Austin’s Impending Restaurant Bubble (Part 1)
A few weeks ago I shared some of my thoughts around the steps we’re taking to make Reset a product that our consumers feel good about paying for. In light of some restaurant closures that have hit Austin this summer, I wanted to focus today’s piece on what’s going on in the restaurant industry (our business partners), in the US and here in Austin, and some interesting trends and innovations that are happening in response. FYI, it gets a little depressing…
Over 50 restaurants, bars, and food trucks closed down in Austin in 2016. That number bumped up to over 70 in 2017. It’s July 2018 as I write this, and there have been almost 50 shutters already. Austin Java, an iconic Austin restaurant, closed its Barton Springs earlier this month because of the increases in their property tax, stating in their letter to their patrons “to stay in this location would mean a dramatic increase in menu prices in order to stay afloat.” Alcomar closed in May because of a “proposed rent increase by their landlords.” Fair Bean Coffee in South Austin closed after 10 years last November, with their owner stating that part of the closure was due to staffing challenges. Black Star Coop almost closed in 2017, but still struggles to find back-of-house staff because “businesses are just short on chefs right now.” In October 2017 Threadgill’s HQ location on Riverside stated that after 22 years of business, they were likely to close in 2018 since in the last five years, their cost to operate in that location (lease, insurance, rent, tax) increased 600%. They ended up signing a lease later in 2017 that guaranteed them three more years.
I could go on and on, but essentially what’s happening to this already slim margin industry are labor shortages (leading to rising labor costs), increasing property values (leading to rising rents), and a saturation of the market (leading to consumers spreading out their budget over many more restaurants), knocking many restaurants out of business. As Blackstar Coop’s owner stated, “Health care goes up every year. Rent goes up every year. All of our vendors’ prices go up every year.” This is happening all over the US, but with Austin’s rapid increase in property values and below average unemployment rates, restaurants are closing their doors quickly.
Thrillist predicts that there won’t “massive simultaneous closures” but “different cities will be affect at different times.” They predict that the restaurant industry is going to be hollowed out (essentially the gentrification of food), with fast-food and fast-casual succeeding due to lower labor costs, high-end restaurants weathering as long as they can keep defending their high meal prices with accolades and stars, and food delivery apps (like UberEATS and Blue Apron) taking away from the middle by providing high quality food at lower prices. Sit-down restaurants may revert back to what they were 20 years ago, “reserved for special occasions,” since they’re going to have to raise prices to keep up with their rising costs that are out of their control.
We can blame a lot of things for this unfortunate trend — for example Wall Street interests (our favorite punching bag) poured billions of dollars into the restaurant industry since the early 2000s after they got burned from the dot-com bubble, supporting chain restaurants more so than independents due to lower risk. The number of restaurants in the US is growing at about twice the rate of the overall population, but the number of independent restaurants dropped 3% (2016)!
And while chain restaurants are reporting slower same-store sales growth more recently, they are attracting more money from private equity and banks (like Del Taco and Papa Murphy’s) since franchise fees and royalty payments are buffers against overall sales declines (i.e. the lenders don’t have to worry about actually operating restaurants).
50% of US restaurant labor is in chain restaurants. If the restaurant bubble blows, there will be major ramifications on our labor market — restaurant jobs have accounted for 10% of this year’s job growth, and the hospitality industry is eclipsing all other major industries, with some predicting that by 2020 there will be more cooks and servers than factory workers.
If that isn’t sufficiently depressing, tune in for Part 2 next week where we talk food innovation, operational innovations, and tech innovations that are coming up across the globe and here in Austin that are coming up and what they mean for our independent restaurant community (it’s not all bad news).