In a note that we’ll file away under the definition of ‘irony’, Bloomberg wrote today that the fun-loving, free-spirited socialists of San Francisco are suddenly really pissed off that their liberal economic policies have resulted in a wave of restaurant failures, making it nearly impossible to find good food at an ‘affordable’ price.
We would be pissed too...who could have guessed that artificially raising wages well above market supported rates would result in business failures?
On Thursday, the Michelin Guide announced its 2018 Bib Gourmand winners for San Francisco with only 67 restaurants on the list this year, a decrease from the 74 restaurants in 2017. Twelve restaurants in total dropped off, once you factor in some new additions. In 2016, there were 73 restaurants, and in 2015, 76 were on the list.
Restaurants that rate a spot on the Bib Gourmand list are defined as places that offer notable food at a reasonable price. Michelin specifically defines that as two courses plus dessert or wine for $40, not including tax or tip. A group of anonymous inspectors choose the restaurants. Bib Gourmand restaurants are not eligible to receive Michelin stars.
Some of the attrition on the 2018 list is due to places that simply fell off (or maybe even got promoted to the star list, proper), like Bistro Jeanty in Yountville, Bistro 29 in Santa Rosa, and Le Garage in Sausalito. But the alarming rate of restaurant closures in the Bay Area also accounts for the dip on the list, with spots like Bar Tartine and Mason Pacific in San Francisco and Scopa in Healdsburg wine country shutting their doors.
So what was the catalyst that sparked the ongoing massive wave of San Francisco restaurant failures? Well, Bloomberg figures it’s the result of soaring minimum wages and health care costs…you know, all the things that San Fran liberals argue and protest for.
Factors like skyrocketing rents, minimum wage and health care have certainly taken a toll on Bib Gourmand-style restaurants around the Bay Area. More than 60 restaurants closed between Sept. 2016 and Jan. 2017, according to the East Bay Times. “We’re at this precipice where the model of the full-service restaurant is being pushed to the brink,” said Gwyneth Borden, executive director of the Golden Gate Restaurant Association.
Although ecstatic by the news of her Bib Gourmand, Brown Sugar Kitchen’s chef/owner Tanya Holland echoed the sentiment during a phone interview: “It’s so challenging to operate this kind of restaurant in the Bay Area right now” especially when it comes to staffing, she said.
Of course, as we pointed out back in January, a Thrillist article written by Kevin Alexander highlighted the demise of one independently owned restaurant in San Francisco, AQ, that shut down earlier this year for all the same reasons listed above. When it came to minimum wage hikes, Alexander found that just a $1 per hour minimum wage increase reduced an independent restaurant’s already thin profit margins by $20,000, or 10%. So we imagine the $5 minimum wage hike that California just passed is probably slightly less than optimal for restaurant owners.
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.
Meanwhile, when it comes to Obamacare, Alexander noted that AQ was hit with an incremental $72,000 of annual expenses in 2015 that didn’t exist in 2012, which eroded another ~30% of the company’s peak net income.
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.
Then there are those pesky rental rates which have been driven ever higher by nearly a decade of 0% interest rates that have resulted in artificially high demand for “yieldy” commercial real estate.
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.
What’s next? Is San Francisco going to tell us how mad they are that Obamacare is driving up healthcare premiums?
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Author: Tyler Durden