By Paul G Fetscher CCIM CRX CLS, President Great American Brokerage

Like many other American teenagers, my first paycheck was at a hamburger stand. That was just two years after Ray Kroc had purchased the development rights from Mac & Dick McDonald.  Burgers were 15 cents, a shake 20 cents, and just 12 cents for great fries.  All in all, it was an excellent lunch for 47 cents.  All transactions were cash.  I used to get tips when I worked at the window. 

I cut my teeth working for Carroll's Hamburgers.  It was a 1,168 SF building with a basement.  That's where I had to go to get the 50-pound bags of potatoes.  I carried them upstairs, peeled them, cut out the eyes, and sliced them into a water-filled sink.  Then I got up to my elbows, stirring them up to rinse off excess starch.  Cooking them was a two-step process.  First, they were par-cooked for about three minutes.  Those par-cooked potatoes needed about another two minutes to finish them off to a golden brown.  Our competition wasn't Mcdonald's since there weren't any in New York.  Instead, it was Wetsons, Burger Chef, and the newly opened All American Burger.

I went to college and majored in Civil Engineering. I worked on everything from solidifying the soils under Subways in Brooklyn to building the first nuclear power plant in the Carolinas, but I wasn't having fun! 

An opportunity opened up.  I visited a recruiter.  He asked, "What do you think about real estate?" 

"I know they're not making any more of it."  And off I was in Commercial Real Estate. 

About three years later, a requirement came in for Restaurant Real Estate, and I was off to the races. I read that Marriott purchased Big Boy. I loved their strawberry pies. I wrote to Marriott to suggest I could find sites on Long Island for Big Boys. A Tennessee gentleman, Bill Killpatrick, from Marriott, wrote back to me. 

"We're not interested in bringing Big Boys to Long Island.  But we just bought a chain, Roy Rogers.  We would be interested in growing that chain." It was my start in restaurant site selection.

After spending two years finding locations for Roy Rogers and even having dinner with Roy Rogers himself, Bill Kilpatrick threw me a curve.  The mayor of Alexandria, VA, had called Bill Marriott.  They had built a new City Hall.  He wanted Marriott to create a restaurant in the old city hall.  I was invited to the opening of their first dinner house restaurant, The Joshua Tree.  I loved it.  I told Mr. Marriott that the concept would work well in Long Island.

"If you can find a good location, we will definitely consider that."

And so began my time in dinner house real estate site selection.  Doing deals for a 7-10,000 SF restaurant paid four times better than finding a 2,200 SF Roy Rogers location.

Dinner houses were fun! And the comp meals were a lot better than a Roy Rogers Roast beef sandwich… even with fries.

So, from the Marriott Dinner houses, I went on to Rustler Steakhouses, Moonraker, Plankhouse, Coco's, Steak & Ale, Chi Chi's, and then came Rusty Scupper. I learned from their real estate departments. They then asked me to find a location in other markets: Connecticut, New Jersey, Massachusetts, Pennsylvania, and Washington, D.C.

In the 1970s, dinner houses were king.  Footprints typically were 10,000 – 14,000 SF.  Other than Marriott operations, they served lunch and dinner for seven days.  A visit to one of them was … an experience.  You might be in a Victorian townhouse, a Mexican Hacienda, or a beautifully skylit Oak environment with porpoises jumping over each other in a surfboard-inspired bar top.

The 1980s brought us ferns.  "Fern Bars" ranged from TGI Fridays and Houlihan's to their copies, Ruby Tuesdays and Applebee's.  They broke down the mode of having one room for the bar and another room for dining.

As women emerged in the workplace, they could now meet a friend for drinks, be seated at a table, and not be hassled.  At the same time, a businessperson on the road could sit at the bar and order from the full menu. 

The footprints shrank.  Instead of 10-14,000 SF, their footprints decreased to 8,300 down to 5,500 SF.  There was less distinction between Dining and Drinking areas.  Socially, this was the place to meet and greet.

The 1980s became the decade of chain emergence. California Pizza Kitchen, Boston Chicken, later to morph into Boston Market, and Cheesecake Factory were three of the early leaders. Who remembers Il Giornale? It was owned by Howard Schultz, who then purchased a coffee bean merchant in Pike's Place Market and launched Starbucks, which sold hot beverages.

The 1990's1990s saw several shifts. The first McDonald's opened in Moscow, and the last Horn & Hardart closed in New York City. Steve Ells, a Culinary Institute of America graduate and a former line cook at Stars in San Francisco, concluded that Americans wanted better food fast. His response was to open Chipotle. Others followed, and Fast casual was born.

Meanwhile, Pepsico's restaurant brands, Kentucky Fried Chicken, Pizza Hut, and Taco Bell, all grew faster than ever, domestically and internationally. The restaurant industry found there were more stomachs outside the United States than there were in the U.S. International growth started to exceed domestic growth. Our brands were exported.

Restaurant sales continued to absorb more and more of the food dollar. Total restaurant industry sales rose to $295,000,000 from a mere $42,000,000 in 1970, a sevenfold increase.

At the turn of the century,  a new word came into vogue: "value."  It preceded the word "menu."  Burger King had 11 items on its $1 value menu, and McDonald's and others followed.

Darden Restaurants initiated Seasons 52, which followed the trend of having fresher menu items in the hopes of better nutrition. The consumer clearly was embracing the concept of more sophisticated dining and better fare. Seasons 52 had a decent wine list, a first for a chain restaurant.

Ruth's Chris emerged from the Deep South and led the growth of high-end dining as a chain. In Providence, RI, Ned Grace answered with Capital Grill.

Nutrition became the buzzword.  President George Bush called for Nutrition Labeling.  Three out of four consumers said they were trying to eat more healthfully in restaurants.  Restaurant sales continued to grow and increased to $500,000,000.

New York City passed legislation requiring any restaurant with 12 or more units to display calorie counts on its menu. To avoid compliance, Houston's Restaurant changed the name of its Manhattan Restaurants to Hillstone.

The top three soft drink companies agreed to stop selling sweetened sodas to schools, and  Mayor Michael Bloomberg started attacking sweetened sodas. At the same time, more and more restaurants started buying local produce." Farm to Table" became prominent in the never-ending search for a healthy image.

Meanwhile, restaurants began to shrink, not in numbers, sales, or footprint.  TGI Fridays shrank their footprint from 8,300 SF to 6,700 SF.  At a construction cost of $350/S.F., the reduced footprint could be built for a savings of $500,000 per unit at a cost of only losing 15 seats.  However, the loss of seats wasn't a problem.  Due to shifts in consumer habits, lunchtime wasn't just 12:00 – 2:00.  More people were having lunch later in the day.  Later evening dining was a result of people working later.

At the same time, the white tablecloth restaurant saw shrinking customer counts during the week.  We saw a distinction between "Eating" and "Formal Dining".

A full-service dining experience would typically take an hour and a half to two hours. With more women in the workforce not cooking home meals and folks working later and on their computers, available time for dining shrank. The demand now was for Casual Dining. Consumers wanted to be in and out in under an hour. Chili's, Cheddars Scratch Kitchen, Red Robin, California Pizza Kitchen, and the like were just what the doctor ordered.

Restaurant developer Norm Brinker fought against mandatory insurance. He found that only 26% of his employees were the primary wage earners in their families. All the others were covered by the insurance of the primary earner in their household.

He also fought against minimum wage increases. Half of his employees earned far more in tips than they did in wages, so in the full-service restaurant industry, things were just fine as they were.

Conversely, if a politician or a legislator raises the minimum wage, they expect to get the full backing—and vote—of all those who would benefit.

Seattle led the charge by imposing a $15 minimum wage. Like flipping a switch, a substantially higher minimum wage was implemented. Employers substituted technology for staff as quickly as they could. 

If you walked into a McDonald's, you were confronted with self-service touchscreen terminals rather than finding a counter backed by smiling faces, not by staff giddy about their higher compensation.

Effectively, the increased minimum wage served to eliminate jobs.  Back in 2014, a front-of-the-house employee in New York received a minimum of $5 per hour as payroll.  In the decade since, we've been looking at almost tripling wages to the front of the house.  Funny thing.  I haven't seen anyone working three times as hard or performing their duties three times as fast.

While the front of the front-of-the-house wages rose, the back-of-the-house demanded more as well. The $10/hour line cook who used to work 60 hours a week now was raised to $15 but became unaffordable at the $22.50 overtime rate.

Along came Covid.  It was both a catalyst and an accelerator.  Patrons wanted to eat outdoors.  That is, those who were willing to venture out at all.  Instead, third-party delivery services thrived.  I'm trying to figure out how an industry with a 10% bottom line can afford to pay 30% to a third party to deliver their goods. Some New York City operators formed ghost kitchens that existed only online.  Their prices were suspiciously 20% - 30% higher than their normal menu pricing to absorb third-party fees.

More people than ever are working remotely. If someone works from home on Mondays and Fridays, the downtown restaurateur has lost 40% of its market. Unfortunately, they are still required to pay 100% of their rent.

The viable numbers in the restaurant industry have changed drastically. Diners used to be open 24 hours a day, but operators couldn't afford these elevated rates. They have significantly cut back their 168-hour work weeks, and 50% of diners are closing altogether.

Let's review some of the basic restaurant metrics. Are you buying whole chickens and butchering them?  That saves food costs but raises labor costs.  I don't care what is your food cost.  I don't care what your labor cost is.  But I care very much about your food, labor, and Prime Cost.  Ideally, that was about 30% food and 30% labor for a prime cost of 60%.

Anyone who has been to a supermarket has seen significant increases in the cost of commodities.  The sale prices are higher than the pre-covid prices on just about everything. The price of eggs doubled.  A rack of lamb used to sell for $8.99 per pound.  Currently $16.99. Before Covid, you could buy a steak for substantially less than today.

There is a limit to how much of the costs can be passed on to the consumer.  As fast food meal prices approached the promotional prices being offered by casual dining, there was a strong pushback.

The Cost of Living increase from 2010 – 2020 was a mere 1.6% per year compounded. However, restaurant pricing has increased by over 60% in the past decade. Starbucks prices (for selling hot water) have increased by 39%, Taco Bell by 81%, Pizza Hut by 86%, and McDonald's prices have doubled.

A decade ago, you had to pay a server $5/hour. Today, it's a minimum of $15/hour. 

I used to say to restaurateurs, "I don't care what your food cost is.  I don't care what your labor cost is.  But I care very much about your food plus labor costs."

With food and labor costs increasing, it is extremely difficult today to hit a prime cost (food + labor) under 65%. Half of operations are closer to 70%. So, where do these additional percentage points come from? Profits!  For example, diners who used to enjoy about 12% profits struggle to make half of that as pre-tax profit.

So, how can an operator deal with these tectonic shifts? One way is to close for lunch Monday through Friday. Among other benefits, this will limit overtime labor costs. Diners that used to be open 24 hours now close by 9 or 10 PM.

One of our clients ran a 60-seat cantina. With staffing challenges during COVID-19, they eliminated the floor staff. Now, you have to come to the take-out counter to pick up your food. Tips decreased, lowering the cost to the consumer. Table turns increased, and net profits increased.

However, new operations are moving towards much smaller footprints.  Today, most requests for new restaurants are in the 2,000 SF range.  Historically, I have leased dozens of restaurants in the 10,000 SF range.  Therefore, I have to do five deals to earn the same commissions I got from a single deal.

Did I mention credit cards? Think about this:  Today, the typical full-service restaurant with liquor has credit card charges greater than sales. 

Another sad note. Sales and real estate taxes exceed profits in the New York Metro area.  So why should someone invest hundreds or millions of dollars to build a restaurant and give most of it to the government?

Norman Brinker, founder of Steak & Ale and Bennigans and developer of Chili's, Maggianos, and other brands, said it best.

"Your competition isn't the guy down the block.  It's the Government.  They can put you out of business faster than anything else."

Paul G. Fetscher CCIM CRX CLS,  is the president of Great American Brokerage, a commercial real estate firm specializing in restaurants and retail. His business involves finding locations, negotiating leases, buying and selling businesses, and valuing businesses. He is past president of NYSCAR, the N.Y. Metro CCIM Chapter, and voted the Long Island Board of Realtors Commercial Broker of the Year. He has been in real estate for over 50 years but has never sold a house or rented an apartment.