Back in the day, the music and sports industries were undercapitalized and did not appear to have market value. Then investors, trained and poised to identify properties or products that could be purchased for less than their potential worth as a commodity, created structures that led to investment in sports and music. Many athletes and musicians got rich, investors made a terrific profit.
That’s what’s been going on in the hospitality industry for over ten years, and with increasing velocity the last six years. Hedge funds and large investment groups have put money into restaurants with the result that chefs are richer than ever before, have money saved for retirement, and can develop creative plans not strictly driven by profit; their creative efforts are funded by money-making brands within their organizations.
The best and most recent example is the IPO launch of Shake Shack. Nearly $300 million later, this franchise of burgers, hot dogs, fries, etc. now is the global, upscale answer to McDonald’s. The caloric count is the same as McDonald’s. The wages are higher: $10 an hour for the average Shake Shack employee, which means, before taxes, for a 40 hour a week, 50 week per year position? $20,000. Is that enough to make rent, pay for groceries, have money for transportation, and save 10% per year for the future? No, not by a long shot.
More broadly, the new investment strategies are creating a standardization of service, product, wage structure, marketing, and types of food sold in restaurants. You know how people say that music sounds the same no matter the genre? That applies to most food sold in most restaurants. The investors figure out what sells, how it can be marketed, which sources are cheaper, and ask that chefs work within the guidelines provided. It allows for predictive models of capital growth and investment. Without standardization, forecasting profit is riskier, and one vital point of investment is managing risk.
Increasingly, dining experiences have become rarified and reflect the economic disparities of where we live. Specifically, we see about a handful of super expensive restaurants that operate on a break-even basis, but exist because the lower end brands provide the funding.
Shake Shack provides the capital for Gramercy Tavern. Otto provides the capital for Del Posto. Bouchon provides the capital for Per Se. Numerous other examples exist within other de facto franchises.
It’s not better or worse than before. After all, money doesn’t change the way food tastes. It’s different.