You hear the statistic all the time – 60% of all restaurants fail in the first year, and a whopping 80% don’t make it past five years.
But is the situation even worse in New York?
According to The New York Times, yes, especially for independently owned establishments.
Not only is the number of independent restaurants in New York City dropping faster than the national average, but with real estate so pricey, it’s getting harder for new restaurants to open in their place.
And real estate is just one of the things threatening New York’s vibrant dining scene.
How expensive is a lease for restaurant space in New York compared to other major cities? A lot. According to the Times, real estate for restaurant space goes for $120-$180 per square foot in Manhattan, versus just $60-$80 in Los Angeles and $60-$120 in San Francisco. That’s a pretty major difference, with even the cheapest spaces in Manhattan priced at twice the rate of the cheapest spaces in LA and San Francisco.
This becomes especially alarming when you look at the ideal formula for a restaurant’s financial health. If the average successful restaurant needs to aim to spend just 10% of its revenue on occupancy costs (rent and utilities), that means that New York restaurants need to be making way more profit than the average restaurant in another major city. But for a variety of reasons, that’s not always possible.
New York, located in the northeast, is far away from most of the major agricultural areas in the US. Especially compared to Los Angeles and San Francisco, which sandwich California’s agricultural Central Valley, restaurants in New York have to source their food from far away, resulting in higher costs because of transportation.
Restaurants closer to agricultural areas can also enjoy seasonal, specialty and fragile produce for less cost – it simply takes less effort to get these foods from the fields and into their kitchens. New York restaurants simply don’t have this luxury, especially in the winter months; in fact, the Times estimates that restaurants in Manhattan sometimes pay thousands more each year for the same quantities of food as restaurants on the West Coast.
The lower cost of food and rent make it easier for restaurants in major West Coast cities to pay their employees and deal with other overhead costs.
New York, with its high rents and ingredient costs, doesn’t have the wiggle room. Couple that with rising minimum wages (many restaurants will be faced with a tipped minimum wage increase from $7.50 to $10 in 2018), and a lot of New York City restaurants are at even more of a financial disadvantage than their counterparts in other major cities.
While chain restaurants are dealing with increasing wages by eliminating positions altogether (McDonald’s is starting to use self-service kiosks rather than paying counter service employees higher wages), sit-down restaurants don’t have that option – rising wages are just another cost that needs to be made up with revenue.
Not only does the tristate area boast more restaurants than any other area of the US (16.9 restaurants for every 10,000 people), it’s also lousy with quick-service chains. According to Grubstreet, in 2016 80% of all restaurant visits were to fast and fast-casual chains. With such a saturated (or over-saturated) market, it’s hard for small, independently owned restaurants to remain competitive.
With expensive rents, higher food costs, and increasing wages, the only way for many of these restaurants to stay viable is to increase food costs. The problem? People aren’t really willing to pay more for their food.
This is most easily illustrated when you look at restaurants that have tested no-tipping models. Even though customers pay roughly the same price for their meals, when they see the tip included in the price of menu items, it scares them off. Restaurateur Gabe Stulman tested a no-tipping model at his restaurant Fedora in New York City, but eventually eliminated it – customers ordered less food than they used to, and started ordering cheaper wines, even though without having to pay for a separate tip, the meal prices were essentially the same.
People are also more reluctant to pay higher food prices when eating out because, overall, the cost of food has been decreasing over the past few decades. In the 1960s, the average American household spent 17.5% of its income on food. These days, that number is around 9.6%. And when food is so inexpensive to buy at the grocery store, it can be hard for consumers to justify buying an expensive meal out.
All of this makes it challenging for New York City restaurants to make up for the money spent on rent, food, staff and other overhead costs by raising their menu prices – it works in theory, but many customers aren’t willing to buy it (literally).
New York City may be a global dining destination, but it’s getting harder and harder for independently-owned restaurants to make it there. That’s a scary prospect for diners who prefer a nice sit-down meal to a cheeseburger ordered from and served by a robot.
And if restaurants in New York – with its higher expendable incomes, tourist appeal, and cultural emphasis on dining out – can’t turn a profit, what hope is there for the rest of the country?
Justina Huddleston is a food writer living in Los Angeles. When she's not writing for Menuism or SheKnows, she spends her time in the kitchen creating both virtuous and decidedly junky vegan food. Buffalo chickpea pizza, anyone? She's also been known to eat a plain block of tofu or beans straight out of the can for lunch, but somehow those culinary adventures don't make it to her Instagram. You can follow Justina on Twitter or see what's cooking in her kitchen on her blog A Life of Little Pleasures.