Paying Rent on a Seat

When the Linkery got a little bit of national attention for our service-charge/no-tipping business model, it started a chain of events that led, among other things, to my becoming friends with Bruce McAdams and Mike von Massow of the University of Guelph.  Over lunch with them on a beautiful Toronto day, Mike, in passing, said something like (to the best of my recollection):

I’ve talked at length about this with consulting clients when I work with them on pricing. We’re not charging for the food and drink. We’re charging rent on the seat. Everything else we do, the pricing, the upselling, it’s all just a way to extract rent for the time a guest is occupying a chair in our restaurant.

The genius of this observation, in my opinion, is hard to overstate. It cuts to the quick of restaurant pricing, restaurant value, and the weird reaction restaurant operators have on hearing the words, “it’s expensive for what you get.”

To really understand the math, we need to lay out a typical restaurant operating budget. A simple model that is often used in textbooks is approximately this:

Cost of food & drink (COGS): 35% (of sales)
Labor: 35%
Rent: 5%
Operating Costs (utilities, insurance, bank fees, etc): 15%
Profit/Return on Capital: 10%

A more typical model, that we independent restaurant operators would discuss over bars in San Diego, is:

COGS 27%
Labor & Management: 33%
Rent: 10%
Operating Costs: 30%
Profit/Return on Capital: 0%

Two asides:

1) At a certain type of larger restaurant, they can get their COGS below 20%, which is a good way to make profits although not good for food quality.

2) In any circumstance, when you do a really high volume of sales — perhaps through a lot of to-go orders, or just being full from open to close — the percentage that goes to labor costs and variable costs starts to come down quite a bit and profits quickly improve. “Volume,” a friend used to say, “cures all ills.”

Back to pricing. It turns out that, once a restaurant pays for its cost of goods, labor and rent are by far its largest remaining costs. Furthermore, its other operating costs are largely fixed — specifically, they are a function of maintaining a brick-and-mortar location.

So, on the cost side, after paying for the raw product, costs are driven principally by the size of the establishment. Every hour you’re open, you need a minimum amount of people working the facility, determined by the number of seats available. Because, if you suddenly get a wave of guests, you have to take care of them.

All this means that, whether occupied or not, every seat costs money every minute.

On the revenue side, for table-service restaurants, the limiting factor is the number of seats in the restaurant. Or specifically, the amount of sales that can be generated by any seat. Sometimes guests complain that certain American restaurants are too focused on getting them out of their seat after dinner; I suppose the truth is the restaurant doesn’t care whether they stay or leave as long as they order a certain amount of food and drink per hour.

The fundamental strength of the business model of a table-service restaurant is measured by the equation:

number of seats * (seat revenue after COGS – seat cost)

The last part of that equation, seat revenue minus seat cost, has to be positive for the restaurant to work financially. The name of the game, then, is to generate as much revenue per hour per seat as you can while making it seem like your prices actually reflect the value of the goods that you’re selling. This a weird situation, right? Economically, the seller is selling the opportunity to sit in a restaurant and enjoy some food and drink; and the buyer is buying the food and drink itself!

No wonder this leads to a lot of situations where the guest feels as though she’s gotten bad value; that guest looks at what’s on her plate, or compares the retail cost of the wine or beer she ordered, or judges how satisfied she is with the culinary preparations — and meanwhile, the cost of providing those things is largely dictated by unobvious, orthoganal forces like the commercial rent market, loan rates, labor costs in the community, investor expectations, and so on.

As I pondered what Mike had said for a few weeks, it became obvious to me that there is a solution. A pricing model for restaurants that actually reflects their cost structure — and it’s totally do-able.

Food would be sold more or less at cost, perhaps with a 30% markup — as opposed to the usual ~300% markup you’d currently find. In other words, a steak that now sells for $32 in a restaurant would now sell for $11 on the menu. However, there would be a seat surcharge — a cover charge, if you will — for every second you were in the restaurant. Because, eating or not, your presence in that seat generated labor and operating costs, and you also have to pay the base rent for that square footage. When you walk in and sit at the table, the clock would start running, and when you went to pay, the seat surcharge would be added to your check.

Of course, the seat surcharge would cover labor, operating costs, and have a little added for profit.

The end result would be that you would get a hell of a deal on the food, and pay for all the other costs of the restaurant in a way that reflected your use of them.

Am I going to institute this pricing model at my next restaurant? Nope. But I do think it’s interesting to keep it mind as a possibile alternate universe, and, when I go to a restaurant, I often mentally break down my bill as though it had been itemized this way.

Because, I now understand, I wasn’t paying much for the food. I was mostly paying rent on a seat.

Meditation on a Baja Fish Taco

I endured a couple more variations of not-good fish tacos this weekend, as Katie and I continued our foolish quest to find a satisfactory scratch for our itch in the Bay Area. It’s our own damn fault, we’ve got no business eating them here, a place where the food item itself makes no sense at all.

Usually I don’t find it difficult to eat in harmony with the place that I’m at. In Southern California, we basically never ate salmon, except on the rare occasion in Ensenada when a salmon or two turned up in the downtown bay. Now that we’re in parts northern, I savor the access to wild salmon at home and in restaurants, and I only long for yellowtail on rare occasion.

But the fish taco is harder. I’ve been eating them, from Baja street stands, my whole adult life. And on a warm morning when I don’t have any pressing obligations, I jones for one. Or three.

The thing is, though, the fish taco is a genius food where it’s from. In a fishing town like Ensenada, after the high-value fish are sold to market, there is plenty of bycatch and low-value fish which stays in town, at low prices. The cheap and plentiful whitefish and angelito shark is local and tastes as fresh as it is, but it’s a bit on the boring side. So it gets beer battered and tempura’d in beautiful lard, put in a recently made corn tortilla along with cabbage and pico de gallo, and topped with crema-based white sauce and muy picante salsa. It’s an incredibly delicious street food that usually costs about a dollar, even in the higher-priced burghs of North Baja.

As soon as the dish gets transplanted to another location, it starts to fall apart, conceptually. The biggest issue is the availability, or lack thereof, of fresh, cheap, delicious fish that fries well. In the coastal cities of the western US, commercial fishing — to the extent it has not been displaced altogether — doesn’t dump a lot of cheap bycatch into the local economy. So a cook in US California who wants to serve a fish taco is faced with either 1) purchasing cheap, poor-tasting, usually farmed fish, like tilapia or 2) paying a premium for quality fish. Paying a premium is the right answer for me, of course, but when it leads to a seven dollar street taco, you start to hear complaints. A friend of mine once described this kind of fancy dish as a bourgeois insult to the idea of a taco. We’re pretty sure writing that in a review of a major advertiser is what got him fired from the local paper, but he has a point. The core purpose of a taco surely centers on making something delicious out of a tortilla and whatever else is at hand.

In San Diego, many restaurants address the lack of cheap delicious fish by making a grilled fish taco from premium fish such as yellowtail, the end result of which is clearly a high-value item but is something totally different than the Baja, batter-fried, fish taco. As for actual Baja-style fish tacos, the fish conundrum derails most US California fish tacos, from San Diego to San Francisco and beyond, before they even get started.

On top of that, we can pile on the other reasons it’s hard to get a good fish taco outside of Baja:

* Few options for good corn tortillas. In the Bay Area, for instance, the only great ones I’ve had so far are at restaurants that make and grind their own nixtamal. [UPDATE, Summer 2014: I’ve since been introduced to La Finca Tortilleria in the Fruitvale neighborhood of Oakland, who produce excellent corn tortillas.] In San Diego, the independent tortillerias are a bit better but they still are forced to trade off some quality for commercial viability.

* A general lack of commitment to high-quality frying in lard. Instead, the US industry standard frying oil is canola oil because it is cheap and industrially produced — despite the distinctive and unpleasant taste it imparts on foods fried in it.

* The fact that not many people, including professional cooks and restauranteurs, have actually tasted a fish taco in Baja they could use as a reference. As someone who has lived most of my life in the San Diego/Tijuana/Ensenada region, it’s easy for me to forget that north Baja is physically and/or mentally remote to most people, whether they be Mexican, American or from countries even further away.

With all that, it really is insane to think that there would be a good Baja style fish taco anywhere outside of Baja. And that’s great; it’s how food should be — about place, the physical and cultural landscape that produces it.

But I confess: it’s just a matter of time before I’ll be in my home kitchen, grinding nixtamal and dunking fancy white fish filets in a kettle of hot lard. Old cravings die hard.

Going To Town

Hey, we found a location for our upcoming restaurant! I’m very happy about it. The space is in the Longfellow neighborhood of Oakland, in North Oakland not far from (but not right next to) Temescal. It is close to MacArthur BART, directly on AC Transit, and has easy bicycle access from large areas of Oakland, Berkeley and Emeryville.

We have to go through a full permitting process, which will probably take a while (which is fine, we are still waiting for escrow to close on the San Diego restaurants anyway, and the time off from the biz is productive too). And there are no guarantees with permitting, it’s possible we might not get approval. But we love the space and the neighborhood, so we’re planning on the best.

At the new restaurant we intend to do something very small — around 30 seats, I think. We’ll cook and serve local, handcrafted food, which continues to be my primary interest. Our main focus will be serving our neighbors, but it’s my intention that we’ll be unique and excellent enough to also appeal to adventurous folks throughout the Bay Area. At this point we plan to start by offering dinner, with the idea of later adding a casual lunch, and potentially morning coffee/snacks in some way, assuming we can make all those moving parts work. Our future website will be here.

More than anything, we are really grateful to be opening in Oakland. The longer we’ve spent in the Bay Area, the more we’ve found ourselves drawn to what’s happening in “The Town” — not just the Oakland culinary scene, which is incredibly dynamic right now, but also its art, music, culture, writing, and, most compellingly, the people we meet here. I recently read an article that I thought referred, in passing, to Oakland as “the most interesting place in the country” and I didn’t even bat an eye. On second look it turns out I was reading the quote wrong, but regardless, that’s the feeling I’ve been getting about Oakland.

Of course, as is true throughout the Bay Area, many Oakland communities face challenges associated with gentrification. I do believe that a restaurant, operated thoughtfully, can be a positive force for both longtime residents and new residents, and we hope to achieve that. I feel that we were reasonably successful at that in North Park, although the changes that happened in North Park were not as drastic as what’s happening in Oakland now. But we’ll do our best: restaurants can make a big impact in a community, and applying that energy in a constructive way is one of the great joys of the business.

One of the most exciting parts about Oakland, for me, is that it has a very strong and vocal movement for urban agriculture. Helping support and develop hyper-local, small-scale food production was a focus for us in San Diego and I hope we can be a part of that in our new home, as well. Already, we’ve toured one great urban farm, and seen a couple more we hope to learn about. I’m not sure exactly where we’ll fit in, but finding that out will be part of the fun.

Of course, before we signed on the dotted line, we had to do due diligence: we sought out and drank up fine Oakland-produced beer and Oakland-made wine. They are both great, of course.

Anyway, I imagine there won’t be any news updates on this in a while, other than at some point, “yes, we got our required permits” (which I plan on) or “no, we didn’t get our required permits” (which I hope doesn’t happen, but if it does, life goes on). But that’s where we’re at, and it feels great. And, as I have to time to write more about what we intend to do at Salsipuedes — that’s the name of the new place — I’ll write about it here.