Daniel Shein is a co-owner of the restaurant Nur in New York City, and co-founder of Agnoris, a restaurant analytics company that graduated from the prestigious YC incubator. He’s spent over a decade in tech and almost another decade following his passion for helping restaurants succeed.
If you spent time in a big city in the 90’s or early 2000’s, you experienced the restaurant industry at its creative peak. It was the age of celebrity chefs, inventive cuisine, and dining rooms beyond description. Hospitality was an art on full display. Talented people from around the world filled ground-floor real estate voids like artists draw on a blank canvas.
And most shockingly, many of these restaurants made good money.
So how did we go from an inspiring, artistic industry – that was also decent business – to one of the hardest but least rewarding endeavors? To understand that we need to look at how customer perceptions of restaurants have changed and how that shaped industry leadership.
Going back a couple of decades, eating out was a rare luxury: something most of us did only on special occasions.When we went out, we made it an event to remember. We expected to be catered to, pampered, and almost always indulged in alcohol and desserts.
Turns out that makes for great business. As anyone selling luxury goods will tell you, it’s easy to earn a profit when the customer is looking beyond a need and indulging in a want. Additionally, restaurant rent was low, as were labor costs thanks in part to restaurant chains fighting for lower tipped minimum wages. So as long as people were filling seats, restaurateurs kept a decent chunk of the revenue.
So what was the hardest part about running a restaurant? Getting customers.
Customers needed to choose your restaurant on the rare times they went out. If I’m dining out a limited number times per year, I’m carefully choosing those places, and my tolerance for a bad evening is very low. Restaurants had to either make it to the top of the customer’s restaurant list or convince customers to eat out more frequently.
As a whole, the industry focused mostly on bringing in customers and creating experiences they would love and share. Dining out became about one-upmanship, with some restaurateurs writing books, others regaling children with toys, and the crazy tackling epicurean feats bordering impossible. Regardless, they all made us all want to eat out more.
Those days were relatively pedestrian by today’s standards: if you wanted to be a successful restaurateur, you need only creativity and communication. If you loved connecting with people, if you loved entertaining them and making them happy, you had a good chance of creating an experience that would make them return.
In those days the industry was propelled by the passion of the entertainers and artists alone. Working in hospitality wasn’t just a job: it was a way of life.
And it may have worked too well.
Today, people no longer eat out 20 times a year – they eat out 20 times a month. That’s easily five billion more meals a year. Consequently, costs have gone up. Restaurants (and nightlife in general) have turned cheaper neighborhoods to thriving communities, ratcheting rents (looking at you Union Square) which increased the cost of living and therefore increased the costs of labor. Expectations have grown in parallel: a casual look at Yelp reviews of even the best restaurants will show you how picky customers have become. All the while, the industry has exploded with competition which means restaurants have a much harder time attracting customers.
This rapid rise of dining out has attracted technology companies seeking to benefit from industry growth. Entrants like OpenTable, Yelp, DoorDash, and UberEats have grabbed consumers en masse, dangling customers in front of starved restaurants, forcing lopsided economics on the already-struggling operator.
Yet the industry didn’t change overnight. The crescendo was building for years, but as is the too-familiar case in hospitality, few understood the need to evolve before it was too late.
Why? While running a restaurant is one of the most complicated jobs out there, most of the people around the table weren’t seasoned operations experts; they were hospitality experts. And when the main metrics restaurateurs were watching correlated to dining experience and not to business economics, the foundation upon which they built their businesses washed out from under them. They paid through the nose for services that brought in customers but didn’t measure ROI, LTV or CAC – terms indoctrinated at an early age in consulting, investment banking, or really any other operationally focused industry.
You see, many people working in hospitality embraced it as a way of life from an early age. And while they were great at their work, many lacked exposure to other business methodologies. There has been little, if any, cross-pollination between hospitality and the industries of finance, media, or software. So while e-commerce businesses learned to operate more efficiently and profitably engage customers, many in hospitality actually took pride in avoiding change, telling the world (and themselves) that hospitality was a refuge from modernization and immune to the realities of economics.
Well, reality has caught up. Hospitality’s economics became unsustainable long before COVID, it’s just that COVID has really laid bare the lack of investment in modernization. Your favorite restaurant that was packed every day of the week pre-COVID was barely surviving then, no it’s on life support. The business got very hard, and the recent pandemic was a killer blow to an industry that was in desperate need of re-inventing itself already.
So where do we go from here?
You’d be hard pressed to find someone who thinks the current state of restaurants is “good”, and pundits are waiting for the other shoe to drop as tens of thousands more restaurants are likely to close for good. But here’s the thing, and please don’t shoot the messenger: this is actually a healthy process. Evolution is natural, and one need only look to retail for a case study.
As the days of e-commerce began to take shape, it became harder to compete as a stand-alone brick and mortar operator in a sea of sameness. Who needs to go to a store when there’s Amazon? And while the old playbook was comfortable, it was very fragile. The new playbooks that adopt technology and data enabled retailers to extend beyond inherent limitations of brick and mortar and re-invent themselves.
Some people worry these are signs of an industry losing its soul, but a quick look at the retail industry has shown that the opposite can be true. There are more ways than ever for a retailer to focus on what they do best and be more creative thanks to using better tools and modern practices to manage the business. Just like selling clothes doesn’t need to happen in-store anymore, restaurants can break barriers and serve people differently. Modernisation can be liberating.
While times are very tough for the restaurant industry, this is far from the end. In many ways, this is actually a new beginning. The customer demand generated by the leaders of our industry over several decades is as strong as ever. And as they slowly bow out, a new generation of leaders is starting to form: those who are redefining the business model of hospitality. As someone who took part in the ecommerce revolution and now spends his days helping restaurants anyway he can – I’m excited.
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