Bursting the Restaurant Bubble

Stay protected against rising costs and fierce competition

Healthy competition is called “healthy” for a reason. It often yields improvement. But some restaurateurs worry about a tipping point when there are just too many restaurants—and that point is near.

“There used to be one or two restaurants of note that would open a year,” says Victor Albisu, chef-owner at Del Campo in Washington, D.C., and Taco Bamba in Northern Virginia. “And the restaurant experience was very different. You’d go and give a restaurant one two, three or four chances.” 

No more. As new buildings rise, so do the number of restaurants occupying those spaces. Diners in many big cities could easily go out for years and never hit the same place twice. 

The “restaurant bubble,” as some restaurateurs are calling it, impacts a restaurant’s ability to hire the best, make a profit, keep patrons coming back—and keep the lights on. So, what does a restaurateur need to survive?

What’s A ‘Bubble’?

For more than a decade, about 10,000 new restaurants have opened every year across the country with a slight decrease during the recession, according to data from the Bureau of Labor Statistics. Currently, there are over 600,000 restaurants in the country, but economists aren’t worried about a total industry fallout like other sectors, such as housing. While more venture capitalists are getting into the restaurant game, most restaurateurs aren’t beholden to venture capital or loans for supporting their restaurants.

“Demand to eat out at restaurants has been solid even through the downturn,” says Tyler Cowen, professor of economics at George Mason University in Fairfax, Virginia, and author of An Economist Gets Lunch.

He cites obvious causes for the ongoing success of restaurants: a shift in traditional gender roles with women working away from home, an increase in millennial diners and restaurants filling in for entertainment like movies and theater. Still, the fight to stay relevant while labor and real estate costs are rising poses its own set of challenges.

“Within every industry there’s going to be pockets of bubbles,” says Stephen Zagor, dean of business management at the Institute of Culinary Education in New York. Those pockets could include location or style of service like fast casual, he says. Classic midtier restaurants might have reason to fear the fast-casual boom. 

“Traditional, family-style chain restaurants are having a really hard time resonating with millennials who are looking for authenticity,” said Ben Lawrence, assistant professor of food and beverage management at Cornell’s School of Hotel Administration in Ithaca, New York. “Those midscale category restaurants are really challenged. The average check is about the same as Panera Bread, but their cost structure is much higher.”

Getting Real with Real Estate

Tight urban areas face some of the biggest challenges competing with rising rents. With all those choices, regulars who used to be the bread and butter of restaurants can be hard to find and keep. 

“Every time they build a building, there’s thousands of feet of more restaurant space,” says Albisu. 

Rather than fight for space within Washington, D.C., Albisu has ventured to the suburbs. After opening the first successful location of fast-casual concept Taco Bamba in Falls Church, Virginia, Albisu plans to expand by two more locations in nearby towns Springfield and Vienna.

He sees value in Vienna as an “up-and-coming food community” and opportunity in Springfield, which has been overlooked by other chef-driven concepts but has population density. Each location of Taco Bamba will be slightly customized to encourage diners to check out other locations—including his fine-dining restaurant Del Campo in D.C.

A regular doesn’t necessarily have to be someone who dines faithfully at the same restaurant anymore. Your “regulars” could be hitting your different concepts across town. 

In Portland, Oregon, Chef-owner Jenn Louis owns a tavern, fine-dining restaurant and catering business. Running diverse operations lends to financial stability, but she also finds customers regularly hopping from one concept to the next. 

Connecting her catering business, Culinary Artistry, to her restaurant, Lincoln, was a no-brainer. But when it came time to open Sunshine Tavern, convenience wasn’t a good enough reason to open something nearby. Instead, Louis took note of the foot traffic and density 20 minutes away in Southeast Portland, which is less convenient for her, but “it serves the need of the neighborhood.” 

Labor of Love

It’s not just diners who flock to the latest restaurant opening. Operators are finding that employees in the front and back of house can be lured to the newest hotspot.

“Some chefs and general managers make a career out of jumping from one hot opening to the next,” says Jimmy Carbone, owner of Jimmy’s No. 43 in New York City. 

Take a proactive approach to labor issues now, using mentorship programs to foster staff bonding and loyalty. Labor woes may compound this year as many states are already increasing minimum and tipped wages.

“A well-managed restaurant in most cases should be able to manage these wage increases,” Zagor says. Basics like selectively increasing prices, buying more carefully and finding creative ways to save outside of labor costs can help operators stay prepared, he says. 

It can be done: In Oregon, Louis pays a minimum wage of $9.25 and no tipped minimum by striking a balance between food, pour and labor costs. Specials, such as an extended happy hour at her fine-dining spot, Lincoln, work twofold to show off scaled-down dinner menu items to customers while reducing costs.

The Silver Lining

Although fast-casual spots are getting plenty of buzz and the space is crowded, don’t be afraid to move the scale up. Diners are willing to pay more for the right experience.

“We need to adjust our framing. They’re competing against all other ways you might spend the money, and you have a lot of ingenious chefs doing great things,” Cowen says.

Regular checkups on service and quality are essential for any operation, but experimentation can help a restaurant pull ahead. 

After Jimmy’s No. 43 hit the 10-year mark, Carbone decided to go back to basics. Small touches such as putting out free popcorn and greeting individual customers helped gain customer loyalty. Larger upgrades ensued such as updating to a full liquor license and changing the kitchen’s identity. After experimenting with kitchen pop-ups, he partnered with Chef King Phojanakong of New York City’s Kuma Inn to add a microconcept in the restaurant called Tito King’s Kitchen with pan-Asian dishes like spring rolls and a Filipino-style whole roast pig. The update was rewarded with rave reviews and a new stream of customers.

Narrowing the focus at both of his establishments, Albisu has found authenticity is the key to customer retention in a dense market. “That’s one of the positive parts of so much growth and expansion. The level of restaurants have definitely benefited,” he says. “If you know where to look, you can find really interesting experiences.” 

Would-be restaurateurs are wise to consider the value of having their own space and staff, opting for incubator concepts like food trucks, pop-ups or food halls instead. 

“There’s so much back office to a lot of traditional restaurants and rooms and lighting and decor et cetera,” says Cowen. “And a lot of people don’t give a damn. They just want good food.” 

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