I shared a similar post a month or so ago regarding how the law to increase the minimum wage will have a profound effect on the restaurant industry.
BY - JASON HOFFMAN/THRILLIST
AS SOON AS HE WALKED THROUGH THE DOOR, Matt Semmelhack knew it was over. He'd been away from his San Francisco restaurant AQ for less than a week, but when he got back, it just felt different. It went beyond the usual concerns of the modern restaurateur. "I wasn't worried the lights were properly dim, or the regulars were in the right booths," he says. Instead, Semmelhack was just looking at his staff -- people he hangs out with on weekends, people whose livelihoods he supplies, some of his closest friends -- and all he could see was the money each one of them was costing him, flashing in front of him like a video-game score. "I knew right then," he says, "we had to shut it all down."
Semmelhack is not the only restaurateur looking to duck and cover. The American restaurant business is a bubble, and that bubble is bursting. I've arrived at this conclusion after spending a year traveling around the country and talking to chefs, restaurant owners, and other industry folk for this series. In part one, I talked about how the Good Food Revival Movement™ created colonies of similar, hip restaurants in cities all over the country. In the series' second story, I discussed how a shortage of cooks -- driven by a combination of the restaurant bubble, shifts in immigration, and a surge of millennials -- is permanently altering the way a restaurant's back of the house has to operate in order to survive.
This, the final story, is simple: I want you to understand why America's Golden Age of Restaurants is coming to an end.
To do that I'm going to tell the story of the rise and fall of Matt Semmelhack and Mark Liberman's AQ restaurant in San Francisco. But this story isn't confined to SF. In Atlanta, D.B.A. Barbecue chef Matt Coggin told Thrillist about out-of-control personnel costs: "Too many restaurants have opened in the last two years," he said. "There are not enough skilled hospitality workers to fill all of these restaurants. This has increased the cost for quality labor." In New Orleans, I spoke with chef James Cullen (previously of Treo and Press Street Station) who talked at length about the glut of copycats: "If one guy opens a cool barbecue place and that's successful, the next year we see five or six new cool barbecue places... We see it all the time here."
Even Portland, the patient zero of the Good Food Revival Movement, isn't safe. This year, chef Johanna Ware shut down universally lauded Smallwares, saying, "the restaurant world is so saturated nowadays and it requires so much extra work to keep yourself relevant." And Pok Pok kingmaker Andy Ricker closed his noodle joint Sen Yai, citing "soaring rents, the rising minimum wage, and stereotypical ideas about 'ethnic food' as 'cheap food'" in an interview with Portland Monthly.
Rising labor costs, rent increases, a pandemic of similar restaurants, demanding customers unwilling to come to terms with higher prices -- it's the Perfect Restaurant Industry Storm. And even someone as optimistic as Ricker offers no comforting words about where we're headed.
"These are tough issues that many restaurateurs may face in the very near future," he says. "Closing now is preemptive."
I WANT YOU TO UNDERSTAND WHY AMERICA'S GOLDEN AGE OF RESTAURANTS IS COMING TO AN END.
AQ opened for dinner at the corner of Mission and 7th St on a rainy Thursday, November 3rd, 2011. Though this was Matt Semmelhack's first restaurant, the Princeton graduate and former real estate analyst spent several years working in restaurants in all capacities with an eye towards this opening, and he partnered with an experienced fine-dining chef in Mark Liberman, who'd worked at Michelin-starred restaurants in the past. "I wasn't flying totally blind," laughs Semmelhack. "Just, you know, partially."
He and Liberman wanted to create a hyper-seasonal restaurant with a menu and decor that changed with the seasons. So winter meant stark white walls and Brussels sprouts and winter squash, and fall meant harvest colors and apples and mushrooms, and summer meant tomatoes and bell peppers and, um, bikinis or something. Menus changed whenever new ingredients came in. "I think we had like five or six fall menus at one point," says Semmelhack. "If there was something new at the market, even just for a couple of weeks, chef was going to use it in a dish."
The buildout of the restaurant, from lease signing to serving the first customer, took 13 months, a relatively short period of time in the restaurant world. Total costs to open were just under a million dollars. No paltry sum, but a relatively standard amount for a restaurant in gilded San Francisco, helped along by the somewhat questionable location in Mid-Market, an area that was mostly known for its homeless population's casual attitude towards public nudity. "We had no idea what to expect," Semmelhack says. "It could've broke bad."
It did not. Accolades started pouring in, beginning with all-powerful San Francisco Chroniclerestaurant critic Michael Bauer, who gave it three and a half stars. Esquire’s John Mariani named it one of America's Best New Restaurants for 2012. Bon Appetit put it in the extended Best New Restaurants list. A Japanese magazine said nice things. By the end of year one, it'd made a $250K net profit on $2.9 million in revenue, a rare feat for a sit-down restaurant run by a first-timer.
But the finest moment of a banner year came away from the restaurant in New York. AQ was a 2012 James Beard finalist for Best New Restaurant in America, and Semmelhack, his now-wife Robin, and Liberman flew in for the ceremony. And though they didn't win, Semmelhack recalls it all perfectly. "I remember seeing my wife in a gorgeous dress outside of Lincoln Square. I remember sitting amongst all these legends, people I'd looked up to, restaurants that I'd studied, and just feeling really proud. And then we went to Gramercy Tavern after (whose own Michael Anthony had just won for Best Chef New York City), and I got to meet Danny Meyer and totally fanboy-embarrass myself." He stops talking and leans back in his chair. "We felt pretty invincible."
In the restaurant world, rent always sucks. Unless you manage to play it perfectly, as a restaurant owner you're either moving into a sketchy or "emerging" neighborhood where the rent is cheap but few want to go there, or you're overpaying for an established 'hood and need to be a runaway success from day one. And even if you do manage to make it in the former type of neighborhood, your success often ends up pricing you out of the 'hood you helped revitalize.
In Miami, Michelle Bernstein's Cena by Michy helped rebirth the MiMo historic district but was forced to close this year, after the landlord attempted to triple the rent. And even Danny Meyer had to close and move Union Square Cafe in New York, which, since 1985, had served as one of America's culinary landmarks, when he couldn't rationalize paying the huge rent hike the landlord proposed.
Nonetheless, rent hikes are the devil the restaurant owner knows. The tricky part is figuring out how to survive when every other cost rises too.
Thanks to its dubious location, AQ didn't really have a rent issue (in fact, once it became a national success, the landlord was so incensed at not charging more that he actually sued the real estate broker). And in 2013, it actually increased its revenue, pulling in $3.1 million. But despite making $200K more than it had the previous year, its net profit was $50K lower, as costs continued to creep up and up. What started as $250K profit and an 8.5% margin in 2012 was down to $40K and 1.5% by 2015. Because it had to pay off $42K in Small Business Association loans each year, this meant negative net cash flow for 2015.
Then came 2016. In 2016, AQ's projected revenue was $1.6 million, down a million dollarsfrom the year before. They went from doing 240 covers (dinners served) per night at their peak to around 100 this past year. Naturally, there were a lot of factors at play. Maybe Semmelhack and Liberman took their eyes off the ball while expanding their restaurant empire. Maybe Michelin's refusal to award AQ a star cut the restaurant off from deep-pocketed travelers, crucial to such an ambitious spot after the new-restaurant shine wears off. Maybe it's because there were 3,600 restaurants in SF when it opened, and now the SF Environmental Health Department puts that number at 7,600. Maybe the physical and mental toll of running an aspirational sit-down restaurant for five years was just too much.
Whatever it was, with losses of around $250K and a 40% drop in revenue, there was little Semmelhack and Liberman could do to justify keeping their flagship restaurant open. AQ will serve its last meal sometime in January, 2017. The menu will consist of seasonal winter specialities. The walls will be stark and white.
OPENING A SIT-DOWN RESTAURANT IS LIKE WALKING INTO ONE OF THOSE MACHINES IN ROLLER RINKS WHERE YOU HAVE 30 SECONDS TO GRAB AS MUCH MONEY AS YOU CAN, EXCEPT ALL THE MONEY IS FAKE.
Across the nation, restaurants like AQ -- chef-driven, ambitious, fine-casual dining spaces that straddle the gap between neighborhood fixtures and destinations -- are the ones closing their doors most quickly, mainly for a reason above: labor costs. And it's happening everywhere -- research firm NPD Group reported that in 2016 the number of independent restaurants in the US dropped 3%, while chains increased, and said the majority of those independent restaurants closing were sit-down. The reasons the costs are going up are complicated, involving a mix of laws and taxes and other inherently unsexy things.
I should say before I go any further that all of the restaurant owners and chefs I've talked to are compassionate humans who support better coverage and livable wages, and seem on the whole progressive by nature, but restaurant margins are already slim as hell. There are no political agendas here -- they're just genuinely worried about how to afford to pay extra without radically changing the way they do business.
Let's start with the minimum wage. According to the Bureau of Labor Statistics, of the 2.6 million people earning around the minimum wage in 2015, the highest percentage came from service jobs in the food industry. Though the Obama administration's attempt to increase the federal minimum wage above $7.25 failed, 21 states and 22 cities have raised the minimum wage starting this year, including Washington, DC ($12.50 an hour), Massachusetts ($11), New York ($9.70), and Arkansas ($8.50).
Considering that hour-wage workers are usually the lowest earners and the increase is essential to ensure they earn an actual living, this is the least controversial of the newer expenses and something almost everyone in the industry supports, in theory, but it doesn't change the fact that it's an additional cost that must be factored in. If you have 10 hourly employees working eight-hour shifts, five days a week and you raise the wages a dollar an hour, that comes out to a nearly $20K increase on the year. In AQ's best year -- a phenomenal year by restaurant standards -- that would have been nearly 10% of profits.
Then there's health care. For the better part of its history, the restaurant business was a health care-free zone, which is ironic, given this Bureau of Labor Statistics' description of the back-of-house work environment: "Kitchens are usually crowded and filled with potential dangers." With the introduction of Obamacare, most restaurant workers finally got the coverage they've needed for years through the employer mandate, but critics often talk about the strain it puts on small-business owners due to a puzzling and controversial element that defines "full time" as 30 hours per week, and not the 40-hour workweek used almost everywhere else (the Save American Workers Act proposes to move this back to 40 hours).
Though this mainly affects bigger restaurants with staffs of 50 or more full-time workers, independent sit-down restaurants still need to provide suitable coverage (meaning it has to be affordable, less than 9.5% of the employee's income) or face fees of $2K per employee. Consider AQ. Semmelhack told me that in 2012 they paid $14,400 for health care costs. In 2015, they paid $86,400. That's an increase of $72K MORE per year than 2012, or 29% of their best year's profit.
One of the unintended consequences of the Golden Age of Restaurants was unreasonable customer expectations for virtually every eating experience. "Customers now think life should be one endless brunch," says New Orleans' chef Cullen. "With freshly made bottomless mimosas." It is no longer impressive that things are local, farm-sourced, and handmade -- it's expected. But, as Cullen explains, the rise of the Golden Age "scratch kitchen" (in which everything is made in-house), long a point of pride for fine-dining kitchens, isn't usually financially realistic in the more casual kitchens.
"It's self-flagellating chef martyrdom at its best," says Cullen. "Chefs all want to make their own charcuterie and bake their own breads. And if you're wildly talented and you're making exceptional stuff, great. But most chefs know in their heart they can buy it from a local butcher or baker and it'll be at least just as good, but they're too proud. And so you've got these kitchens putting in just as much labor as fine-dining spots, but not charging nearly enough to make it worth their while."
Those elevated expectations now even extend to delivery. And the rising food delivery apps promising local, higher-quality foods at cheap prices (Munchery, Blue Apron, Zesty, UberEATS, DoorDash, Postmates, etc.) are starting to seriously position themselves as, at best, major nuisances and, at worst, that annoying word everyone in the tech industry throws around: disrupters.
"I think they're the ones pricing out fine-casual dining restaurants," says Anjan Mitra, owner of the DOSA restaurants in SF. "These apps are all backed by hundreds of millions from the VCs (venture capitalists) -- so it doesn't even matter that they're all losing money. They can afford to pay chefs and line cooks and prep cooks more than any restaurant, and though many of them work with restaurants now, the bigger, ambitious ones are figuring out ways to completely cut restaurants out of the picture. And if that happens to take 10% of the revenue from a local sit-down restaurant, that's a massive hit. That could be the difference between staying open or shutting down."
In this day and age, we expect so much from our restaurants and chefs. But chefs aren't real estate agents. They aren't lawyers or social media managers. They aren't accountants or tax code experts or HR managers or media personalities or improv actors or CEOs. They want to make some delicious food, and feel a sense of accomplishment and do that thing they love. You don't get into this for the money because THERE IS NO FUCKING MONEY. But you need to survive to continue your art and the deck is being stacked higher and higher against the average restaurant every year.
And now opening a sit-down restaurant is like walking into one of those machines in roller rinks where you have 30 seconds to grab as much money as you can, except all the money is fake, minus one lottery ticket taped to the bottom of one of those dollars. And that one lottery ticket is a restaurant unicorn like State Bird Provisions or Momofuku Ssäm Bar or Rose's Luxury or Au Cheval.
And if you happen to be the lucky owner of that ticket, you cash it in and head back to the restaurant casino and buy more chips and take them to a higher-limit table and keep betting on yourself and your food and your people and you hope that your wherewithal and previous luck and skill keep it all going, and you become a place like Zuni Cafe or The Spotted Pig or, hell, Commander's Palace and you're able to last into paying off investors and actually making a living and becoming the nostalgia pick, the place everyone goes to recall that feeling they had when they walked in and discovered that the food you make is art, and you are a national treasure.
And then your lease runs out, your landlord sells to a developer, and they triple your rent.
WHAT WE'RE WITNESSING IS THE HOLLOWING OUT OF THE RESTAURANT INDUSTRY CENTER -- THE GENTRIFICATION OF FOOD, CARRIED TO ITS LOGICAL CONCLUSION.
So what have we learned? Well, for one, the restaurant bubble will not burst like the stock market. There will not be massive simultaneous closures -- different cities will be affected at different times, some places may hang on years, often propped up by personal savings or an owner who either doesn't care about losses or refuses to see the writing on the wall.
But for the average city diner, the bubble bursting will have very real consequences. For one, most sit-down dining will, in many ways, revert back to what it was in the '80s/'90s: reserved for special occasions. And this is for the simple reason that restaurants need to universally raise their prices to keep affording to pay their workers and buy food and serve you a choice of sparkling or still water with your house-baked bread and house-cultured butter (this will also serve as a gut check for the mass of people who claim to be for changes to restaurants that result in paying fair wages, but as soon as they see higher prices themselves as a result of said wage increases, immediately forget their lofty talk and take to Yelp to complain).
But then again, more and more restaurants will also opt to go the other way, and become hip iterations of fast-casual restaurants, with smaller menus, counter service, and a skeleton crew of front- and back-of-the-house staff. "The age of the cool counter-service bar is upon us," says Semmelhack. Big-name chefs are already moving away from their sit-down restaurants to join the fray: Chef James Holmes shuttered his nationally lauded Olivia restaurant in Austin and turned it into Lucy’s on the Fly, the fourth location of his fast-casual fried chicken concept, and just a few weeks ago, the celebrated chef of NYC's Del Posto, Mark Ladner -- owner of a four-star review from the NY Times, and a Michelin star -- announced he'd be leaving at the end of January to open his own fast-casual Pasta Flyer joint.
Until the point of over-saturation, the places these chefs are creating, the cheaply hip, fast-casual counter joints, will thrive. You can already look to spots like Hat Yai in Portland, New Orleans' Company Burger, and Honey Butter Fried Chicken in Chicago to see that that model currently works. Combine that with the proliferation of well-curated food halls -- Atlanta's Krog Street Market, New Orleans' St. Roch, Revival Food Hall in Chicago, Pearl in San Antonio, etc. -- and the aforementioned rise of app-based dining, and it's hardly a question why most casual fine-dining restaurants are endangered.
And maybe that's fine for the diner, who will surely adapt and maybe even appreciate saving some cash while still getting most of the trappings of the cool sit-down restaurants, and maybe it's even good in the long run for the restaurant industry, as the lack of capital forces people to get creative and experimental. But that doesn't change the fact that the current owners and chefs who've poured all their savings and passion into restaurants open now will never be able to get that money and time back.
What we're witnessing, as you see this rise of both the high and low end, is the hollowing out of the restaurant industry center -- the gentrification of food, carried to its logical conclusion. You had something that was interesting and a great value, it attracted everyone, and now all that's left until a rebirth is extravagance or thrift.
Once Semmelhack quietly announced he was selling the restaurant, potential restaurateurs began inquiring, asking to look at the space. On an unseasonably warm day in December, just over five years after he'd opened the doors, Semmelhack showed around a couple of prospective buyers. One was a fine-dining concept doing high-end, exquisitely tasteful prix fixe small plates. The other was a small pizza chain. AQ's ground floor, it said, would be perfect for a catering business on the side.