Do We Need to Crack Down on Restauranteurs?
I think that Dave Alpert’s suggested changes to DC’s regulatory efforts to ensure the existence of non-restaurant retail opportunities would be an improvement over the status quo. Still, I would reject the whole premise that regulation is needed in this sphere. Here’s the rationale:
Adams Morgan. Photo by randomduck.
Fostering a diverse range of retail in a neighborhood commercial area is a difficult balancing act. DC has tried several techniques for managing this balance, including limiting the frontage devoted to restaurants, limiting liquor licenses, and offering bonuses to new development that contains certain uses.Restaurants, especially those allowed to serve alcohol, can afford higher rents than neighborhood-serving businesses, like grocery stores, hardware stores, pharmacies and dry cleaners. As bars and restaurants become successful, an area draws more foot traffic, attracting more of those businesses. Landlords can charge higher rent, which pushes out the local businesses. This is basically an economic game theory problem: the most natural equilibrium states are a mostly-vacant corridor on the one hand, and nothing but bars on the other.
What’s going unasked here is the question of why the restaurants, especially those with liquor licenses, can afford to pay higher rents? The reason, of course, is that they register higher operating profits. But why do they register higher operating profits? Well, I would submit that they’re so profitable precisely because of the regulations aimed at limiting their quantity.
If you made it easier to open a restaurant, and easier to get a liquor license, then many people would look at the high operating profits currently being earned and open more bars and restaurants. The increased competition, citywide, would reduce bar and restaurant profits and eventually bring the system into equilibrium. But right now the preferred marginal use of a currently vacant structure is as a bar or restaurant precisely because there are so many regulatory barriers to opening new ones. Given not only the hard limits, but also the uncertainty involved in securing regulatory approval, people hesitate to attempt to start up new bars and restaurants even though if you can get a new one off the ground in the right neighborhoods in DC you’re certain to earn profits. That leads to structural undersupply of restaurants, oversupply of vacant buildings, and a persistent culture of mediocrity.
The problem, when people envision a neighborhood becoming “a new Adams-Morgan,” is that they’re envisioning a very limited deregulation. The high levels of regulation prevailing throughout the city means that if you make a single three-block stretch of some street somewhere friendly to new bars and restaurants then you really will get a ton of new bars and restaurants crowding everything out. But it’s a fairly large city. If there were less regulation across the board then the new bars and restaurants would be spread throughout the city and no particular neighborhood would see a drastic increase.
38 Responses to “Do We Need to Crack Down on Restauranteurs?”
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April 30th, 2009 at 1:05 pm
Can’t agree. Grocery is an incredibly low-margin business. Back in the 1980s the chain I worked for was ecstatic when they achieved 1.0% net margins. 1.0%! Even in those days 15% net was typical for most businesses. And that was a mostly suburban chain with lower cost of business than one with urban sites. Restaurants and especially bars are always going to be able to beat margin (and sometimes even gross sales) on a per-sq-foot basis.
April 30th, 2009 at 1:15 pm
The triumph of theory over experience!
Running a restaurant that does not fail is an enormously difficult enterprise, Matt–nearly 60% fail in the first 3 years, according to the most stringent figures available. The regulation is at most a marginal influence.
April 30th, 2009 at 1:17 pm
While I think the policy you prescribe is on target, you’re probably wrong to assume an even spatial distribution of bars and restaurants. Instead, there is likely to be agglomeration in a few areas because spatial agglomeration is very common, especially in industries exhibiting high fixed costs, specialized labor needs, and other factors identified by Krugman in his 1991 and 1993 books.
As to Not Really’s point: margin isn’t everything; volume also matters. After all, its not like there are zero grocery stores! They earn profits through high volume, rather than high mark ups over gross costs. New restaurants, remember, have an extremely high attrition rate, not because they can’t charge high enough mark-ups, because they can’t get enough customers to meet their fixed costs.
April 30th, 2009 at 1:17 pm
if you can get a new one off the ground in the right neighborhoods in DC you’re certain to earn profits
I’m skeptical that this is true of most restaurants, at least for ones that are not _mostly_ bars. Restaurants have one of the highest failure rates of small businesses and, if you pay attention, they come and go quite quickly, even in seemingly good locations. This applies to all sort of restaurants. This would seem unlikely if merely starting one was the biggest hurdle to making a profit.
April 30th, 2009 at 1:19 pm
I’m of two minds about this. I don’t know what the regulations are like in Brooklyn, but my neighborhood has tons of good grocery options (not cheap grocery options, but that’s a topic for another day). Maybe those groceries are all losing money, or only making a little, but they certainly don’t seem to be going away.
On the other hand, in the abstract it’s easy to imagine a neighborhood being overtaken by businesses that largely cater to non-residents who come to the neighborhood at night and on weekends. The result could be a much less livable neighborhood for actual residents. Whether this is a problem worth addressing through regulation is up for debate, but the fact that deregulation would allow a new equilibrium to emerge doesn’t mean that the equilibrium would be a pleasing one.
April 30th, 2009 at 1:19 pm
yeah, I appreciate the inclination, but I think it oversells the market theory and undersells the particular structural differences in the nature of businesses. a successful bar is always going to make more money than a successful dry cleaner. so in a truly free market, what you would get is a constantly opening and closing flow of restaurants/bars hoping to hit the jackpot. and no grocery or dry cleaner.
April 30th, 2009 at 1:27 pm
There’s no “n” in “restaurateur”.
April 30th, 2009 at 1:28 pm
Dang, Madam’s Organ is still around? That was there 857 years ago when I lived in DC. Chief Ike’s still there too?
April 30th, 2009 at 1:43 pm
So maybe my neighborhood is idiosyncratic, but it has plenty of dry-cleaners, despite their alleged inability to compete with restaurants/bars.
Also, you have to figure locksmiths are pretty low-margin, but zoom in (I mean, really zoom in close) on pretty much any part of New York or DC in Google Maps and search for “locksmith.”
April 30th, 2009 at 1:47 pm
In the suburbs, each grocery has to supply almost everything that their competitors do. They even carry things at negative mark up just to get people in the store so they buy big mark up items.
Urban groceries would not need to do that. Without nearby competition, with more walk-in customers, they could restrict themselves to high mark-up items that don’t occupy a lot of shelf space.
The locals are still screwed if they want to buy a 5 lb bag of flour, though.
April 30th, 2009 at 1:49 pm
What sort of businesses are restaurants and bar actually replacing? Because the space/location requirements are different for different types of businesses.
Hardware stores and book stores were long ago killed by the big box retailers and Amazon.com, not because some restaurant can pay a bit more rent.
Art galleries?
Dry cleaners? Is there a shortage of cleaners in DC?
Apparel and shoe stores? The malls and big chains have mostly killed off most independent apparel stores except for the odd ethnic craft type place selling imported stuff from Guatemala and Thailand.
I’m just curious what sort of business is becoming endangered in DC due to this plague of new restaurants.
Oh, and by the way, this conversation would be absurd in Texas.
April 30th, 2009 at 1:49 pm
There will be.
April 30th, 2009 at 1:53 pm
“a new Adams-Morgan”
I just threw up a little in my mouth. Not quite “a new Georgetown” bad, but not good, either. I think the interesting question is why these two neighborhoods, which are horribly inconvenient to public transit (the name on the Woodley Park-Zoo/Adams Morgan Metro stop notwithstanding), are the two most likely to feature hordes of young drunk people late at night.
As much as it would annoy my own sensibilities to have more of the Adams Morgan crowd out on U Street, I think it’s better for them and for the city as a whole if they’re somewhere like that: more transit and wider thoroughfares that can’t be totally clogged with cabs. Ditto Dupont. Build more areas like that, please, not more areas like Adams Morgan.
April 30th, 2009 at 1:58 pm
Don’t go dissin’ Adams Morgan – it’s one of my favoriate parts of DC. I say, if lots of people want to go into your neighborhood to eat and drink – great!
And I’m not convinced by Matt’s theory that there would be natural equilibrium and dispersal of restaurant chains if city-wide restrictions were reduced – surely there’s economic and cultural logic in having restaurant intensive zones where prospective diners have a large choice of where to eat. Such neighborhoods draw in traffic, whereas one isolated neighborhood restaurant might struggle to survive.
April 30th, 2009 at 2:03 pm
As much as it would annoy my own sensibilities to have more of the Adams Morgan crowd out on U Street, I think it’s better for them and for the city as a whole if they’re somewhere like that: more transit and wider thoroughfares that can’t be totally clogged with cabs. Ditto Dupont. Build more areas like that, please, not more areas like Adams Morgan.
Yeah. Back when I was living in the Dupont Circle area in the mid-90s I was always somewhat surprised by how many restaurants were in Adams Morgan which was unreachable by metro and how few good ones were in Dupont Circle. There was a cluster on 17th St and Ct. Ave but not the same density as Adams Morgan.
April 30th, 2009 at 2:08 pm
The real villain here is commercial vs. residential zoning. There’s no way I’d want to go to 18th st to pick up dry cleaning or groceries or 2×4s. But a block or two away? Sure. But I bet that would require variances and special permits and everything to build a little storefront hardware store in a residential area.
Eliminate the zoning, streamline the process of opening a small business, and you’ll go a long way toward making cities more livable.
April 30th, 2009 at 2:08 pm
Also, any regulation of this is a recipe for boring nightlife in a city. Dry cleaners and restaurants, especially those serving alcohol, have completely different schedules. Who wants to walk down a street with 2 retailers open from 8am-6pm for every restaurant? It would be dull and deserted at night. There’s a reason restaurants and bars tend to dominate certain streets and it’s because these streets have become neighborhood nightlife districts. A city without any is a city I don’t want to live in.
April 30th, 2009 at 2:10 pm
Say regulations are taken off and more people open up bars and restaurants. Then there are more bars and restaurants. There are more bars and restauarants than now. Such a move wouldn’t free up space for other uses. There would be more bars with each bar’s profits reduced.
April 30th, 2009 at 2:13 pm
Deregulation? Next thing you know Obama will be handing out billion dollar checks to the DC restaurant lobby.
April 30th, 2009 at 2:14 pm
Why not just let grocery stores, hardware stores, pharmacies and dry cleaners serve liquor?
Problem solved.
April 30th, 2009 at 2:16 pm
If there are vacant buildings then accepting rents less than a bar or restaurant rent obviously makes economic sense. 2/3 the dollars of a bar rent is better than 0 dollars from a vacant building. I don’t think the economic situation is being well described.
April 30th, 2009 at 3:00 pm
This assumes that there is a saturation point for bars somewhere short of 98% of all businesses. I’m not so sure of that
April 30th, 2009 at 3:16 pm
“Restaurants have one of the highest failure rates of small businesses …”
Actually, they don’t. They are pretty much average. I think the myth started because people notice new restaurants more than other businesses.
April 30th, 2009 at 3:22 pm
Matt’s sort of right about the latent demand but not entirely.
I expect there’s fairly significant latent demand for corner restaurants (likely ethnic) in random corners of the city, where they benefit from local foot traffic and general laziness. Not everyone wants to go a long way to some nightlife district just to eat. Some restaurateurs would be satisfied if they could open anywhere, not just the high-rent, risky but high upside districts like Adams Morgan.
The natural equilibrium, absent zoning, should look more like Paris or London than DC. We’ve screwed it up with zoning again.
April 30th, 2009 at 3:25 pm
I find Mike’s point interesting.
I am from New Orleans and while there are certainly corridors of high business activity like Magazine St., there are also really great places to eat smack in the middle of residential neighborhood. DC seems to want to push all business activity to certain types of streets. Obviously this is a function of history – like Penn. Ave in SE, Barracks Row, and H Street NE – but now seems to be a function of zoning laws.
April 30th, 2009 at 3:25 pm
WWOD What would Obama do? He’d increase taxes on the the restaurants and start a stimulus program for other businesses. Or, he’d force restaurants into bankruptcy and then give the balance of the business to the nearest union.
That’s the ticket.
April 30th, 2009 at 3:43 pm
Granted, licensing has the effect of “unnaturally” limiting liquor sellers. On the other hand, there is a tangible benefit to society of not maximizing the opportunities to manipulate one’s neurotransmitters.
Just as total prohibition didn’t work well, so for unlimited license.
April 30th, 2009 at 3:48 pm
“If there were less regulation across the board then the new bars and restaurants would be spread throughout the city and no particular neighborhood would see a drastic increase.”
This is the sort of argument I’d expect from a 19 year old libertarian who has never actually set foot in a city. Regulation might exacerbate the problem, but I’ve never met a government agency that’s capable of regulating trends or reputations. You can open a restaurant in many parts of the city… you’ll find a few clustered around most Metro stations. But once a neighborhood like Adams Morgan has a good location with hundreds of storefronts and such a reputation that people simply go there for the nightlife, then people will want to open bars and restaurants there.
Whereas, say, Petworth has a few successful places that mostly cater to neighborhood traffic, but it’s not a destination address. Easing regulations isn’t going to turn it into a destination address.
April 30th, 2009 at 4:10 pm
I don’t think loosening regulations/licensing in an effort to boost competition and thereby reduce monopolistic-like profit margins in order drive down rents for other businesses to prosper is a linear recipe for awesomeness.
The regulations and licensing are in place for reasons other than to provide a barrier-to-entry for new competition. Restaurants and bars have a naturally higher regulatory cost than a hardware store or art gallery. I don’t want the food to kill me/make me sick–ensuring that establishment adheres to the principle that it shouldn’t kill its patrons is not *free*. I thought we decided last century that free-market conditions don’t really do a very good job of self-regulating in this case.
April 30th, 2009 at 4:11 pm
“Well, I would submit that they’re so profitable precisely because of the regulations aimed at limiting their quantity.”
Well, I would submit that your uninformed spectulation is incorrect.
Local groceries, clothing stores, hardware stores, and pharmacies are in competition with big box stores and suburban malls. Their edge in competition is convenience, but if their prices go too high, many customers (those with cars) will travel outside the neighborhood and a significant fraction of their sales, particularly of high end items, will be lost to the competition, whose rent and overhead are lower, whose bargaining power with suppliers is higher, and whose traffic is greater. The suburban compeitition puts a cap on the prices that these stores can charge.
Most neighborhood restaurants are not in competition with their suburban counterparts, because part of the pleasure of an urban restaurant is the urban setting. People who live in a city won’t go out to a Wheaton strip mall for a meal, but they might go out there for a mattress. On the other hand, some people who live in Wheaton will come downtown for a meal, even if it’s more expensive; but they won’t come downtown to buy a new showerhead.
This means that in-town restaurants can generate more revenue than hardware stores. So, if you make more space available, you’ll get more restaurants, because they can pay higher rents.
What’s wrong with that? Well, for a livable neighborhood, you’d like to be able to get a lock installed or a pair of shoes resoled without going out to Wheaton. The only way to do that is to force the downtown landlords to rent to the hardware guy at a price he can pay, given the competition he faces from Home Depot.
April 30th, 2009 at 4:25 pm
Bloix hits the nail on the head.
We have this same issue in my town. Problem is, landlords will sit on a vacant property for years, refusing to come down in rent. I’ve often thought that a tax on vacant square footage might be the answer.
April 30th, 2009 at 5:07 pm
I would agree with MR YGLESIAS that we need to look at some city regulations .Not all are good and some are out of date.
I would disagree about there being “too many “restaurants in an area.I used to live in the neighborhood of Canton in east Baltimore. Were there a lot of restaurants and bars ? Oh yes!
Were there too many? Who am I to say ?
With all due respect to MR YGLESIAS ,I wish he would stop assuming that he knows what is best for other people.
I enjoy this blog And i often find MR YGLESIAS ‘S posts about infastructure and transportation very informative.But he has a bad habit of wanting eveything to be” EFFICIENT”.
I do not drink so I do not go into a lot of the bars.I go to my favorite bar to have a burger. Should the city shut down all of the other bars? No, because the world does not revolve around me , or what i like. It also does not revolve around what MR YGLESIAS likes.
I do not mean any disrespect towards MR YGLESIAS and I enjoy his blog. But I wish he would realise that there are many people in this world with different tastes than his.
April 30th, 2009 at 5:23 pm
We’re not throwing out health codes. We’re talking about making the default answer to “can I open a restaurant here?” “yes”.
April 30th, 2009 at 5:43 pm
I live between Woodley and Adams Morgan; A-M isn’t really all that inconvenient to metro, being about a 10-15 minute walk to Woodley and maybe slightly more to Dupont Metro.
If you can’t walk that far comfortably, you need to re-examine your lifestyle.
Anyway, regarding the regulation question, an answer is FAR bonuses for resident-serving amenities; bars and restaurants are fine, but a grocery gets you a floor-area bump equivalent to 50% of the space granted to the grocer’s. A bookstore, perhaps 100% to a cap of X, where X is large enough to make an indy book store viable, but too small for B&N to bother with.
DC plays enough games with FAR and overlay districts, just a few more options to intensify our commercial corridors (and perhaps some expansion of those corridors?) and we residents should have our amenities while allowing for the creation of the nightlife districts that we all (sometimes) want to patronise.
-RS
April 30th, 2009 at 5:48 pm
REGARDING COMMENT # 33 BY MIKE
I agree. There have been many discussions on this blog about rejuvinating the cities and their economies.But no one ,[including myself] ever seems to bring up regulations and codes.
Yes there should be health codes and some regulations. But there are many regulations that prevent people from investing in the city.Some of these rules may have made sense when they were written 80 or 150 years ago , but not now.
If cities speeded up their permit process , that alone would be more important than a few million dollars of federal aid!
April 30th, 2009 at 8:54 pm
Not Really at #1 says: Grocery is an incredibly low-margin business …. 1%!
Grocery chains used to make that poor-mouth argument and probably still do. But it depends on how you calculate the margin.
If you buy an item in the morning for $1.00 and sell it in the afternoon for $1.01, then your profit is 1%. But do that every day for a year, as grocery stores do, and your annual return on an original investment of $1.00 is $3.65, or a 365% profit. Of course, you have to deduct costs of doing business from that the same as any business does. But if the grocery business typically returned 1% on investment, grocers would put their money in Treasury bonds and leave consumers to grow their food in window boxes.
May 1st, 2009 at 2:23 am
Urban groceries would not need to do that. Without nearby competition, with more walk-in customers, they could restrict themselves to high mark-up items that don’t occupy a lot of shelf space.
This is pretty much what happens in the poor neighborhoods in L.A. No big grocery stores, only small corner markets with crappy selection and high prices.
May 1st, 2009 at 11:11 am
I’m wondering how it got this way. It’s not like DC has a terribly high urban population density (thanks to the floor limitations), and it’s not as if there aren’t still plenty of areas with cheap rental property. Or is it that the lower population density makes it more difficult for individual groceries to survive?
More to the point, if people can afford to eat out at these restaurants, they can certainly afford to pay for more boutique grocery goods.
BTW–strangely, it’s “restaurateur” not “restauranteur.”