5 ms·

This post misses the forest for the trees. The reason for the low margins in the restaurant business is the lack of differentiation. Their products are largely

by nickff 7y ago

This post misses the forest for the trees. The reason for the low margins in the restaurant business is the lack of differentiation. Their products are largely commoditized, so they have no competitive advantage or market power. Peter Thiel discussed this in a lecture for YC, where he said that you can work very hard to make the best restaurant in a city, but it doesn't give you much pricing power, because the second best is still pretty good.[1] [1] https://www.youtube.com/watch?v=3Fx5Q8xGU8k https://www.youtube.com/watch?v=3Fx5Q8xGU8k

jariel 7y ago
The issue is not 'why they have thin margins' - the issue is their inflexible operating ability mostly due to fixed costs, specifically rent. If restaurants had 20% margins they would still be facing collapse. Rent is a huge portion of costs vis-a-vis most other businesses that can be run 'anywhere' whereas restaurants need prime locations.
- nickff 7y ago
  If restaurants had much better margins, they (or their owners) would have bigger rainy day funds. There are lots of businesses with large fixed costs.
  - pixl97 7y ago
    There are few businesses with such large fixed costs and ample competition.
- paypalcust83 7y ago
  My great-grandfather was in the restaurant business back east, but my grandfather saw how unprofitable it was and became a mechanic rather than continue the family business. (He got fired once as a short-order chef in the 50's from a Howard Johnsons for cooking too well.) Restaurants must relocate to cheaper areas like warehouses and shift to a delivery-first distribution model, which Uber, Lyft, and Google Express could help dispatch. It sucks from a customer-interaction perspective, but it's necessary. Other businesses like Pret in London were already using a hybrid centralized preparation with small, hyperlocal retail sales model. If you want to make money, you can't think and do what everyone else is doing in all respects.
  - 1996 7y ago
    > He got fired once as a short-order chef in the 50's from a Howard Johnsons for cooking too well. Under which logic? The Baron Von Muchausen argument of demoralization?
    - kayfox 7y ago
      Consistency is a big deal in restaurants because mismatched expectations drives bad experiences.
      - Melting_Harps 7y ago
        > Consistency is a big deal in restaurants because mismatched expectations drives bad experiences. It could also be that the expo/chefs valued speed over anything else, I've never been or eaten at a Howards Johnoson's, but I can easily see it being an issue if you're trying to make an effort while being behind on a ton of tickets and management prioritizes volume over quality and it they're seen as the bottle neck. I admit speed is not my strong point, but my presentation and knife skills are strong so I make up for it that way and I'm organized and clean--its what got me to work under a 3 star Michelin chef (total nightmare, he finally got fired a months after I left) despite focusing mainly on Farm to table concepts for most of my career. But I've been judged negatively in other kitchens for playing to my strengths and believing/saying that speed comes with time--in the last place I proved that is the case and trained 4 people due to that philosophy/results. But patience isn't exactly easily found in kitchens or tolerated amongst a bunch of fast talking, high-strung adrenaline/stress junkies which is what most chefs are, myself included.
    - throwawaysea 7y ago
      I didn’t understand that note about firing either. Care to explain your reference? I’m not familiar with it.
  - Gollapalli 7y ago
    >Restaurants must relocate to cheaper areas like warehouses and shift to a delivery-first distribution model, which Uber, Lyft, and Google Express could help dispatch. It sucks from a customer-interaction perspective, but it's necessary. Other businesses like Pret in London were already using a hybrid centralized preparation with small, hyperlocal retail sales model. Yes. Let's just kill all community space. Great idea. I too enjoy being a pod person.
- scoot_718 7y ago
  I have no idea where the restaurants I order from are.
  - mynegation 7y ago
    That's one way to look at it. I, on the other hand, right now order only from the restaurants that are close to home, and I know exactly where they are. In the hopes that at least some of my favourites survive.
dehrmann 7y ago
> lack of differentiation. Exactly. The French Laundry can charge $325+ for dinner because it is arguably one of the 15 best restaurants in the country. It is incredibly differentiated.
- PaulDavisThe1st 7y ago
  That level of differentiation, though, is only available to on the order of 20 restaurants in the entire country.
  - dehrmann 7y ago
    I don't think we disagree here. I was pointing out that those rare times restaurants are differentiated, they can demand a premium, but only because they're differentiated. Restaurants aren't inherently low-margin, but most are, and it's because they're not differentiated.
nrp 7y ago
I know I'm being pedantic, but the best restaurants in the biggest food cities have pricing power because they effectively become Veblen goods. Benu, Coi, Quince, and so on can pretty much charge what they want to. They will continue to be booked out a month in advance, and the exclusivity itself becomes a draw. The line a restaurant needs to cross to achieve that differentiation is apparently a second Michelin star.
- LaEc 7y ago
  Those are not examples of true Veblen goods but rather goods which use price as a signal of quality. True Veblen goods are things like staple foods for the very poor where the increase in price eats so much of their income that they can only buy more staple foods.
  - opo 7y ago
    You are thinking of a Giffen good. A Veblen good: >...A higher price may make a product desirable as a status symbol in the practices of conspicuous consumption and conspicuous leisure. A product may be a Veblen good because it is a positional good, something few others can own. https://en.wikipedia.org/wiki/Veblen_good https://en.wikipedia.org/wiki/Veblen_good A Giffen good: >...The classic example given by Marshall is of inferior quality staple foods, whose demand is driven by poverty that makes their purchasers unable to afford superior foodstuffs. As the price of the cheap staple rises, they can no longer afford to supplement their diet with better foods, and must consume more of the staple food. https://en.wikipedia.org/wiki/Giffen_good https://en.wikipedia.org/wiki/Giffen_good
blueblimp 7y ago
What I don't understand is that restaurants seem very well differentiated to me. I have a significant preference for the food of some restaurants over others, and I'm not remotely a foodie. The medium post seems to be arguing for charging $12 for the example Doner instead of $11. It could just be that I'm relatively price-insensitive, but if I'm choosing between meals at two different restaurants where one costs $11 and the other $12, the decision is being made by which meal I'd prefer eating, not by the $1 difference. If we're talking a 2x in price, then sure, that can sway my decision. But the article is not talking about such big differences.
wendyshu 7y ago
What's an example of a well differentiated restaurant?

by nickff 7y ago

jariel 7y ago

The issue is not 'why they have thin margins' - the issue is their inflexible operating ability mostly due to fixed costs, specifically rent. If restaurants had 20% margins they would still be facing collapse. Rent is a huge portion of costs vis-a-vis most other businesses that can be run 'anywhere' whereas restaurants need prime locations.

nickff 7y ago
If restaurants had much better margins, they (or their owners) would have bigger rainy day funds. There are lots of businesses with large fixed costs.
- pixl97 7y ago
  There are few businesses with such large fixed costs and ample competition.
paypalcust83 7y ago
My great-grandfather was in the restaurant business back east, but my grandfather saw how unprofitable it was and became a mechanic rather than continue the family business. (He got fired once as a short-order chef in the 50's from a Howard Johnsons for cooking too well.) Restaurants must relocate to cheaper areas like warehouses and shift to a delivery-first distribution model, which Uber, Lyft, and Google Express could help dispatch. It sucks from a customer-interaction perspective, but it's necessary. Other businesses like Pret in London were already using a hybrid centralized preparation with small, hyperlocal retail sales model. If you want to make money, you can't think and do what everyone else is doing in all respects.
- 1996 7y ago
  > He got fired once as a short-order chef in the 50's from a Howard Johnsons for cooking too well. Under which logic? The Baron Von Muchausen argument of demoralization?
  - kayfox 7y ago
    Consistency is a big deal in restaurants because mismatched expectations drives bad experiences.
    - Melting_Harps 7y ago
      > Consistency is a big deal in restaurants because mismatched expectations drives bad experiences. It could also be that the expo/chefs valued speed over anything else, I've never been or eaten at a Howards Johnoson's, but I can easily see it being an issue if you're trying to make an effort while being behind on a ton of tickets and management prioritizes volume over quality and it they're seen as the bottle neck. I admit speed is not my strong point, but my presentation and knife skills are strong so I make up for it that way and I'm organized and clean--its what got me to work under a 3 star Michelin chef (total nightmare, he finally got fired a months after I left) despite focusing mainly on Farm to table concepts for most of my career. But I've been judged negatively in other kitchens for playing to my strengths and believing/saying that speed comes with time--in the last place I proved that is the case and trained 4 people due to that philosophy/results. But patience isn't exactly easily found in kitchens or tolerated amongst a bunch of fast talking, high-strung adrenaline/stress junkies which is what most chefs are, myself included.
  - throwawaysea 7y ago
    I didn’t understand that note about firing either. Care to explain your reference? I’m not familiar with it.
- Gollapalli 7y ago
  >Restaurants must relocate to cheaper areas like warehouses and shift to a delivery-first distribution model, which Uber, Lyft, and Google Express could help dispatch. It sucks from a customer-interaction perspective, but it's necessary. Other businesses like Pret in London were already using a hybrid centralized preparation with small, hyperlocal retail sales model. Yes. Let's just kill all community space. Great idea. I too enjoy being a pod person.
scoot_718 7y ago
I have no idea where the restaurants I order from are.
- mynegation 7y ago
  That's one way to look at it. I, on the other hand, right now order only from the restaurants that are close to home, and I know exactly where they are. In the hopes that at least some of my favourites survive.

dehrmann 7y ago

> lack of differentiation. Exactly. The French Laundry can charge $325+ for dinner because it is arguably one of the 15 best restaurants in the country. It is incredibly differentiated.

PaulDavisThe1st 7y ago
That level of differentiation, though, is only available to on the order of 20 restaurants in the entire country.
- dehrmann 7y ago
  I don't think we disagree here. I was pointing out that those rare times restaurants are differentiated, they can demand a premium, but only because they're differentiated. Restaurants aren't inherently low-margin, but most are, and it's because they're not differentiated.

nrp 7y ago

I know I'm being pedantic, but the best restaurants in the biggest food cities have pricing power because they effectively become Veblen goods. Benu, Coi, Quince, and so on can pretty much charge what they want to. They will continue to be booked out a month in advance, and the exclusivity itself becomes a draw. The line a restaurant needs to cross to achieve that differentiation is apparently a second Michelin star.

LaEc 7y ago
Those are not examples of true Veblen goods but rather goods which use price as a signal of quality. True Veblen goods are things like staple foods for the very poor where the increase in price eats so much of their income that they can only buy more staple foods.
- opo 7y ago
  You are thinking of a Giffen good. A Veblen good: >...A higher price may make a product desirable as a status symbol in the practices of conspicuous consumption and conspicuous leisure. A product may be a Veblen good because it is a positional good, something few others can own. https://en.wikipedia.org/wiki/Veblen_good https://en.wikipedia.org/wiki/Veblen_good A Giffen good: >...The classic example given by Marshall is of inferior quality staple foods, whose demand is driven by poverty that makes their purchasers unable to afford superior foodstuffs. As the price of the cheap staple rises, they can no longer afford to supplement their diet with better foods, and must consume more of the staple food. https://en.wikipedia.org/wiki/Giffen_good https://en.wikipedia.org/wiki/Giffen_good

blueblimp 7y ago

What I don't understand is that restaurants seem very well differentiated to me. I have a significant preference for the food of some restaurants over others, and I'm not remotely a foodie. The medium post seems to be arguing for charging $12 for the example Doner instead of $11. It could just be that I'm relatively price-insensitive, but if I'm choosing between meals at two different restaurants where one costs $11 and the other $12, the decision is being made by which meal I'd prefer eating, not by the $1 difference. If we're talking a 2x in price, then sure, that can sway my decision. But the article is not talking about such big differences.

wendyshu 7y ago

What's an example of a well differentiated restaurant?