Some quick thoughts on the booming and (soon to be busting) restaurant scene

The Paradox of American Restaurants

The “restaurant renaissance” has been interesting for me to watch firsthand over the last several years. I have seen more restaurants pop up in more areas than I can count. In fact, I’ve been known to quip about which centers and restaurants will go bust in the next recession. So, I’ll begin with a quick quote from the article that sums up the restaurant story.

Perhaps nowhere is benefiting from the urban restaurant renaissance more than California cities. Of the 15 major cities where Yelp ratings have improved the most, five are in the Golden State, including number one on the list, Irvine. That’s no surprise, perhaps, given the organic revolution and the proximity to the state’s absurdly fertile Central Valley, which produces half of the country’s fruits and vegetables. But it’s another reminder that the restaurant renaissance is a surprisingly local and elite phenomenon. We are living through a golden age in food—if you can pay the bill.

Now, I want to actually begin by addressing my cynicism. While it may be beneficial for consumers to have many quality food choices, the truth is the economics does not add up. On the cost side, as more restaurants enter the market, the cost for space goes up. In some places lease prices are already astronomical. Second, as demand for quality ingredients increases the price of these ingredients increases. Now, a lot of these costs can easily get passed on to the consumer. Especially when the trend is such that restaurants are booming in wealthier cities where the cost of food is of very little concern to customers. But, the problem comes from the fact that there isn’t enough people to keep every restaurant filled. And since most people like variety, it becomes difficult to keep the same customer coming in every day.

And problem number 2, which is the real problem, is that in the next recession consumer spending at restaurants will drop significantly. If restaurants are struggling to get customers in the door at the top of an economic cycle, how will they get consumers in the door at the bottom? The benefit of the long economic cycle is it has allowed more restaurants to enter the economy. The downside is there will be more pain when the cycle ends.

The next thought I had while reading this was a connection to inequality (though I will avoid a long digression today). As you can see below, spending on food away from home has converged with the amount of money spent on food at home at the same time that foot traffic is declining.

food spending

The data also shows that the middle class simply cannot afford to pay the cost of eating out as much anymore. Anyone who eats out has probably noticed the bill has increased abnormally over the last few years. As you can see below, you are not crazy as inflation for eating out has jumped in the last few years. Unsurprisingly, this is the period when the restaurant renaissance occurred.

CPI food

The article reconciles these trends with four reasons: 1) with too many great restaurants to choose from, individual restaurants are hurting but the aggregate level is strong, 2) the middle class is struggling (as mentioned above), 3) takeout is becoming king, and 4) the wealthy are spending more money on eating out.

And lastly, I will leave you with a very funny quote from the article:

But today’s symbol of office chow is the “sad desk lunch,” where midday conversations are mediated by laptop, rather than occurring across the table.

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