Richard's Rules for Restaurant-Based Revitalization: New business models are needed for 2025

* Maybe instead of "New business models are needed for 2025" what's required is a lot more conservatism and hewing to the old models.

SIN, Philadelphia.  "Experience ‘vibe dining' at SIN, a new Italian steakhouse in Northern Liberties," NBC10.

I wrote a piece in the series pretty recently, in December in "Richard's Rules for Restaurant (Food) Based Revitalization, Salt Lake City and DC's Chinatown."  

20 years later, perhaps the title is a bit of a misnomer.  When I first wrote about this in 2005, it was about "how do you get activation in neighborhood commercial districts when there aren't a lot of restaurants, and the neighborhoods are just beginning to improve, that is, attract more residents and businesses.

While that's still a factor today, now it's more about how do you keep restaurants alive as neighborhood commercial district activation devices, given the extranormal changes in business conditions.

The DC area Restaurant Association of Washington put out a study stating that 40% of DC restaurants are likely to close, and it attributes this to higher labor costs due to DC's change to a much higher minimum wage for employees.

But the fact of the matter is there are so many things going on: 

• yes labor, which is why some restaurants are shifting to counter ordering ("Seattle restaurants get creative to make numbers work after wage hike," Seattle Times)
• during covid, fewer people went out to eat, and it is difficult with narrow margins for restaurants to catch up for the revenue losses from those years
• post-covid inflation makes restaurant meals much more expensive--according to Crain's Chicago Business, restaurant meal costs have increased 30% over the past few years
• over-storing in that because restaurants are easier to open for entrepreneurs compared to other retail categories, many places have too many restaurants relative to demand
• one example of over-storing is food halls--which commercial property owners resort to because of a desire to activate empty space.  Although one advantage is the cost to open is less than a stand-alone restaurant
• revenues are down significantly, between more choices and a declining number of people going out to eat because of high cost meals (the Technomic food consultancy did a study finding 31% of the respondents were going out less often)
• downscaling, shifting patronage to lower cost restaurants, including take out from Whole Foods and Trader Joe's (DC now has 6 TJ's)
• with lower revenues, rents are too high--the metric is that a restaurant shouldn't pay more than 15% of its gross revenue as rent, but rents (and property values) haven't shrunk relative to the change in business prospects.

Lower revenue, both from too many competitors and the drastic increase in the cost of going out to eat,  and rents are what is making restaurants close.  Not crime, not necessarily higher wages (and sometimes a business model out of sorts with its location).

The last hurrah at Brookland’s Finest with Stephanie Coleman, wife of co-owner Tony Tomelden, being comforted by longtime friends Danica Petroshius and Lori Hamilton at the crowded bar. (Deb Lindsey/For The Washington Post)

The Washington Post has an article, "‘It’s just not sustainable’: D.C. restaurants pushed to the brink," about the closure of a reasonably good presumably popular neighborhood restaurant, Brookland's Finest.  Back when we lived in DC, we were patrons.

Part of the issue with restaurants like Brookland’s Finest is that they’re in neighborhoods with low population densities, says John Asadoorian, a retail real estate broker in Washington. Because of Washington’s height limits, communities such as Brookland have a smaller pool of potential diners to keep restaurants afloat when economic conditions force people to cut back on spending. These diners may also choose to spend their discretionary income instead on restaurants in nearby neighborhoods with more robust and trendy dining scenes, such as Union Market, NoMa or Shaw, Asadoorian says.

The pandemic also had a yo-yo effect on communities and the businesses they support, real estate experts say. At first, as downtown buildings shut down, office staff and other nonessential workers spent more time in their neighborhoods, which was a boost to businesses, says Tracy Hadden Loh, a fellow at Brookings Metro who tracks commercial real estate and development. (Tomelden, incidentally, says Brookland’s Finest didn’t benefit from the shift: “We’re ringing half of what we did before the lockdown. There’s a certain bunker mentality that was starting to be a fact of life in general.”) [emphasis added]

The article touches on drops in revenues

... “One of the biggest reasons why the restaurant industry suffered across the board everywhere is just the cost of going out to eat,” says chef and restaurateur Robert Wiedmaier, who closed two restaurants in Washington last year, including his fine-dining flagship, Marcel’s.

“It’s expensive to go out to eat. It used to be if you went to a really fine-dining restaurant — and it’s still like that — you’d drop $300 to $400,” Wiedmaier adds. “But now you’re dropping $250 for four at a mediocre restaurant.”

but focuses on labor.  Brookland's Finest revenue is half what it was in 2019.  No wonder it's closing.

Plus, I'd say Brookland's Finest pricing wasn't favorable to multiple times per month patronage--$28 for a burger and fries (the menu doesn't say fries are included); $27 (sandwiches $19 to $24 plus a side, I think), for spaghetti and meatballs (entrees from $24 to $33), etc.

Customers flocked to Brookland’s Finest before it closed. (Deb Lindsey/For The Washington Post)

Note that the rents/commercial property tax regime for DC retail businesses has been an issue more generally.

For years I testified that DC's property tax methodologies over value commercial property when it comes to retail stores.  

I stopped testifying when I realized that the city's elected officials either didn't understand or care.  They seemed able to focus on a legacy business or two worried about displacement (like Ben's Chili Bowl) but they couldn't grapple with it being a systematic problem affecting all retail businesses, thus requiring a systemic-structural solution.

-- "Displacement of retail businesses through increasing property tax assessments," (2005)

-- "Forcing Displacement by the disconnection of tax assessment models from public policy goals," (2005)

-- "Displacement of retail businesses through increasing property tax assessments," (2005)

-- "Dupont Circle's changing retail environment covered in today's Post ," (2006)

-- "Is there a link between historic designation and chaining up of retail in neighborhood commercial districts?," (2006)

-- "Testimony -- Historic Neighborhood Retail Business Property Tax Relief Act," (2006)

-- "The real estate market replicates commodity, not community," (2007)

-- "Avoiding the real problem with DC's property tax assessment methodologies," (2007)
-- "Cleveland Park Retail: My off-hand evaluation, the rents are too high," (2009)

-- "Revisiting the issue of neighborhood commercial district property tax methodologies," (2013)

-- "Further evidence of DC being an international/national real estate market," (2018)

The Virginia Inn is shown in downtown Seattle in 2019. (Erika Schultz / The Seattle Times)

As an example of the difficulty of renegotiating rents, a decades old restaurant in Seattle's Pike Place Market, the Virginia Inn, is closing because of intransigence by the Market, owner of the space, to renegotiate rents ("Virginia Inn, Seattle restaurant that predates Pike Place Market, will close," Seattle Times).

“The one sticking point that I had with our lease was the percentage-based rent that [the PDA] charges on top of the base rent and the maintenance,” Perez said, “and that is 6% of our total sales after $1.2 million.”

Getting back to the rent metric, a 30% or more increase in cost of goods sold, and a 5x increase in wages, with increased sales prices not accompanied by net revenue increases, the rent metric should be negotiated downward.  Especially for percentage-based rent, which should exclude no net revenue cost increases from the base.

A different issue is business models out of sorts with their location.  I wrote about this in the comments on the earlier blog entry, "Richard's Rules for Restaurant (Food) Based Revitalization, Salt Lake City and DC's Chinatown," with the failure of Makan in the Columbia Heights neighborhood of DC.  

And this about larger districts, "Experience economy/nightlife: Boston, LA, Pittsburgh, London, Santa Monica."  

Makan had average entree costs significantly out of step with being located in a neighborhood, not Downtown or key restaurant districts like a Georgetown DC, where patrons go out for special meals, often on business accounts (Also see "Why restaurants are fighting to avoid being special-occasion spots," Crain's Chicago Business).  Makan's meals cost $22 to $29, while Takoma Park's Kin-Da Thai restaurant costs $14-19.

From the article:

Dining out at certain restaurants has become so expensive, many customers now view it as a treat, affordable only on special occasions. Chicago restaurant owners are fighting to make sure their establishments do not slip into that category. To be relegated as a special occasions-only spot in a customer’s mind is akin to being friend-zoned. It’s a difficult designation to come back from, being considered too expensive for a casual meal. And in this economy, it could be a death blow for restaurants.

Getting customers to return again and again is the name of the game for sit-down restaurants these days, said David Henkes, senior principal at market research firm Technomic. A Technomic growth metric correlating to customer traffic declined 1.5% last year.

The cost of eating out has risen about 30% in the last five years. People are eating at restaurants less frequently. Some are trading higher-end restaurants for more casual spots. Owners want customers to celebrate with them. What they don’t want is for customers to view their restaurants as places they can only afford to visit once or twice a year.

“The goal is for our clientele to come often, not just an occasion type of place,” Richard Vallejo, partner at Botánero, a new Mexican agave lounge and restaurant in Wicker Park, told Crain’s in December. “That just doesn’t work for today’s business model.” 

To combat this concern, higher-priced restaurants are rolling out more affordable offerings. The hope is that customers view the restaurants as spots they can afford to dine at several times a month. For owners, success in this area comes in the form of a reputation. They want to be viewed as the neighborhood spot, a refined but casual go-to place to grab dinner.

The Philadelphia Inquirer reports that the SIN restaurant in Northern Liberties has closed  ("SIN, the Northern Liberties steakhouse that brought ‘vibe dining’ to Philly, closes").  In a "gentrifying neighborhood" not particularly upscale, the restaurant had a DJ at night, and a focus on bottle service, with a brunch bottle package at $700.  WTF?  

Only cities like Las Vegas, Miami, maybe NYC, and Los Angeles have enough high rollers to make such a concept workable.  And the restaurant even says so on its website.

A vibe-dining concept incorporating upscale cuisine with a taste of Miami, New York, and Las Vegas nightlife

It's a perfect example of a "special occasion restaurant" in a regular neighborhood, not being enable to sustain itself on local business, but reliant on an entire metropolitan area for its patronage.