I was really amused when the President made the pronouncement that certain countries were “sh*tholes” implying they weren’t worthy of consideration as part of the great American dream. Forget the partisan politics and political correctness of the statement because as an entrepreneur and businessman, I thought that Mr. Trump would appreciate the value of marginal markets and a crappy location. I profited from this understanding years ago and so did he.
In my early life I was in the restaurant business. My first place was located on the exclusive Upper East Side of Manhattan. Right on Madison Avenue I was in the middle of New York’s “Silk Stocking District” and “Museum Mile”. Here I was in one of the richest markets in the world and I was prepared to be busy all the time. The irony of this location was that the people who lived there had LOTS of disposable income and counter to my initial logic, this presented a problem for my budding new restaurant.
Having abundant disposable income became the problem because they had limitless options as to where they would go, when they would travel and what appealed to them that day. These people had weekend homes in the Hamptons; went on vacation a few times a year; took winter trips to the Caribbean; winter ski trips to Aspen and could go to the theater and symphony every night. Summertime on the Upper East Side was a ghost town. My prime location and well healed customer base forced me to struggle for years to manage my cash flow and operations. My customers were really wonderful people but the fact was that my audience didn’t really need me. I worked hard at it for 10 years and addressed an underserved market at that time – catering to their brownstones and Park Avenue apartments. Ironically a seeming gold mine that turned into a sh*tty market.
I grew up in Bay Ridge Brooklyn and I remembered from early on that the restaurant and bars in that community were vibrant and active for many years. The community was filled with working class people and middle level Wall Street workers but no one was really considered wealthy. Cops and firemen, electricians and plumbers, dock workers, nurses and teachers filled the homes that many worked hard to by. They regularly went out to their favorite restaurants, bars, pizzerias and special occasion places. Caterers were busy with weddings and christenings. These people enjoyed a vacation a year, but weren’t going to the Hamptons to hang out at celebrity parties.
Learning from that reflection, I opened my next restaurant in a neighborhood that was “gentrifying” (aka – sh*thole with Yuppies and artists moving in). This place looked a bit dicey and was filled with working class people who worked hard and scrapped together enough to buy a row house but had tight budgets. For many, vacations involved loading up their mini-vans and going to a family resort in the Poconos if they were lucky. Their idea of a beach resort was an above ground pool in their tiny back yard. Their mini-vacation was coming to my bar to let off steam or treat their family for dinner on a special occasion. Most of my restaurant friends thought this was a crappy location. Boy were they wrong and I went on to open more restaurants and the formula held true.
We became part of the community and served food they liked and understood at prices they could afford. The atmosphere that was comfortable and not fancy with a staff of locals so that everyone felt at home. Consistency was the key as my customers didn’t have a lot of disposable income to experiment on the culinary gymnastics of white table cloth Chef. They needed to know it would be good every time. The place was a huge success in this downtrodden neighborhood because it became special and important to the customers. The place gave them some comfort and a special treat after working hard. Rents were low and the appreciation was high. This crappy location, targeted properly was pure gold!
This formula for success was amplified in the 1990’s when Outback Steakhouse mounted a controversial strategy. They decided to roll out non-prime steakhouses at a time when the popularity of beef was at an all-time low. They were going for the mass market and were only looking for marginal “B and C” locations that afforded cheaper rents and because they were weaker locations they would not serve lunch. At that time, many of us in the industry thought they were crazy. No one was eating steak, least of all working-class people and how could you survive without serving lunch. Well – they knocked it out of the park. The first IPO became one of the most successful IPOs on Wall Street and they went on to open hundreds of locations.
In recent history, I have observed locations once considered horrible, having gone in a completely different direction. Brooklyn is a prime example as neighborhoods my Dad warned me to stay out of have turned into the hot spots for trendy dining and drinking. The Lower East Side was no man’s land for years. Tenements, drug dealers and all kinds of sh*tholes infested the streets. Today, it is one of the most sought after locations in the city. Now the rents are through the roof and dreaming of a new location on streets like Rivington, Clinton or Delancy are unattainable. Long Island City, Hoboken and Jersey City have followed their blue collar cousins and are now prime for growth.
I recently looked at a business plan for a restaurant group coming into NYC from California. They are planning on building out a new location in the Bowery area. The budget calls for close to $1.8 million in build out, equipment and expenses. They have no more than 80 seats and are paying $500,000 a year ($41,000 per month) in base occupancy costs. All I could think, was what motivated them to think that this was a good financial decision. The Bowery was once the poster child for the homeless, alcoholic and drugged out unfortunates in our city. Today you had best be ready to plunk down $2 million for a trendy apartment. So, will this be a gold mine… or a crappy location investment? Only time will tell.
One of the reasons why banks and financial investors don’t take most restaurant owners seriously is that very often they don’t show good financial judgment. They run on gut feelings and emotion rather that objectively analyzing the data and running the numbers. What appears to be a crappy location may be the opportunity of a lifetime. What appears to be a high-profile spot, may take you down financially. Proceed with Caution.
If you have any questions or would like to discuss your business, please email me at DSederholt@sfscapital.com