Four Reasons for San Francisco Restaurant High Closure Rate

Opening a restaurant in San Francisco is not for the faint hearted.  Perhaps steely courage and an unfettered belief is the only way to think about this superbly risky venture.

One interview I saw a restaurant owner said that meal delivery and meal kits plus increases in lease rates and labour costs are what make a restaurant operation a loss making venture.

The increase in closures seems steady this year than the entire decade.  It seems not just restaurants are closing in let say an organic way–natural causes but at a very un-natural rate.  And this trend has caught my attention–I have written about it twice in the past few years: San Francisco’s Quick Sand of Retail and Restaurant Landscape in 2018 and in 2017 San Francisco’s State of Restaurant Closures.

So if there is a further decline in retail and restaurants walking neighbourhoods like Valencia Street what will there be to walk to?   I do see an increase in decline in the city being less and less civic oriented.  While this is not new across the US it is for San Francisco.  San Francisco is a unique city in which a large part of the population has only been here a 2-3 years–my longevity’s here is unusual and perhaps there is less fondness and affection for what is here.

There are four main reasons that I will talk about that account for the bulk of San Francisco restaurant closures.

1. Lease Rates, How Many Glasses of Wines Do You Need to Sell?

More precisely what does it cost just to pay rent?  How many glasses of wine or cups of coffee that just go to pay the base rent?  The answer is yes many glasses of wine and cups of coffee to pay monthly leases.  While the lease rates are quite high–there is increase rents year over year that take their toll.

I reviewed a lease for a restaurant/coffee bar this year and the terms were on the onset not favorable for this operation.  The percentage rent was remarkably low–meaning that this operation has to pay a percentage of sales in addition to rent based on certain sales benchmarks achieved.  I advised that this should be eliminated or increase so that the sales benchmarks would not kick in too soon.  So there was not sure were the terms right–there was also a preference of operator.  The landlord in this deal were keeping their options open to get a “perfect” tenant.  And well perfection is not possible and being selected is tough so what does an operator do?  They might agree to terms in the beginning that are not favourable for long-term success.

For chain restaurant or coffee operators the terms are often in their favour and they have the power to have either an edge or get suitable terms.  Landlords are doing their best to get their best deal–they do think in San Francisco–you just have to wait long enough for that perfect tenant… but this is often Waiting for Godot.

I do believe the city should do more to discourage store fronts from being shuttered for months to years on end.  San Francisco reputation is on the line and even in obvious terms the tourist trade will be affected.  I am not sure why anyone would be a tourist in San Francisco–so superbly expensive and the experience might be more interesting or compelling somewhere else.

2. Check/Customer Expense

While San Francisco has a very large population of wealthy people who call this city their home–not everyone is wealthy.  San Francisco restaurants are expensive–and add on the wine, beer or cocktails that can be a special occasion for many residents is expensive.  Just add up the costs as a diner by looking menu of a ‘moderately’ priced restaurant – a first, second and two glasses of wine with high taxes and tip is somewhere between $50-75.  While this may not sound like a lot there is a large population that live here with large student loans and are not always in the 6-figure salary bracket.

I just got back from Italy where the costs are reasonable as a patron.  A simple breakfast is my preferred breakfast mode and paying €2 is pretty common for a Cappuccino and Cornetto.  Dinners are equally inexpensive–where last week I spent €22 for a two plate meal and wine…. it was not a fluke it was easy to repeat.  I kept thinking it was a much more expensive meal than when I received the check.

The opposite is what I experience in San Francisco.  While there are wine countries near San Francisco that doesn’t matter for wine prices–they are high.  In Italy it is not a struggle to get a great bottle of wine for an exceptional price not just at a restaurant but off premise as well.

3. It’s Those Free Lunches

Yes, it is those free lunches that have had an impact–Silicon Valley did not just create jobs in San Francisco it brought it’s free lunches to San Francisco.  Last summer I recall on Friday’s I tried enjoying a nicer lunch and I had eaten at all those that were open for lunch.  I eventually ran out of lunch places during the business week?!?  Unlike New York or other cities San Francisco has a large population that are not open for lunch.  Simply if there was a demand more restaurants would be open for lunch.

Just a few years ago Alta, CA was a very nice restaurant opening mid-Market (Van Ness and Market) but it was doomed–while Twitter and Uber are nearby–it didn’t matter because of those free lunches.

But unlike in Europe or New York most people don’t have a glass of wine with lunch… it is a restaurant culture that doesn’t fit my sensibilities of where wine is requisite with my meals.  I do think if I am dining out at a full service –a glass of wine is not or should not be unusual but in San Francisco it is.

4. It’s A Cultural Thing

While there has been a high closure rate in San Francisco another city has been hit hard as well this year: London.

San Francisco is a very different restaurant town–some very nice restaurants are still operating and I hope will continue.  But I am skeptical.  The ‘cultural thing’ is that there is a different emotion and relationship to restaurants.  I was surprised there was little disappointment from what I could ascertain when Fleur de Lis closed in 2014 after 28 years in operation as an example.

To extend the “cultural thing” is it that people don’t have the devotion to eating out if they can afford to do so.  San Francisco is home to Lyft and Uber–it is also quarters for many home, grocery and meal delivery services as well.  San Franciscan are amongst the highest percentage buyers of online products.

Being in Italy—I certainly recognized and felt the civicness of eating out.  It is not just fulfilling needs of nutrition but it is a way of life.  I am not sure that civicness is still a part of a San Francisco—which is a ‘change of heart‘ from a generation ago if not longer.

Further and as a personal example I remembering eating at a legacy restaurant.  While at that restaurant it was impossible to not look outside and outside was some very unsavory behaviour.  Me and my dinner guest made the waitstaff aware–it was so unsavory that our appetite indeed was teetering.  So the cultural thing is also about the ever increasing difficulty of living in San Francisco and the lure and love of the city has and continues on a downward slope.

I do hope the “restaurant” closure rate decreases and I do believe the City will not to help small business owners directly in keeping their restaurants open.  I do think that rent control for restaurants would be a great idea.  I do not hold my breathe for city officials to make the right decision to help small businesses (restaurants) in San Francisco in any way.



James the Wine Guy

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About James Melendez

II love wine and business. I am obsessed with the subject, the art, the history, the sciences, organization management, and making things less complex I have been a former national wine marketing manager for a large off-premise food and wine retailer (280+ retail locations in 30 US States); the love for wine taught me the good practice of using the best methodologies to right side a business which unto itself is complex. Further complexity is wine. Wine simple to enjoy and yet profoundly complex because of many factors: Many grape varieties States of wine: sparkling, still and fortified wines Vintage Blends Regions/AVAs/DOCs etc. Many producer styles Many producers Limited supply Limited and often restricted distribution My experience is still a lot of intimidation with respect to wine. Wine means many things to many people; status, fear, success, ‘you’ve arrived’, enjoyment, good times, tradition and even ceremony. I have consulted with wine producers and association. I have spoken on Wine and Social Media, Wine and Video and The Business of Wine in conferences in the United States and Europe. Beer and spirits do have the same dynamics–there are many producers but compared to wine there is no other consumer product like it. I have been writing about since November 2006 on my site and I have over 2,890 wine videos on my YouTube channel talking about general wine subject matter as well as specific educational topics on wine and reviews. I have been a wine judge and have traveled to many wine countries in the new and old world. Wine has taken me to great places. Life is tough for most of us and it is nice to celebrate life with those near and even far. What wine is really about is sitting around a table with family and friends raising your wine glass and saying—to life! I love to write about travel, food, technology and business–please subscribe! Salute, *** A plethora of wine reviews from wines regions around the world. Read more of my wine © 2020, 2018, 2017, 2010 James P. Melendez – All Rights Reserved.
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