Asymmetrical Information

In my area, the "Mom and Pop's" have been replaced by numerous Chinese and Mexican resturants. The help generally speak little or no English. They avoid the ownership problems by leasing form local building owners. It appears that the buildings serve as both home and business. Food is not bad, prices are reasonable, and by and large, no interest by Immigration. The children, and there are many, tend to attend the local private schools.

I have a 50-something friend who has travelled on and off for a living his whole career. He likes to use coffee as an example of something that is incredibly much better everywhere in the country - and it's not because of Starbucks (though that may drive the next jump). It's because of measured packets of coffee the busy waitress rips open and dumps in the machine!

I had a good cup of coffee at a gas station on Tuesday, for instance - I'm sure that human hands hadn't touched it since it was in whole bean form.

I think related to Risk is cash-flow. A chain can afford to have a particular unit run at a deficit for a couple of years, while a mom-and-pop restaurant isn't likely to be capitalized that well.

In most of upstate New York, the chains are ADDING restaurants to the mix, rather than replacing existing restaurants. Ten years ago, we didn't even have chains in the area, except for Friendly's, McDonalds, Wendy's, and Burger King. Not even an Arby's! Now we have an Applebees (the first chain to come in) and a Chiles. And a couple of "local" chains have opened up, too.

We also don't benefit from illegal labor up here--it costs $25/hr to have our house cleaned twice a month and $25/hr for the plant people to pull the weeds in the garden in the spring and fall.

Despite all the rhetoric and propaganda small business is generally a mediorce business.

Census and the Small Business Administration recently did a very good study of small firms.

Because it did not confirm to the "received wisdom" it has not gotten much publicity

it can be found at:
http://www.census.gov/csd/susb/susbdyn.htm

It found that since 1988 the share of employment in small firms -- under 500 employees-- had
fallen from 54.5% to a low of 49.4% in 2002 before rebounding to 50.7% in 2003.

The report said just 0.4% -- yes, four tenths of one percent -- of the number of firms accounted for about 50% of private employment in the US.

More importantly, they found that payroll per employee was 25% higher in large firms and the
revenues per employee was 58% higher in large firms. Moreover, except for firms with 0-4 employees the wages and revenues per employee increased steadily as firm size increased.

This data implies that productivity is much higher in large firms and profits are also far superior in large firms.

This does not negate all the myths about entreneurs in the economy, but it does put them in a different perspective. I would think a major force behind this is that the few small firms that are really good and successful quickly grow into large firms.

In your listing you did not include the advantages in management,knowledge or experience the large chains bring to the table. THis probably is behind several of the things your listed.

I think spencer's onto something with his comment, and that it ties to some of yours. An established set of procedures, equipment that's standardized and that has been checked out for both cost and usability, training materials that have been successful in teaching 16 year olds how to do their job acceptably after a week of experience, all these things are really valuable.

Along with that, as a consumer, I tend to go with chains when I'm traveling for the low-variance reason--I know about what I'm getting from, say, Chilli's. It's not all that great, but it's also not terrible. By contrast, a random restaurant I've never heard of may be fantastic, but may also be awful.

I think these are closely related. A good cook in a well-run kitchen can make much better food than most chains. But if you take someone with little or no experience and have him cook food for customers, you had better have good training procedures, equipment that demands little of his skills, etc. I remember working at McDonalds in college, where everything you cooked came prepackaged and had a simple, streamlined procedure to cook it and a timer for making sure it got done properly. Now, a good cook doesn't need a timer telling him it's time to flip the burger over on the grill. But a 16-year-old boy who never cooks for himself at home sure does.

6) and 10) appear to be mutually exclusive.

I wonder if the amount of government regulations that resturants face has anything to do with it. After all, there are a ton of laws that you need to navigate to open a new resturant - zoning, health codes, liquor licenses, ect. Chains have a bunch of lawyers and lots of experience in these things, while the average Joe is likely to find this intimidating. The liquor license thing may have a lot to do with it - it's a huge profit center for resturants. It's probably not a coincidence that one of my favorite cheap resturants near where I work is a corner family-owned bar - the foods cheap, but they probably make most of their money on booze.

That may also explain the popularity of franchises - they have a structure and guidance to help people open chains (as well as ad support and brand recognition). That means that many of the entrepeneur types who would otherwise open resturants on their own go with a chain.

Maybe chains can afford to advertise on televsion and local places can't? Not necessarily because they make more profit per meal, but because they can spread the costs out over more meals.

5, 6, and 8.

3 is likely wrong. There are lots of Mexican, Chinese, and southeast Asian restaurants around here (here being the SF Bay Area), and it *is* legal for a foreign national to own property in the US.

(6) and (10) don't have to be mutually exclusive: Americans could, at the same time, not give a damn about the quality of what they eat AND want it to vary as little as possible. A combination of taste for blandness and lack of curiosity is not be unheard of. I do not think (10) is true, however.

People I know who know people who have started restaurants and bars say that the types of (native-born) Americans inclined to open such establishments are disproportionately likely to put any early profits down the hatch or up the nose. Don't know if there are any studies on the "party animal" factor though. Perhaps chains and franchises provide a level of structure that keeps the local operator from going off the rails.

There is nothing wrong with chains. The food is actually quite good. The portions are great. And the prices are usually much better than what you will see when you are "fine dining."

Cracker Barrel is the best. Best food. Best price. Best place for the family.

Chilis is good.

Ground Round is good.

There is no better breakfast place than Cocos.

Olive Garden is good.

Red Lobster is Great! Prices are a little high, but good food.

Chains may not have increased much as a percentage of all restaurants in most areas. It just seems like they're taking over because they tend to stay, while independent restaurants come and go.

Some of this is zoning itself, which tends to segregate all the businesses into one area and the houses into another. A mom-and-pop store is going to survive just one way - close, personal contact with a small goup of loyal customers. It's really hard to do this in a strip mall next to Wal-Mart. When the business, the bakery, the restaurant, what have you was mixed into the residential scene, it was possible for the establishment to survive by being 1) really, really close to the customer base (downstairs, often) and 2) on a first-name basis with as much as half the customers. Zoning makes this sort of thing increasingly impossible.

What about the franchise factor? Would-be restaurant managers have a lot of opportunities and financing available to buy a franchise of an established chain rather than doing eerything from scratch.

Cisco: Good point, it seems as though I hadn't thought that through as thoroughly as I thought I had thought it through. (God, that sentence is fun to spell!) I think my confusion stems from how "X doesn't care what he eats" can be interpreted as a low premium on value *or* a low premium on consistency.

Chris_Jones: I think the ironic part is that most of the people lamenting the decline of mom-and-pop shops are the ones pushing hardest for stringent zoning rules like that one. Go fig.

Spencer: I think there might be some bias in the numbers themselves (I'm sure there's a special term for what I mean, but I can't recall or don't know it).

What I mean is, I suspect that some industries do naturally benefit greatly from being a large concern rather than a small (the obvious ones are any sort of bulk manufacturing, finance, insurance - I don't think those can be done at all by a small business), and it's no surprise that those very large companies will also employ a huge share of people (I mean, how many employees does GM have? GE? Any of the big mega-banks?).

Similarly, those jobs, like in finance and high-end management and CEO/CFO-ness, will attract a hugely "disproportionate" share of high-end salaries, both because only a large company can afford them, and because only large companies need them, and because, since you can't do finance in any serious way in a "small business", nobody making a (literal) banker's salary is going to be in a "small business", ever.

This does not imply, however, that wages overall would increase if there were no small businesses, which is what the numbers otherwise would suggest, precisely because many small businesses couldn't be effectively replaced by large ones. (The fact that they haven't already suggests the unprofitability of doing so, in fact; and that ignores the entire issue of startups and new-product entrepreneurism and the very family-run ethnic restaurants that Megan's post is mostly about.)

In other words, for some markets and some tasks, either structure will be best adapted, and the percentage of jobs provided by each structure, and the pay structures associated with each, provide no insight at all into which structure is appropriate to what instance.

While productivity and profits may well be concentrated in big firms, that seems likely to be because those areas best suited to automation or computerisation-derived productivity gains and profits are also those best suited to large companies, not because large companies are automatically more productive. (I can see argument for their being typically more profitable simply because of economies of scale, however.)

In other words, I'm not sure that they're more productive/profitable/employing because they're big, rather than because they're doing the sorts of things that benefit from being big rather than small.

"Chain restaurants, almost by definition, do not produce great meals; too much of their food is pre-cooked, cut, or processed"

I have to disagree with this one - there's no reason why pre-cooking, cutting(?), or processing automatically detracts from the quality of a meal. Indeed, I don't think they have them in the NYC area (they don't in Manhattan), but Fazoli's - yes, the fast food place - has the best red sauce of any Italian restaurant I've ever eaten at, and I been to a lot of Italian restaurants, mainly in NYC and San Francisco. And whether your in Las Vegas, Dayton or Erie, it's exactly the same, so I'm pretty certain it's not made onsite. The second best is the Belmorah Pizza at Lexington and 57th, which isn't exactly a quaint, romantic dining experience.

The real reason for the success of chains lies in reason number five, and the reality that the vast majority of people who go out to eat do so not for a fine dining experience, but because making a meal at home and cleaning up afterwards are time consuming irritants they don't want to be bothered with

Taste is pretty relative when you're talking about "the best red sauce" etc.

I've moved out to the country in the last 2 years and we grow a garden and prepare from scratch at least 70% of our food. Heck, even the beef we eat was from a steer we bought off the neighbor.

Anyway, after a year of this I'm begining to taste a lot of "preservative" type tastes where I never noticed them before in prepared food. Anything canned seriously bothers me. Frozen is better... (ie flash frozen vegetables, not frozen fish sticks!)

So while some may claim prepared food from a distributor is fine, and 2 years ago I would have been front and center agreeing with them, now I know from experience this is just another example of plato's cave...

http://en.wikipedia.org/wiki/Plato%27s_allegory_of_the_cave

sigh...

Cost of Capital.

The S&P 500-ization of the American Economy. Fueled, with Premium for Premiums, by MutFund buyers and Index Fund (de-)vestors( to begin with two of the many origins ).

taster, you well know it.

I'd be wary of assuming the assumption is correct. There are more restaurants now with more people eating out more often. Also, chain restaurants tend to be much more visible. Good real estate is expensive and good chains know the value of a good location and spend considerable effort identifying and securing good locations. Non-chain restaurants probably undervalue location and have fewer resources to secure good locations. My point being good locations are much more visible than a random slot in a strip mall or around the corner off the main drag. (Prime commercial landlords also look for well-financed well-known tenants).

I'm too busy now to hunt for statistics, but I'd bet the anecdotal evidence for a significant percentage increase in chains is misleading.

Jane,

I have to agree with "albatross": I think a lot of the reason for the growth in chains is that the eating public demands it. This is not because Americans don't care about the quality of food. It's because we do care. Here in Arizona, I hardly ever go to a chain. When traveling, I almost always eat at chains. Why? The risk of getting a bad meal at an unknown facility is less tolerable than the assurance of getting something decent, if not great, at a chain. It's just too hard to find a good place to eat if you are unfamiliar with the area. For example, when in NYC on business last April, we went to a highly rated Italian place just off Broadway. While expensive, the food was just okay. (I know good Italian food.) Another example, when our kids were younger, we almost always ate at McDonalds when traveling. Why? My wife was assured of a clean restroom. (The quality of the food was a distant second on the list of priorities.)

One last thing, I don't think NYC is as immune to chains as you claim. One of my disappointments was finding there were virtually no "real New York" restaurants close to Times Square. That the chains have taken over this area seems to support my contention that the traveling public seems to drive the growth in chains. Times Square is a big draw for tourists.

Sigivald -- I was not trying to make any great points by showing the data on large vs small firms. I was just showing one example of how "conventional wisdom" is often wrong as part of the explanation about chain restaurants.

Jim Henley -- your comments about how entrepreneurs put their profits up their nose is without question the stupiedest most ignorant comment I have ever seen.

David,

this: "when in NYC on business last April, we went to a highly rated Italian place just off Broadway. While expensive, the food was just okay"

I'll be betting the "rating" was by Zagat's... How 'bout it?

Also, why do people have such a hard time finding decent eateries in unknown locales? Ripley's, people that live/work in that area know them, it help's to ask. + forget Fodor's/ Zagat's/ "lonely planet" guides. The old Berra-ism "No one goes there anymore, It's too crowded~" is one to remember.

Mark,

Yes, the rating was by Zagat. We did ask for recommendations from the hotel concierge, "Can you recommend a nice restaurant near the theater?" He said he'd "heard good things about xyz." When I asked him what his experience was, I thought his response was candid if not helpful: "Mr. Walser, I can't afford to stay at this hotel, let alone eat at that restaurant."

Maybe, next time we are going to be in NYC, I'll ask Jane to post some recommendations.

Possibly one reason why chains are more common these days is that good, successful restaurants have quickly learned that the chain approach is a nice way to stabilize one's business income. If a mom-n-pop succeeds, they start opening additional locations. Here in Colorado, there are now something like a dozen restaurants bearing the name "The Armadillo," featuring a southwestern/Mexican menu blend that is quite good. It started 15 or 20 years ago with one location. Another place that wants to head that direction is El Jimador, a fairly authentic-gourment Mexican place that just opened its third location.

The seemingly-independent Chinese places also tend to take a chain approach, although it isn't visible on the surface: frequently, at least two or three members of the extended family will have a restaurant somewhere, and they pool resources informally (supplies, family workers, transportation, money).

Other business --

Taster has hit a truism on the head: garden fresh beats anything once you've actually had the privilege of tasting it, provided it was prepared correctly. No processed product in the world can possibly equal the taste of a carefully assembled, from-scratch tomato sauce.

The one problem is, you have to devote the equivalent of about 10 hours a week, all summer long, to even a modest-sized vegetable garden. The food preparation for a full-featured meal will require about 2/3 of all utinsilry in the kitchen, sometimes twice. Once dinner is over, you better have invested in the 1.5L cabernet, because you'll be looking for the other half of the bottle in order to erase the memory of that night's dishwashing chores.

So, a restaurant that can make a consistent level of goodness at a reasonable price, is often preferable when you want something better than a casserole, but don't have all evening to devote to the meal.

David,

Sounds like you were staying at a Marriot, what says you? :)

Also, I've found that it's the Bartenders that tend to know and, surprising to me, anyway, many "locals" are found in "Hotel" bars, as well.

Curious if this squares w/ others experience...

When in NYC I am slow to read your posts and thus slow to comment, though I believe I passed you on the street in Midtown. It is hard to improve on your list, but I will add the ability to take advantage of national marketing and the resulting economies of scale from advertising on national television, etc.

Mark,

The Marriott was a good guess, but we were at the Westin. When we return in April, I hope to try another hotel. We'll be there for a week and would prefer something within an easy walk of the Westin (where my conference will be held). Any suggestions?

anony-mouse points out what I think is the critical data point. The rise of Small chains, of 2, 3 to 10 stores.

Here in Sydney, there are negligible illegal restaurant staff, and very few of your American chains (McDonalds, Burger King, Sizzler, Wendy's, KrispyKreme... that's about it, and KK only started a couple of years ago.) But there are heaps of small chains of 2 to 5 restaurants.

These micro chains don't have the mass buying power and production line efficiencies, they don't have advertising, they don't have cross country consistancy. But they are still on the rise.

My guess (and both my Wife and Bro-in-law have run restaurants) is that the legal/regulatory restraints are much harder for your first restaurant than your second or third. Not so much because you don't have to pass the same regulations, but because you already know how to do so, you know the guy at the health board, you know that the 23A-c form can be filled in without all the detail that you can't actually know until you open...

Another point I'd add to your list is:

x) Availablility of capital.

Imagine you are a bank and you have two potential clients to lend to:

a) A new entrepenuer with little to no track record
or
b) A large restaurant chain with a long track record and lots of assets

who will you lend money to to open a new restaurant?

Chain restaurants also frequently have access to the stock market to acquire capital to open additional locations, which mom-and-pops do not.

As an expert chain-restaurant eater, I'm going with #6. No matter where I am, I know I can get a decent meal at a chain place. The service is usually a lot better, too.

Imagine you are a bank and you have two potential clients to lend to:

a) A new entrepenuer with little to no track record
or
b) A large restaurant chain with a long track record and lots of assets

who will you lend money to to open a new restaurant?

Yeah, good point, quadrupole, banks only loan to blue chip companies.

Actually, they don't, they just increase the offered interest rate with the risk of the venture.

Restaurants are just like other businesses- the profits go to the relative handful of superstars who really know how to build and run them.

The chains are the survivors of the competive process. Superstar restaurant entrepreneurs leverage their time and talent by expanding geographically.

I live in the Dallas area, the womb of restaurant chains, where there are essentially two kinds of restaurants- chain restaurants and want to be a chain restaurants.

I've also owned several restaurants (actually two small chains of restaurants) and believe me, creating a restaurant is way too much work if you're only going to profit on one copy of it.

People like chains. They pay more for brand names in restaurants just like anywhere else.

As several posters have pointed out, you can do better, but you can also do worse. Not everyone picks a restaurant for the best possible meal, and no one does it all the time. The cool new trendoid restaurant is great for a Saturday night date but not when you're in a hurry on Wednesday, with the kids.

There are advantages to size in restaurant chains as in anything else, particularly in advertising clout. And you're more likely to succeed when you're opening store 100 (or 1000) instead of breaking into the business for the first time.

I think that last point leads to some survivor bias as well, as smaller restaurants come and go (the restaurant business is hard) but chains, like corporations and cockroaches, tend to persist.

Person, you said

Yeah, good point, quadrupole, banks only loan to blue chip companies.

Actually, they don't, they just increase the offered interest rate with the risk of the venture.

I guess a better way to put it would be, who do you think the bank will lend money to to open 20 locations this year, a chain or a stand-alone restaurant or entrepenuer. My basic point is that capital is more comfortable being placed with entities with more experience and more assets, and chains fit that bill.

quadrupole: If that was your point, all you had to say was that smaller, less experienced businesses pay higher interest rates. You didn't have to act like banks never loan to small ventures because they only care about risk and not return.

Maybe it is because advertising works and chains can advertise.

David,

After I had guessed "Marriot", It dawned on my that those guys probably wouldn't have even remembered your name, and addressed you as, merely, "Sir".

As far as Hotel recs for NYC, I'm probably not the one to ask, been fortunate to have friends in the city.

This may be a good place to start:

http://nymag.com/search/sitewide-search.cgi?textquery=Best+Hotels&search_type=all

from New York Magazine

David Walser, I think you hit upon a very good rule for asking for restaurant recommendations: ask people who roughly in your same socioeconomic range. It does me no good to get a recommendation for a restaurant that would cost me a week's salary. I want to know the best place that I can afford to go to.

8) Labour cost: Related but not exactly the same as the point above. Food is a minor cost for most restaurants, even cheap ones; the real cost is labour and real estate.

I'm assuming you're talking about NYC. We both live there, so I assume that's your statement.

You're right that labor is expensive, but you're dead wrong that "food is a minor cost". That's actually dumb. When you go out to eat, about 1/5 of the money you pay ends up in your body. It varies, lots - everyone does steaks, right? Cow is cheap, and few people can tell the difference beween good and bad. But the buy-side of the deal is important. Go buy for a nice italian place in SOHO, and tell me food is cheap. Either you have people hired to hang out at specific points at like 5 AM, or you're really, really cool, and managed to become a celebrety.

--done with NYC food culture

I didn't read all the comments so someone has probably already mentioned this but name recognition and a successfully tested formula are also huge factors.