
The Thrill of Losing Money by Investing in a Manhattan Restaurant - PanMan
http://www.newyorker.com/business/currency/the-thrill-of-losing-money-by-investing-in-a-manhattan-restaurant
======
feklar
Friend of mine runs a tiny and successful to-go cafe. His most unexpected
problem was competitor restaurants around him constantly phoning city hall to
"complain" about his business in hopes they regulate him off the street. The
most common complaint at first was cooking smell, so the tiny cafe is forced
to install expensive filtration exhaust.Then the complaints turned to signage.
A city inspector showed up numerous times to measure his sign, how far his
little sandwich board was placed in the sidewalk out front, the brightness of
the lights on his sign, that the artwork on the sandwich board was offensive
or violated one of the thousands of regulations regarding public advertising.
Then the complaints turned to patio, there was too much noise, chairs were too
far into the street, garbage was left too long on tables, ect.

Anybody with a restaurant/cafe startup idea should have some kind of
contingency plan to deal with the inevitable use of city hall to try and close
you down.

~~~
rayiner
Eh. The city passed laws to regulate how much for-profit businesses impinged
on the public. Food smells in the air, signs and patio chairs on the public
sidewalk. Especially if we're talking about a typical patio that actually
impinges on the public sidewalk. Regulating that doesn't seem unreasonable.

And if everybody else has to follow those laws, why should your friend's place
be any different? Why should a competing business have to bear the expense of
installing a filtration system, then sit idly by while someone sets up shop
next door and flouts that regulation?

This is where part of the criticism of cabs is unfair. Cabs aren't allowed to
maximize their profits through the perfect price discrimination offered by
dynamic pricing. Stuff like Pool and $1 fares are illegal for cab companies to
do. So why shouldn't they complain when Uber competes with them without
following regulations they have to follow?

Your complaint sounds like those people who get mad when someone rats them out
for cheating in class.

~~~
javajosh
_> Your complaint sounds like those people who get mad when someone rats them
out for cheating in class._

The legal system is so complex that _we are all always cheating_.

People only call for strict enforcement of the rules when they don't like you.
It is a wonderful thing to get the government to attack your enemies for you.

~~~
rayiner
Yeah, it's so complex:
[http://www.nyc.gov/html/nycbe/downloads/pdf/nycchecklist_res...](http://www.nyc.gov/html/nycbe/downloads/pdf/nycchecklist_restaurantsigns.pdf).

OP's examples were not obscure subsection g part 4 item iii-type stuff. They
are basic things you'd think about if you were considering the impact of your
business on the public.

~~~
javajosh
That's a strawman attack. You imply that the entirety of applicable law was
contained in that URL, which is false. The actual corpus of law a citizen and
business owner must be aware of is the entirety of the law from Federal,
State, County, and City, plus all private contracts to which I am bound,
covering every activity you do. You're a lawyer sarcastically chastising me
with a link to the specific law, and that is poorly done. The very existence
of "lawyer" as a _profession_ implies that the law is too complex for
individuals to understand.

The computer science version of this would be some poor guy confused about
TCP/IP and I could link to the precise part of the RFC that answered his
question, with a sarcastic, "Right, that's so complex". I'd be an asshole if I
did that.

------
AJJB10
Minimal viable product/lean startup. This is not that. For a restaurant that
means:

1\. Have good food, that sells. Nothing else matters. No big up front
investments. Have a killer product, which you make in your home kitchen if you
have to. I thought Americans knew this, with their food trucks and shared
kitchens.

I see this all the time. People thinking about how to name their company, how
the logo looks, or in this case which forks to use. These things matter, but
only in the long run, when you're able to sell your product successfully
already.

Access to money and people like the author make this difficult, you aren't
forced to survive.

A restaurant near me has started without a name, no interior decoration and a
less than good but not too bad location. After six months they had a line out
the door, every night. After a year they had a name. After two years they
renovated, but just a little bit. Now it's 5 years later, it looks fancy, they
have a logo and it's nicely renovated. But they started with the product.

I think it's a good idea to do everything in reverse, especially when we are
worried how we are perceived. We see finished, well working things and think
we need to emulate everything they are doing, including the expensive business
cards, when it's really the other way around. Product first, being forced to
survive, the details come later. Makes for a much more relaxing atmosphere as
well, with much less meetings that go nowhere.

~~~
CPLX
This sounds like it was written by someone who has no direct experience (side
note: selling people food you made in your home kitchen is illegal) and I am
pretty sure restaurants, generally, aren't like tech startups, where you
experiment to get product-market fit and so on.

People like food, they want to eat it, and chances are high you're making food
that's generally recognizable as such and part of a general culinary category
and price range. There are acceptable standards for service, wait times,
cleanliness, and so on, that you can meet or exceed to provide a certain level
of experience.

From what I understand, and being around the business, restaurants almost
invariably sink or swim based on how good a real estate deal they've been able
to get, and their ability to have a stable staff and be relentless about
controlling costs, things like spoilage, advance planning, etc.

Software based startups are all about growth. You fuck around as you describe
and when you nail the product it grows like crazy at a very low marginal cost.

Restaurant economics essentially look nothing like that. They aren't about
growth, they are about margins, and since they have to be highly price
competitive, that means fundamentally the business is about managing expenses.

~~~
kafkaesq
_From what I understand, and being around the business, restaurants almost
invariably sink or swim based on how good a real estate deal they 've been
able to get, and their ability to have a stable staff and be relentless about
controlling costs, things like spoilage, advance planning, etc._

This sounds like it was written by someone who doesn't like food. What I've
seen in NYC, over and over again, is that of course you don't want the worst
location (or financing terms), and you don't want to shoot yourself in the
foot with incompetent operational management or an ever-churning staff.
However, those are simply the prerequisites; they're necessary, but not
sufficient for success.

If you want to thrive, you absolutely have to have a kick-ass product† (that
you also happen to wholeheartedly believe in). If your menu just isn't
inspiring (or it's too expensive or otherwise not right for the neighborhood /
night-time crowd) -- it doesn't matter what your staff turnover is or much
forethought you put into the operations. Inevitably you will fail.

But if your menu is truly awesome, people will make a beeline to your little
hole-in-the-wall, wherever it is, and jostle for a spot at your narrow formica
sitting counter and a chance to wolf down your product, nevermind the
styrofoam bowls, plastic sporks and tissue-thin napkins.

Case in point: [http://xianfoods.com](http://xianfoods.com)

† By product I mean the combination of "menu offering, ambience, staff and
cultural vibe." The interplay between these can be quite subtle, and it's
tricky to get them right (which is why it's really to believe in what you're
doing, and have _taste_ in all things, not just food). The point I'm trying to
make is that from what I've observed, it's definitely not primarily a matter
of managing your margins and not getting screwed by your lease.

~~~
Spooky23
If you're in NYC, and you're truly awesome, but have a shitty lease, you'll
find yourself with a 5x increase that puts you out of business.

The places that last own the building or have a long lease.

~~~
kafkaesq
I already acknowledged, in my post above, that of course you shouldn't have a
"shitty" lease.

My point is that (along with all the other boxes one should tick in starting a
restaurant in a cutthroat market like NYC) -- and in particular if your goal
is to run a business that's actually thriving, and not just marginally
surviving -- it's not _sufficient_.

------
cool-RR
The problem with investing in something cool, like owning a restaurant or a
bar, is that you're competing with a lot of people who are less mature than
you. They are less mature than you because they're willing to risk their
financial future just so they can feel that they are cool guys who own a
restaurant.

It's always dangerous to compete with people who are less mature than you
because they are okay with losing the important things in life in order to
beat you, so you'll be forced to either go down to their level or lose to
them. It's like playing chicken against someone who has suicidal tendencies.

~~~
bagacrap
This was more or less the point of the article, although the article's author
was less slanderous of the competition.

------
jimmywanger
The fact of the matter is, this article explains why restaurants are money
losing.

It's an intrinsic good to own a restaurant. You get satisfaction from simply
owning a restaurant, no matter if you make or lose money.

It feels good to treat your friends, and get preferential treatment at your
own place. Making money sometimes is secondary.

It's sort of like programming for the games industry. A lot of people just
want to be in the games industry, cause it's "cool". That's why they accept
long hours and poor pay.

The ROI for a scrap metal yard or a sewage plant will always be higher than
the ROI for a comparably priced restaurant.

------
NumberCruncher
Spot the guy ho knows what he is doing!

\- Andrew Yang, the principal investor of a successful restaurant [...] who
comes from a restaurant family

or

\- Gary Sernovitz is a writer and a managing director of a private-equity firm

~~~
M_Grey
Everyone who thinks about opening a restaurant should be forced to read
'Kitchen Confidential' half a dozen times, especially the sections about what
it actually takes to win in the business.

------
fitzwatermellow
Counterpoint. The Halal Guys going from a single cart to 300+ restaurants:
"How Halal Food Became a $20B Hit in America"

[http://www.bloomberg.com/news/articles/2016-09-14/america-
lo...](http://www.bloomberg.com/news/articles/2016-09-14/america-loves-muslim-
food-so-much-for-a-clash-of-civilizations)

In their case, it was certainly _because_ of the overpowering yet enticing
smell of fresh grilled spicy lamb kebobs wafting across the block that drew
the "I wouldn't eat meat off the street in a million years" nabobs ;)

------
johansch
Here's the real content, found at the end:

"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."

~~~
telotortium
And of course, the explicit connection drawn to the _raison d 'être_ of this
site: "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."

------
1024core
The only way you can make money in a restaurant is via booze. I know a couple
of restaurant owners, and they admit it: if they just sold food, they'd be
losing money. The profit margins on alcohol are insane. A $1 bottle of beer
can easily go for $5 (a 400% markup). And wine? A decent $12 bottle of wine
will easily fill 6 glasses, at $7 a pop.

So if you're planning on opening a restaurant, be sure to get your liquor
license. You'll depend on it.

~~~
cylinder
The markup is the same on food. It's just that people only order one main dish
each but can order several drinks, and it's altogether another additional
revenue source that you need.

~~~
1024core
If you read the article, you'll see that the markup on food is nowhere close
to alcohol. He claims a < 3% profit.

------
paulsutter
You know those tiny lunch places in downtown San Francisco? Closet-sized and
to-go only? That's what people should try as their first restaurant.
Unfortunately, people usually try that second.

------
lisper
I don't get it. If your gross margin is 3% you can raise your prices by 6% and
_triple_ your operating income. Are NYC restaurant-goers really that price-
sensitive?

~~~
beachstartup
the problem is all these stats are lumped together for all types of
restaurants all over the spectrum.

yes, a high end place can easily raise prices and make more money. plenty of
them do exactly that.

low end places are squeezed both on supply and demand side, and can not easily
do this, or the owners are simply afraid.

if you raise your prices by 6% but business drops by 10% because your
customers are price sensitive, and the same month you are hit by an unexpected
cost, then what?

------
tptacek
_You can’t own one-forty-second of the next Zadie Smith novel._

Really? It seems like you kind of can, these days.

I wonder also whether restaurants are the kind of investment that only works
if you can have a portfolio of them.

------
mturmon
OK, but done better by Anthony Bourdain in his famous book:

“To want to own a restaurant can be a strange and terrible affliction. What
causes such a destructive urge in so many otherwise sensible people? 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? Why venture into an industry with
enormous fixed expenses (rent, electricity, gas, water, linen, maintenance,
insurance, license fees, trash removal, etc.), with a notoriously transient
and unstable workforce, and highly perishable inventory of assets? The chances
of ever seeing a return on your investment are about one in five. ...

“The easy answer, of course, is ego. The classic example is the retired
dentist who was always told he threw a great dinner party. 'You should open a
restaurant,' his friends tell him. And our dentist believes them. He wants to
get in the business — not to make money, not really, but to swan about the
dining room signing dinner checks like Rick in Casablanca.”

------
bsder
The standard joke: "How do you make a small fortune in the restaurant
business?"

"Start with a large fortune".

------
lordnacho
> 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.

That's the key take-away (haha). I liken it to poker. If you're at a table
with an idiot, you'll get his money. If you're at a table with a bunch of
them, they'll get yours.

------
joshu
It feels like building owners capture basically all of the excess profit of
restaurants, which is to the significant detriment of the quality of a
neighborhood.

------
oneloop
> 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 (...)

24,000 restaurants is not demand, it's supply. This is the Mr. Market fallacy.

~~~
adevine
The author understands that. "That demand" is referring to the tourists,
residents, young people, etc.

~~~
oneloop
I understand that the author understands that "that demand" is tourists. What
I meant is that you can't measure the amount of demand (tourists) by looking
at the amount of supply (restaurants), which the author does.

~~~
CPLX
That's not a sound way of thinking about economics.

Seeing that a certain level of supply remains stable over time tells you a
great deal about the amount of demand present.

Of course it does. Much like looking at the skyline allows you to make some
basic assumptions about aggregate demand for office space in Manhattan versus
Kearney, Nebraska.

~~~
grkvlt
Except where it doesn't work, such as in the restaurant business, where some
non-trivial percentage of the supply is superfluous and will go out of
business. Of course, they will be replaced, so there is an argument that it is
at least stable, even despite the high turnover - perhaps that's what you're
meaning?

------
canada_dry
And for anyone dreaming-the-dream, but thinking a hip new food truck is the
way to go... a reasonably well equipped truck will run you upwards of $400K+.

~~~
johansch
Or quite a lot less:

[http://prestigefoodtrucks.com/custom-food-trucks-for-
sale/](http://prestigefoodtrucks.com/custom-food-trucks-for-sale/)

------
misiti3780
I have always wondered why more people in NYC dont start with food trucks.
That would be the most "antifragile" approach to starting a restaurant --

if the food isnt working, change it, if the location isnt working, drive
somewhere else

you could approach the restaurant game like you are a/b testing a sign up page
until you got it right, then nail down a location etc.

disclaimer: I have never worked in the food industry

~~~
wmil
There's a long wait list for street food vendor permits, so it's not as simple
as you think.

But the bigger issue is that's it's glamorous to own a restaurant. You can
take your friends there and brag about owning it.

Taking your friends to your poutine truck just doesn't impress them.

~~~
spacehome
> There's a long wait list for street food vendor permits

Maybe there shouldn't be?

------
oneloop
The author writes as if he was looking for entertainment, not profit. The
journey from investing* to losing half of it over 7 years does sound
entertaining, so I guess he got what he wanted.

* he says he invested "a car", so $10-40k?

------
nxzero
Only restaurants I've known that did well owned the real estate they were in
or were super cheap high margin places that were popular with a good location.

Lots of restaurants are just fronts for money laundering.

~~~
solidsnack9000
> Lots of restaurants are just fronts for money laundering.

I've heard this before, but I've never been able to find any corroboration.

How does it work? Half your palettes of milk never get delivered?

~~~
nxzero
Correct, half of the pallets get delivered and the dairy farm is owned by the
launder too via a series of shell companies.

Best way to learn about money laundering (ML) is to study anti-money
laundering (AML), since most laundering outfits aren't going to write a book
about how they do what they do.

Most interesting thing about ML is that in cooking the books, they've got to
keep very good records of what's been done, otherwise they've got no idea
what's going on; which is counter intuitive, since you would think they would
not keep records.

------
rgovind
What are some good resources to understand costs of setting up a restaurant in
bay area? I know the general concepts involved, but its hard to get specific
info like labour rates, rents etc

------
qaq
Does this hold true for bars as well?

~~~
dejv
I am in wine business (owner-winemaker of small winery) and it hold true, so I
guess it applies to bars as well

~~~
qaq
that's sad, I guess I need a new retirement idea :)

------
trendia
thrill is misspelled

(ignore this post)

~~~
themartorana
Two posts down from a missing apostrophe as I write this. Am I being trolled?

~~~
ProxCoques
I think "trill" would actually make a better headline. Reminiscent of little
birds...

~~~
fokinsean
or Houston hip hop

------
theonething
So you don't think obeying the law is a good thing? Don't you think
regulations exist for a reason? In the case of the medical field for example,
I'm very happy it is heavily regulated and I would expect everyone in that
field to follow those regulations.

Now if you think think some of your industry's regulations are unreasonable,
that's a whole other discussion. But it seems like what you are complaining
about here is that your business has to follow rules/law/regulations.

~~~
newmanships
I don't think that's what he means at all. Nowhere in his statement does he
say he shouldn't have to obey the law. Think the complaining is more about the
vast amount of regulations that there are. I'm sure you break laws on a daily
basis that you have no clue even exist (if you live in the US).

~~~
tptacek
There's overly complex regulation, and then there's "this type of business is
required to have an air filtration system and yours has been operating without
one for months".

My brother just opened a coffee roaster and cafe in suburban Chicago. It's
just him, my sister in law, and a couple friends, none of them with any
hospitality experience. There were a lot of regulations, and they had to go
several rounds with the city during their build-out. But they got through it.

The weird thing about the comment upthread is that they were "forced to
install" a filtration system. How did that get past inspection? The dumb
little coffee shop --- no food, no cooking smells --- had to have one just to
open up.

~~~
wtbob
> There were a lot of regulations, and they had to go several rounds with the
> city during their build-out. But they got through it.

So far as you know. The problem is that it's entirely possible that there's
some little-known codicil of some code which they are in violation of, the
rectification of which could at the outside cost as much as they've already
invested.

~~~
tptacek
I have friends running small food businesses in Chicago --- I was an investor
in one of them, a butcher --- and while my friends have run into problems
after inspections and suchlike, none of them have been shut down or really
jeopardized in any way. The inspection drama I've seen has, I hate to say it,
been mostly reasonable.

(The neighborhood complaints, less so.)

Am I just "lucky", and this is a commonplace problem with other people's
companies?

~~~
wglb
For a sample size of two, one a painting and repair garage, and another a
trucking company, the level of annoyance and apparent post-facto requirements
for opening these businesses were right up to the threshold of madness.

------
Mendenhall
Bad math edit :)

~~~
adevine
Your math is way off. 2 million annually works out to about 40k a week, so not
sure where your 1600 a day comes from.

~~~
Mendenhall
In my head I divided by 52 but then for some reason divided again by 4
thinking that was per month.

