New York City Restaurant Economy 2009

[Fat Guy]

The New York City restaurant economy has been surviving a year of recession pretty well for, I think, two reasons:

First, for a significant portion of 2008 foreign money poured into the system on account of currency valuations, providing restaurants with substitute customers even as domestic clients spent less. (Also, overseas investors supported several new ventures.)

Second, just as the foreign currencies (and economies) started declining, holiday season was upon us.

So, while revenues have been down for restaurants we have not seen a large-scale die-off in New York restaurants.

Now it's January. What's going to happen? I thought we could use this topic to speculate and also to track significant economic events in the New York restaurant business during this first part of the year.

[slkinsey]

In This NY Times article, Ben Benson is quoted as saying that "up to date we’re off 6.2 percent . . . In the restaurant business, if you’re off between 5 and 10 percent, you’re knocking profits down 25 percent. What surprises me is our food cost has not come down." Another example he makes is that "last night we did 350, which is terrific. Last year on the same night, we did 450." He concludes saying that "in the '89 recession we were resistant. After 9/11 we bounced back. But this is lingering. Last summer, we were supported by the Japanese and European tourists who thought we were an inexpensive restaurant. I’m concerned about whether they’ll be back this summer."

[oakapple]

Even in the best of times, the restaurant industry has a relatively high failure rate. When chefs/owners are asked the reason, they seldom blame themselves. You don't hear, "Our food and service sucked." If they can, they come up with other reasons.

So when a place closes, and the chef says, "The recession killed us," that may or may not be true. Many new places around 6-18 months old will be hitting the natural inflection point that hits all new restaurants. By then, the folks who only patronize the Latest Thing will have moved on. If the restaurant hasn't developed a following by then, it probably never will.

I'm not saying we won't see a lot more restaurants closing than usual. I'm just saying that they won't all be the recession's fault, and they certainly aren't just because the chef/owner says so.

Edited January 2, 2009 by oakapple (log)

[raji]

Great topic.

I'm no economist but in my opinion we've been in a recession longer than that hidden by manufactured jobs numbers, overextension of credit, etc... and that as soon as true unemployment numbers are released and it hits double digits, it will be considered a DE-pression marked by the stock market crash and mortgage crisis, and we're already seeing reduced availability of goods, services and credit....

Again, I'm no economist, but i write this because it feels like a lot of restaurants are on their last legs. Hardly any are hiring, trepidatious ones are shuttering left and right, expensive restaurants are offering new specials and prix-fixes to get people in the doors. However, without a service industry "bailout", in the long view I don't know how many of them can sustain. The Wall St. bailout will keep those popular with bankers in business longer, but that is only effective as trickle-down economics is, i.e. not that much.

Any devaluation of the dollar and increased international tourists traffic helps the places that cater to tourists, but as best I can tell, the types of places that get a lot of writeups on here benefit from domestic tourism rather than international. How many posts on here have we read from people in other cities, who found this board and educated themselves on what the locals find exciting, and then made a trip just to go to those places? While the type of tourism that is thriving now will benefit the institutions, and places that rank high in Zagats and other lists, and get a lot of press.

That said, the economic downturn is global. You'd think I'd be ecstatic that the Yen-to-dollar is at 88, whereas it had hovered around 110 for years now. Japanese tourists almost invariably seek out Japanese food in NYC, just so they can gloat to their friends in NYC and back home that they can get something much better for 1/4 the price in Japan. However, the Japanese began using the "R" word the same time we did, and there is a lot of doom and gloom over there. So even though a shopping trip to NYC is an absolute steal for a lot more Japanese tourists, many are stuffing their mattresses.

As for the euros, midtown was teeming with more than usual around the holidays, but let's see if that sustains. I'm not as familiar with their economic status as I am Japan. I do know that they made it hard to get a table at safe Theatre-district restaurants.

Lots more Chinese tourists too - but they're usually middle-class by China standards so come on a very restrictive budget. I've noticed neighobrhood Chinese takeout places now putting blackboards outside, in chinese, advertising that they have a real chinese chef and what dishes he makes. I'd like to order those...

Recently was in Times Square, and overheard "Should we go to the M&M store now, or directly to the Olive Garden". I think that's an unfortunately large quotient of our domestic tourism.

All-in-all, I think in short order NYC is going to look a lot like it did in '92 again - a lot less selection, survival of the thriftiest, some of our icons shuttered and a distant memory.

I do hope I'm wrong...

Edited January 2, 2009 by raji (log)

[oakapple]

Any devaluation of the dollar and increased international tourists traffic helps the places that cater to tourists, but as best I can tell, the types of places that get a lot of writeups on here benefit from domestic tourism rather than international. How many posts on here have we read from people in other cities, who found this board and educated themselves on what the locals find exciting, and then made a trip just to go to those places?

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It is worth thinking in terms of visitor traffic, rather than tourist traffic, because a lot of restaurants cater to business travelers—people who are visitors, but not necessarily tourists. Business traffic will, of course, be way down this year, and those who travel will probably have lower expense accounts.

We may hate to admit it here, but many international visitors rely on the Michelin Guide and similar publications, not food boards. That sort of makes sense. If I were planning a trip to France, I probably wouldn't ask for advice on a French bulletin board. The fact that I speak their language poorly is only one of the reasons.

The restaurants that appeal to visitors tend to be those with celebrity chefs, those with long-standing reputations (whether deserved or not), those that are near major attractions, or those highly recommended in the major media and published guides.

I was surprised when I dropped into Keens Steakhouse at around 5:30 p.m. on a weeknight in December, and it was already almost full. (Keens, in case you don't know, is enormous.) I heard a lot of non-American accents, and saw a lot of people with shopping bags. The eGullet thread for Keens is pretty anemic, and it didn't exist at all until Frank Bruni reviewed it. The people who fill up Keens aren't getting their advice from eGullet. It has a practically recession-proof reputation.

Edited January 2, 2009 by oakapple (log)

[raji]

We may hate to admit it here, but many international visitors rely on the Michelin Guide and similar publications, not food boards. That sort of makes sense. If I were planning a trip to France, I probably wouldn't ask for advice on a French bulletin board. The fact that I speak their language poorly is only one of the reasons.

The restaurants that appeal to visitors tend to be those with celebrity chefs, those with long-standing reputations (whether deserved or not), those that are near major attractions, or those highly recommended in the major media and published guides.

Right, I think we're basically saying the same thing, I said

"While the type of tourism that is thriving now will benefit the institutions, and places that rank high in Zagats and other lists, and get a lot of press."

I was surprised when I dropped into Keens Steakhouse at around 5:30 p.m. on a weeknight in December, and it was already almost full. (Keens, in case you don't know, is enormous.) I heard a lot of non-American accents, and saw a lot of people with shopping bags. The eGullet thread for Keens is pretty anemic, and it didn't exist at all until Frank Bruni reviewed it. The people who fill up Keens aren't getting their advice from eGullet. It has a practically recession-proof reputation.

Well, I'm aware of Keen's the way I'm aware of the Old Homestead or Smith and Wollensky, or the old Howard Johnson's in Times Square, for that matter, but maybe that's cuz I'm a NYer. There is seemingly always a time and a place for them at one point or another, and they're NY institutions and don't follow any trends....

That said, by both our criteria, we'll probably lose some places we hold dear - with the economic outlook the way it is, some places simply don't have an upswing to look forward to, do they....

[Pan]

The credit crunch is bad for any business except maybe the repo man and bankruptcy lawyers (and, seemingly, CEOs fired from huge financial businesses). It seems a very safe bet that, as Raji says, some longstanding institutions will shutter their doors in the coming year. But I'd never put myself in the position of ignorantly guessing which ones that will happen to.

[oakapple]

I'd never put myself in the position of ignorantly guessing which ones that will happen to.

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I have some informed guesses, but it's unfair to the restaurants to name them publicly.

As a category, steakhouses could come under some pressure. A glut of them opened in the 2005–07 time frame. You hardly ever see a steakhouse close, but all of these places are pitilessly expensive, and many of them depend on expense account dinners.

[Pan]

I have some informed guesses, but it's unfair to the restaurants to name them publicly.

As a category, steakhouses could come under some pressure. A glut of them opened in the 2005–07 time frame. You hardly ever see a steakhouse close, but all of these places are pitilessly expensive, and many of them depend on expense account dinners.

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Might some of them lower prices in an attempt to stay open?

By the way, I agree that it's unfair to name them publicly if it's just a guess (~rumor).

[oakapple]

As a category, steakhouses could come under some pressure. A glut of them opened in the 2005–07 time frame. You hardly ever see a steakhouse close, but all of these places are pitilessly expensive, and many of them depend on expense account dinners.

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Might some of them lower prices in an attempt to stay open?

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The wine list strikes me as the best opportunity. It's hard give much ground on the price of the steaks, because beef is so expensive. Edited January 3, 2009 by oakapple (log)

[slkinsey]

As a category, steakhouses could come under some pressure. A glut of them opened in the 2005–07 time frame. You hardly ever see a steakhouse close, but all of these places are pitilessly expensive, and many of them depend on expense account dinners.

Might some of them lower prices in an attempt to stay open?

Some restaurants can lower prices, but it's unlikely they can lower their margins or their net profit and continue to stay afloat. This will manifest itself in lower-value dishes. The prices may be lower, but the food cost will be even lower. Portions will be smaller and less expensive/lower quality ingredients will be used. This is something that Ben Benson touches on in the NY Times article I linked to. You'll start seeing those 28 dollar plates of pasta that had a 5 dollar food cost come down to being 22 dollar plates of pasta with a dollar fifty food cost. Some places will not be able to do this, and steakhouses are among them. A prime steak costs what a prime steak costs. It's unlikely that the price of prime beef will come down significantly, and steakhouses already have the highest food cost in the industry. There's no way Peter Luger can reduce the price of their steaks enough to make a difference and make it up on volume. Similarly, they can't just start buying cheaper steaks. No one is going to go to Wolfgang's to eat a wet aged choice steak they could get at Sizzler.

[docsconz]

I think everyone here seems to be discounting that food costs will come down, but I thin it is likely that they will for several reasons. First, they are not immune to the laws of supply and demand. If people or businesses are not buying the products at higher prices, then the prices need to decline in order for the product to move. Second, the other major element that pushed food costs higher is energy. As that has declined so has the cost of raising the food. Of course, there is a delay there so with the exception of some products like lobster, that has yet to fully manifest itself. Third, with the real estate crash, rents are bound to come down making restaurant expenses likely to come down as well. Of course some restaurants are locked into expensive long term leases and may find it difficult to decrease that expense. Should they find themselves in trouble they should attempt to renegotiate those leases as the landlords may not have any better prospects should they lose that tenant.

The situation is bleak, to be sure, but it is not without hope.I believe it likely that some favorites will be lost in the shuffle, but those with good food and good business acumen should prevail. Those likeliest to fold are those who were already in trouble.

[slkinsey]

I think some food costs are likely to come down. Some, such as dry aged prime beef, are not likely to come down enough to make a difference.

As for rents in NYC... we'll see. Where I live in the upper reaches of the Upper West Side, I see any number of empty storefronts that had previously been occupied by tenants of long standing who were forced to vacate doe to exorbitant rent demands from the landlord (Oppenheimer Prime Meats being a good example). It's possible, but I won't hold my breath waiting for NYC landlords to reduce their rents.

[raji]

I think some food costs are likely to come down.  Some, such as dry aged prime beef, are not likely to come down enough to make a difference.

As for rents in NYC...  we'll see.  Where I live in the upper reaches of the Upper West Side, I see any number of empty storefronts that had previously been occupied by tenants of long standing who were forced to vacate doe to exorbitant rent demands from the landlord (Oppenheimer Prime Meats being a good example).  It's possible, but I won't hold my breath waiting for NYC landlords to reduce their rents.

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Sam you beat me to the punch - I was about to say, rents have NEVER gone down in NYC, greedy landlords would rather their units stay unrented and take the huge tax breaks on them then actually try to improve the community... and/or they'll offer free months or other incentives but they NEVER want to offer lower rents....... then again, this DEpression will be looked back upon as unprecedented

Some food costs that had been ridiculously hiked alongside the price of oil/gasoline might return to previous levels; it would be nice to have the $20 entree back

Edited January 3, 2009 by raji (log)

[oakapple]

Sam you beat me to the punch - I was about to say, rents have NEVER gone down in NYC, greedy landlords would rather their units stay unrented and take the huge tax breaks on them then actually try to improve the community... and/or they'll offer free months or other incentives but they NEVER want to offer lower rents....... then again, this DEpression will be looked back upon as unprecedented

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Landlords, like restaurants, are in business to make money. If it is in their enlightened interest to reduce rents, they will. (Free months and other incentives are rent reductions by another name.) If it is not in their interest, they won't, and shouldn't.

Rent, of course, is only one element of a restaurant's operating cost. If a restaurant is paying 33% of its costs in rent, and gets a 10% concession from the landlord, how significant is that? It means that 1/3rd of their costs just got 10% cheaper. For a failing business, that might be nowhere near enough.

[docsconz]

Sam you beat me to the punch - I was about to say, rents have NEVER gone down in NYC, greedy landlords would rather their units stay unrented and take the huge tax breaks on them then actually try to improve the community... and/or they'll offer free months or other incentives but they NEVER want to offer lower rents....... then again, this DEpression will be looked back upon as unprecedented

←

Landlords, like restaurants, are in business to make money. If it is in their enlightened interest to reduce rents, they will. (Free months and other incentives are rent reductions by another name.) If it is not in their interest, they won't, and shouldn't.

Rent, of course, is only one element of a restaurant's operating cost. If a restaurant is paying 33% of its costs in rent, and gets a 10% concession from the landlord, how significant is that? It means that 1/3rd of their costs just got 10% cheaper. For a failing business, that might be nowhere near enough.

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For a failing business maybe not, but for a business on the edge as many restaurants always seem to be, it may make all the difference in the world, especially if other costs go down. We are currently in a deflationary economy for better or worse. As a result the current pressure on prices across the board is downward.

[oakapple]

Rent, of course, is only one element of a restaurant's operating cost. If a restaurant is paying 33% of its costs in rent, and gets a 10% concession from the landlord, how significant is that? It means that 1/3rd of their costs just got 10% cheaper. For a failing business, that might be nowhere near enough.

←

For a failing business maybe not, but for a business on the edge as many restaurants always seem to be, it may make all the difference in the world, especially if other costs go down. We are currently in a deflationary economy for better or worse. As a result the current pressure on prices across the board is downward.

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I am just pointing out that a hypothetical 10% reduction of an item that's only 33% of the cost, amounts to about 3% overall. I doubt that any restaurant that closes has a mere 3% problem. A lot of things would need to change (though rent could be one of them) to keep such a restaurant in business.

[docsconz]

Rent, of course, is only one element of a restaurant's operating cost. If a restaurant is paying 33% of its costs in rent, and gets a 10% concession from the landlord, how significant is that? It means that 1/3rd of their costs just got 10% cheaper. For a failing business, that might be nowhere near enough.

←

For a failing business maybe not, but for a business on the edge as many restaurants always seem to be, it may make all the difference in the world, especially if other costs go down. We are currently in a deflationary economy for better or worse. As a result the current pressure on prices across the board is downward.

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I am just pointing out that a hypothetical 10% reduction of an item that's only 33% of the cost, amounts to about 3% overall. I doubt that any restaurant that closes has a mere 3% problem. A lot of things would need to change (though rent could be one of them) to keep such a restaurant in business.

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Agreed.

[markabauman]

AP article on Rainbow Room closing

[oakapple]

I was about to say, rents have NEVER gone down in NYC

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Sure enough, they're going down. Here's FloFab in the Times:

One factor that has been working in restaurateurs’ favor is the real estate market. Landlords are becoming more willing to negotiate.

“There’s been a shift of power, especially since October, and real estate has become a buyer’s market,” said Leslie Siben of JDF Realty, which specializes in restaurants. “With tens of thousands of retail tenants going out of business, restaurants are looking better and better, and every landlord wants to bargain.”

Edited January 7, 2009 by oakapple (log)

[raji]

Well, even then they might bargain down with free months etc. which gets you a lower <i>effective</i> rent, but that doesn't mean the number that goes on the lease is any different. Lowering that is truly a last resort and unprecedented in recent history

[docsconz]

Well, even then they might bargain down with free months etc. which gets you a lower <i>effective</i> rent, but that doesn't mean the number that goes on the lease is any different. Lowering that is truly a last resort and unprecedented in recent history

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The current economy is unprecedented in recent history.

[raji]

I'm no economist

Agreed.....

[robyn]

There was an article within the last couple of days in the WSJ about how higher and even some middle of the road New York restaurants (like Ruby Foos) are dropping like flies. I don't live in New York - but will visit in May. For those of you who live in New York - or travel there frequently - what's your opinion about what's going on?

Here where I live - northeast Florida - a lot of places are dropping like flies too. But a bunch are middle of the road or lower chains I will never miss. And some were high end places that really weren't worth the price. OTOH - we have our first dim sum place with carts ever for this area - and it is packed (we have a reasonably large Chinese population - and they know a good thing when they see it!). On the third hand - no 1-2 hour long waits to get into The Cheesecake Factory anymore. But enough of Jacksonville. What is happening in Manhattan (where I will spending most if not all of my time)? Robyn

[Mussina]

One person's view from a few days eating in NYC last week:

-Corton was a tough reservation to get and seemed to be doing a brisk business

-Jean Georges lunch was a full house - not an empty table

-Dirt Candy - only 18 seats but they were all filled

-Le Bernardin - about 1/2 - 2/3 full at lunch

-WD-50 - we had a 10:00 p.m. reservation and had to wait an hour for our table (happy for them - not happy for us!)