New York City Restaurant Economy 2009

[daisy17]

I'm not sure I agree that higher end restaurants are dropping like flies here. Fiamma is the only one I can think of. Steve Hanson's restaurants are not exactly illustrative of the places most of us spend time at though. Just ask weinoo.

Most of the restaurants and cocktail bars I frequent seem to be very busy - at 6:20 on Friday I snagged the last open bar stool at D&Co, so that hasn't changed too much. The Spotted Pig and Lupa are always packed when I'm there, ditto Ippudo, Rai Rai Ken and the Momofukus. Sripraphai was hopping two weeks ago. By all accounts you can't get into Co. These are not expensive places though (some are the absolute opposite), and I have heard that many places that seem busy are seeing much less spent per cover than a year ago. I believe that. New Yorkers pretty much have to go out if they want to be social, but everyone I know is trying to spend less money on dining right now. I can't remember the last time I went for a really expensive meal. On hold for now.

I definitely have noticed varying degrees of fullness in the same restaurant in recent weeks - full on one visit, not the next (Irving Mill and Scarpetta come to mind). I've heard about hour long waits at L'Artusi but when I was there that wasn't the case. My sense is that it's even more desirable to eat at the bar in this economy - it lends itself well to spending less on a meal. On the other hand, there is a disturbing trend of availability of tables on Open Table. You used to never see 7:30 7:45 8:00 pop up as available for many places. Common occurrence right now.

[oakapple]

Here where I live - northeast Florida - a lot of places are dropping like flies too.

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Just to expand on what Daisy said, it's remarkable how they are not dropping like flies. Really, Fiamma is the only closure "blamed on the recession" that was important outside of its own neighborhood—the only one I can think of that had broad acclaim. I am not so naive as to believe it will be the last one, but I am surprised there haven't yet been more.

By the way, I put "blamed on the recession" in quotes because, even in the best of times, there is a high attrition rate in the restaurant industry. If you close today and mention the tough economy, nobody is going to dispute it, but some of these places might have closed anyway. I am not saying Fiamma is necessarily one of them; honestly, I have no idea.

Long-standing successes are still successes. It isn't suddenly easy to get into The Spotted Pig or the Momofukus, though the owners may be seeing an impact in terms of fewer expensive bottles of wine sold.

Daisy mentioned Irving Mill, but that place was never a tough ticket, aside from the first couple of months. It's a perfect example of a restaurant that might have had troubles even in a hot market.

[daisy17]

Daisy mentioned Irving Mill, but that place was never a tough ticket, aside from the first couple of months. It's a perfect example of a restaurant that might have had troubles even in a hot market.

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Oh, completely agree. I was there right before New Year's and the place was empty. Last week it was completely packed at 9pm - every table and the bar. I wouldn't have expected it but was pleased to see it.

[Felonius]

I think we will see a lot of restaurants closing if the economy continues on its current course through 2009 (which appears all but certain at this point).

It won't be places like Lupa, Momofuku, Spotted Pig, or Jean-Georges. There are 8 million people in this city, and there will always be enough people flush with cash to continue to keep the top echelon of popular restaurants busy. My guess is a lot of the mediocre upscale neighborhood restaurants, as well as some of the really high end/expensive ones that aren't favored by the press will go first. It will be a flight to quality (or at least quality as perceived by Joe Public).

While I don't have a crystal ball, it's not hard to forecast that things in NYC are going to get substantially worse in 2009. The financial sector drives much of the NYC economy, and the pain is just beginning there. There is always a lag effect, and the financial crash of Fall '08 is just now beginning to hit New York in terms of layoffs and unpaid bonuses. I think many people were hoping things would turn around, or were simply enjoying a last hurrah before allowing reality to set in. My friends in finance who were still eating expensive steak dinners in December are now staying home in droves, or choosing inexpensive options for dinner. That's not even counting the 20% who lost their jobs in the past month and are probably going to have to leave NYC to find work. On top of the Wall Street/finance debacle, we now have a recession that has spread globally, which may eliminate the droves of international tourists seen in 2008 chasing the weak dollar and dining out in NYC. Finally, with corporations in nearly every industry under cash flow pressure, the expense accounts and client dinners will be drying up.

I've had conversations with owners/managers of a few of my favorite haunts, and all of them have seen a significant downturn in business in January. I also noticed, as I walked up Amsterdam in the 80's on Friday night at around 8:30, that a good number of restaurants were practically empty (maybe 20-30% of capacity). There aren't many restaurants paying NYC lease prices who can survive for long with empty tables prime-time on Friday night. For many places, I suspect their only hope will be concessions from landlords who realize that an underpaying tenant may be better than no tenant. This was what recently saved the "Emerald Inn" from extinction.

I hope my prediction is wrong, but I just can't see how you can pull $20-30 Billion of income out of NYC payrolls without serious consequences for restaurants and consumer spending.

Edited February 2, 2009 by Felonius (log)

[docsconz]

On top of the Wall Street/finance debacle, we now have a recession that has spread globally, which may eliminate the droves of international tourists seen in 2008 chasing the weak dollar and dining out in NYC.

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Compounding the effects of the poor global economy keeping international visitors away from NYC is the fact that the Euro and the Pound have weakened considerably compared to the dollar. The dollar is the strongest that it has been for some time compared to those currencies.

[Fat Guy]

I think, certainly, 2009 will test how elastic the business model is for many restaurants. And it will test the resourcefulness of restaurant owners.

Most of a restaurant's costs are elastic in one way or another. Some are automatically elastic, for example if fewer customers come the restaurant orders less product and brings on fewer servers for fewer shifts. Some are conventionally thought of as inelastic -- rent, utilities -- but when times get really tough these things turn out to have some elasticity as well. As Felonius noted, in a major downturn some landlords have no choice but to be negotiable. I've also heard tell of some landlords accepting shares in a business in lieu of some rent. And I know of one place that is offsetting rent by renting some kitchen space to a pastry operation during the hours that space is not used. Improved efficiency and conservation can reduce utility costs, not to mention those costs are falling anyway on account of the huge recent drop in oil prices. Food costs may be slipping a bit too, and it's also possible to be more efficient and clever in use of ingredients -- I hear time and again from chefs about how they saved 20% just by butchering something more efficiently or whatever.

The smartest restaurateurs are implementing multi-pronged strategies to cope with the recession. You look at someone like Waldy Malouf at Beacon, and he has been planning for this all year. He added the burger bar, the kitchen counter, the Sunday suppers with reduced wine pricing and BYO, various special events, the $25 coupons, an overall reduction in wine list pricing and probably a bunch of programs I don't know about. And he has made sure the members of his service team are his partners in getting through the recession, so they are all pulling together to accomplish whatever can be accomplished within current constraints. Who knows what will happen to Beacon over the course of a seriously long-haul recession, but certainly whatever happens Beacon will have a lot more longevity than it would were it not so well managed.

Another thing worth noting is that people are still dining out. New Yorkers dine out a lot even in the worst of economic circumstances. And tourists are still coming to New York City -- those tourists typically eat 100% of their meals out. It may very well be that the same or a similar number of meals out per week continue to be consumed versus same-month a year or two ago. The bigger issue is what consumers eat for their meals: the restaurants they choose, and what they order at those restaurants.

The biggest shifts I hear about anecdotally from industry people are: 1- consumers shifting down a tier in terms of fanciness and cost; and 2- consumers at a given restaurant spending less per cover especially on wine.

In addition, who goes out of business and who doesn't can depend more on financing arrangements than anything else. There are some restaurants that are so heavily leveraged that, if their gross drops a few dollars a month, they all of a sudden can't service their loans and a cascade effect kicks in where they're quickly done for. There are other restaurants that have little or no debt, or are able to restructure existing debt. Those restaurants have a much better chance of survival.

[Felonius]

Steven, you hit on several very important points. The debt load on any business is arguably the #1 factor in the survival equation. That debt is generally a fixed cost (not counting a bank workout or bankruptcy), and the only thing keeping many businesses (including mine) from going under right now is the fact that the Fed has brought interest rates as low as possible. There are a lot of businesses that can't lose 20-30% of their revenue and still break even, no matter how they slash variable costs for food and labor. I'd guess that there are many restaurants in NYC right now that are off by that much or soon will be, through a combination of decreased customer volume and a lower average ticket as customers choose less pricy wine and menu options. As Steven mentioned (and I've heard the same through industry contacts), even though many places are still busy, their customers have significantly decreased their average spend. They are splitting entrees at cheaper places, foregoing expensive wine at the high end ones, and ordering fewer cocktails.

When I look at how expensive many NYC restaurant buildouts are, then add in the lease prices, I wonder how these places can survive right now. For example, I have heard that a new local deli in my neighborhood spent $1.5 million to upgrade a former restaurant space for their needs, and have a $55,000 per month lease. Depending on their loan terms, that's $65-70K per month they'll have to earn BEFORE they even get to payroll, food cost, utilities, insurance, taxes etc. I'm guessing that they'll have to do at least 300 covers per day just to break even. That's just a neighborhood deli, I can't imagine the fixed costs for newer high end places like Del Posto, Buddakan, Morimoto, etc. Older businesses who have paid down some debt or have cheaper long term leases will have a better chance at survival. I think that many of the newer restaurants, those opened during the end/height of the financial bubble in 2007, wll be the first to go. Their business models were built on expectations of an economy that has largely evaporated in the past 5 months.

As I mentioned before, unforunately the real crunch is just now starting. The holidays are over, the reality of a long term recession is sinking in, and the layoffs are just now beginning to cycle through the system. In addition, it takes a while for the losses at any business to add up, for cash reserves to be depleted, and for banks and landlords to begin the foreclosure process. The real impact of the Fall meltdown won't likely hit in full force until Spring/Summer 2009.

Edited February 2, 2009 by Felonius (log)

[oakapple]

I suspect that lenders will be willing to work with restaurants to renegotiate payment terms—up to a point. As long as the restaurant is still able to pay something, the lender is probably better off than if they foreclose and get stuck with a vacant property.

[cinghiale]

Some are conventionally thought of as inelastic -- rent, utilities -- but when times get really tough these things turn out to have some elasticity as well.

A Times piece seems to confirm this:

And so some small businesses are finding a silver lining in the recessionary clouds: they suddenly have leverage with their landlords. Six months ago, for instance, the landlord of the Holland Bar in Hell’s Kitchen terminated the lease because he was confident of finding a higher-paying tenant or developing luxury condos. But when he found no takers, he offered the space back to the bar, at a 20 percent increase in rent. The Holland reopened last week.

One reason:

Indeed, many landlords find themselves in a bind because they paid stiff prices for property in recent years and need to cover hefty mortgage payments. On average, Manhattan landlords paid $3,348 per square foot for retail properties in 2008, compared with $538 per square foot in 2004, according to the brokerage Cushman & Wakefield.

Yet:

So even now, amid the deepest recession in decades, many landlords are trying to raise rents on tenants who may have negotiated leases a decade ago. Rising rents caused the restaurant Ruby Foo’s Upper West Side location to close on Jan. 14. And the Knitting Factory nightclub and Cendrillon, a pan-Asian restaurant, are moving to Brooklyn in search of lower rents. (Cendrillon will reopen under a new name, Purple Yam.)

[robyn]

Also keep in mind that it is no longer chic to flaunt money anywhere - even if you have it. Especially if you have friends who are in trouble. Robyn

[sickchangeup]

First Michelin Star'ed place bites the dust:

http://dinersjournal.blogs.nytimes.com/200...sel-is-closing/

[oakapple]

First Michelin Star'ed place bites the dust:

http://dinersjournal.blogs.nytimes.com/200...sel-is-closing/

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Not the first: Fiamma had one too.

[sickchangeup]

Oh yeah, was looking at the '08 list.

[Fat Guy]

I have no idea whether the methodology here is credible -- I imagine it's questionable given the scope of the claim -- but a New York 1 News poll indicates the half of New Yorkers have stopped dining out.

[taion]

I have no idea whether the methodology here is credible -- I imagine it's questionable given the scope of the claim -- but a New York 1 News poll indicates the half of New Yorkers have stopped dining out.

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The blurb about methodology doesn't mention anything about a cell phone sample; if no such sample was taken, then the results are likely to be unreliable.

[robyn]

Just FWIW - every restaurant we have dined at since we've arrived (l'Atelier, Corton, Cafe Boulud, Felidia) has been packed. So I imagine any problems that might exist are affecting mostly second choice/second tier less known places. Robyn

[Sethro]

Moderator's Note:  We've moved this and the next 7 posts over from the Cru topic, as they seem more appropriate to the Restaurant Economy 2009 topic.

If you are an ambitious fine dining restaurant in Manhattan, circa 2009, you are bleeding money. Period.

How's a giant off-premy wine cellar sound, now that nobody wants a bottle over $50, and sommeliers have to haggle with diners table-side?

"Close to the brink" is a far more relative term nowadays. How committed/indifferent are the backers? How many months in the red is sustainable? The answer better be closer to 24 than 12. Especially if the primary investors have already made their returns (see: credit bubble, 2006-2008).

[oakapple]

To the best of my recollection, there haven't been any notable deals coming out of Team Cru, e.g., 3 courses for $35, or that sort of thing. I do not see the usual signs of desperation.

[Sethro]

To the best of my recollection, there haven't been any notable deals coming out of Team Cru, e.g., 3 courses for $35, or that sort of thing. I do not see the usual signs of desperation.

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Hopefully they are amongst the first to realize that those measure don't help the bottom line and do look desperate.

You increase your cover count meaning you need to keep more staff on the floor. However these covers expect to pay exactly the pri fixe cost (plus an 18% tip) and maybe one wine by the glass. You lose money in the short term.

[taion]

To the best of my recollection, there haven't been any notable deals coming out of Team Cru, e.g., 3 courses for $35, or that sort of thing. I do not see the usual signs of desperation.

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Interestingly enough, one of the servers mentioned that the reason they no longer listed the $125 tasting was to give the impression of a lower price level at the restaurant. I don't know if that's really either here or there, though, and it's hard to fault a restaurant for moderately cutting their price point and level of ambition right around now.

[oakapple]

To the best of my recollection, there haven't been any notable deals coming out of Team Cru, e.g., 3 courses for $35, or that sort of thing. I do not see the usual signs of desperation.

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Hopefully they are amongst the first to realize that those measure don't help the bottom line and do look desperate.

You increase your cover count meaning you need to keep more staff on the floor. However these covers expect to pay exactly the pri fixe cost (plus an 18% tip) and maybe one wine by the glass. You lose money in the short term.

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I find that excruciatingly difficult to believe. Dozens of restaurants have independently reached the conclusion that such deals are beneficial. You are claiming that they all, in fact, lose more money than if the seats were empty? And apparently they are too dumb realize it? Sorry, I don't buy it. Edited June 2, 2009 by oakapple (log)

[Sethro]

To the best of my recollection, there haven't been any notable deals coming out of Team Cru, e.g., 3 courses for $35, or that sort of thing. I do not see the usual signs of desperation.

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Hopefully they are amongst the first to realize that those measure don't help the bottom line and do look desperate.

You increase your cover count meaning you need to keep more staff on the floor. However these covers expect to pay exactly the pri fixe cost (plus an 18% tip) and maybe one wine by the glass. You lose money in the short term.

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I find that excruciatingly difficult to believe. Dozens of restaurants have independently reached the conclusion that such deals are beneficial. You are claiming that they all, in fact, lose more money than if the seats were empty? And apparently they are too dumb realize it? Sorry, I don't buy it.

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Well I will just say "trust me". I've had the pleasure of being involved in enough failed restaurants to see these things pretty clearly. Its not a matter of being too dumb to realize that you are spending more money than you are making with these deals, its the instinct to try ANYTHING when your dining room is empty. Plus, most of these deals are conceived by your PR, who is focused solely on keeping your name in print but are not privy to your F&B or labor cost reports.

Edited June 2, 2009 by Sethro (log)

[Pan]

Well I will just say "trust me". I've had the pleasure of helping to close 4 restaurants in the past 5 years. Its not a matter of being too dumb to realize that you are spending more money than you are making with these deals, its the instinct to try ANYTHING when your dining room is empty. Plus, most of these deals are conceived by your PR, who is focused solely on keeping your name in print but are not privy to your F&B or labor cost reports.

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What about the longstanding very gently-priced prix fixe at Jean Georges? I seem to remember Fat Guy saying something like that they'd lose money on that, except that the prep cooks would already be prepping for dinner, anyway. Seems dubious to me, but I'm no expert on the inner workings of restaurants. Do you think Jean Georges is actually losing money on lunch? And they're hardly the only high-end restaurant with a fairly longstanding gently-priced prix fixe. I feel sure you could give some more insight into why prix fixe deals do not all have the same effect on a restaurant.

[Sneakeater]

Sethro, as a big fan of the last place you worked (and in particular your work there), I'd draw a distinction between places that once were very crowded and are now feeling a pinch, and places that were floundering to begin with or never established themselves.

Edited June 2, 2009 by Sneakeater (log)

[Sethro]

Sure, and that distinction would be the amount of time they actually enjoyed being in the black. I don't know anyone at Cru, so I don't want to imply that I have some insider info, but I'd have to assume that they were making money for a few years. That's a pretty good buffer to work against. Obviously every restaurant is in the red their first year (well, maybe not like Fatty Crab UWS or Momo Ko, but those are exceptions) so if you happened to open on the first day of the great depression like we did then you are screwed a lot faster. But I believe most high-priced restaurants, old or new, are screwed regardless.

Jean Georges is a totally unique example. They do so much expense account dining at lunch due to their notoriety and their location that it probably offsets the pri fixe. Also, that is a very famous pri fixe that probably draws a consistent crowd. Do you think that many people will hear about or be compelled to prioritize Cru's pri fixe?

Bear in mind that the profit margin for most of these fine-dining restaurants is in the 10-13% range, unless they have a huge private dining program (which nobody does anymore). So "feeling the pinch" could easily mean something to the effect of losing 100-200k a month. I supposed how sustainable a rate that is varies from case-to-case, but it leaves you at the bottom of a BIG hill regardless.

I hope I'm wrong but I haven't heard any positive speak in a while.

Another overlooked aspect is the effect on FOH. Figure you manage to increase your covers at the cost of dramatically lowering your average check. That means you have to have enough staff on the floor to keep quality consistent (we are talking about fine dining), and their payout point-value is going to drop like lead. Now your expediter, for example is getting four points at $5 a point. If he doesn't quit on his own, you are going to have to release him in order to keep the point-spread smaller, and keep your captains on board. This is possible since captains, servers, runners and busers are all well below overtime hours to begin with. The result is you wind up with fewer FOH staff trying to do multiple jobs simultaneously (at the cost of service quality), and a bunch of unemployed people.

Fine dining restaurants get killed on labor costs to begin with.