articles). We need to work together to make sure our beloved restaurants do not disappear one by one.
