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Cities That Sizzle – San Francisco

Alan J. Liddle

‘Artistic statement’ restaurants make City by the Bay top fine-dining market despite rising cost of doing business

Chef-owner Gary Danko, in a 2000 San Francisco Business Times article on the rise of free-spending patrons in local restaurants, observed, “We’re seeing the New Yorkization of San Francisco, and it’s about time.”

Danko’s relief that local patrons are becoming comfortable with spending more than $100 per person for a memorable evening of food and wine is understandable: Operating costs are rising in the market long known for relatively low average checks.

Referring to the escalation of menu prices around town during the past two years, Al Falchi of The Waterfront Restaurant & Cafe remarks that the trend is “being spearheaded by the rising cost of doing business.”

“Rents are very high here, the [state] minimum wage just went up to $6.25 without a tip credit, you have to provide [employee health] insurance if you have a city lease, and utilities have gone up dramatically,” says Falchi, who has operated The Waterfront for 30 years.

Local food costs also are growing, Falchi says, citing as an example the cost of filet mignon, which has increased from a low of about $8.50 a pound last year to a recent high of $11.50 a pound.

“It’s not getting less expensive to run a restaurant here,” agrees restaurateur Peter Osborne, who owns MoMo’s in the emerging South Beach neighborhood. South Beach is home to the new Pacific Bell Park professional baseball stadium and several office and residential building projects.

Some restaurant watchers can’t help wondering if rising menu prices might not harm San Francisco’s reputation as a haven for tight-fisted fine-dining aficionados and lessen the city’s immense popularity.

In 2000, the readers of Conde Nast Traveler magazine, as they had done in the two prior years, recognized San Francisco as the world’s leading dining destination. Traveler readers also gave San Francisco the highest overall ranking among U.S. cities for the 12th time in 13 years. And the readers of Travel and Leisure magazine in 2000 ranked San Francisco as the world’s most desirable travel destination for the fifth year in a row.

Veteran San Francisco operator John Cunin, managing partner of Cypress Club, confirms that “pricing has gone up.” But he maintains that the “3 percent to 9 percent” price hikes implemented by many restaurateurs around the city appear to have met with “very little [customer] resistance.”

Cunin scoffs at the notion that the downturn in the dot-com market could have severe consequences for San Francisco restaurateurs. “Too much has been made of the dot-com demise,” he opines, adding, “The people who were doing things right and had a bunch of money are still there.”

Besides, Cunin says, “way prior to the dot-com bubble, San Francisco established itself as a destination for business and travel, and that has not changed.” What’s more, he maintains, “the dining-out culture of San Franciscans is well embedded.”

The San Francisco Visitors & Convention Bureau “has really done its job,” Cunin says of that organization’s success at filling the city’s 31,000-plus hotel rooms.

Spread over 43 hills in a relatively compact 49-square-mile area, San Francisco has a population of about 801,000. Its demographic makeup, as of 1998, was estimated to be 40-percent white, 34-percent Asian/Pacific Islander, 16-percent Hispanic, 10-percent black and 0.34-percent Native American.

The city claims several unique sights and attractions, including squiggly Lombard Street; prison-turned-tourist-destination Alcatraz island; and the Golden Gate Bridge. Also endearing to many visitors are those “little cable cars, climbing half way to the stars.”

Culinary art, too, is a big part of the San Francisco tradition.

The city helped launch the national fern-bar movement of the ’70s and ’80s with the 1970 opening of Henry Africa’s. And the retro-diner and small-plate crazes of the mid-’80s and early ’90s were fueled, in part, by the 1985 debut of the Fog City Diner.

Grilling with burning mesquite wood to sear in flavors, a widespread practice today, was popularized in San Francisco in the 1920s by such establishments as Tadich Grill.

San Francisco is believed to have been the birthplace of several popular foods and libations. Among them: chicken Tetrazzini, Crab Louis, cioppino, the Joe’s Special scramble, the Mai Tai and Irish coffee.

Within foodie circles San Francisco stands out from other American cities by virtue of its high density of restaurants per capita. In 1999, the most recent full year for which data are available, San Francisco boasted one restaurant for every 216 permanent residents within the city limits.

Augmenting that relatively small core of resident consumers are a daily average of 590,000 inbound commuters and the millions of day trippers and overnight guests who visit the city each year. In all, visitors annually spend about $6.5 billion on lodging, restaurants, transportation and other goods and services, tourism officials estimate.

San Francisco is both a city and a county, and it anchors a federal metropolitan statistical area that includes Marin and San Mateo counties. The three-county area reported $2.95 billion in taxable eating-and-drinking place sales in 1999, up a nominal 8.7 percent from the prior year. Of that aggregate 1999 sales figure, San Francisco contributed 59.5 percent, or $1.72 billion, a nominal increase of 8.1 percent from a year earlier.

Many San Francisco operators reported strong performances in 2000 and credited a good deal of the growth to spending by patrons affiliated with dot-com, technology and venture capital firms. Among the operators are Niki Leondakis, senior vice president of restaurants for Kimpton Hotel & Restaurant Group, and chef Hubert Keller of Fleur de Lys.

Leondakis says sales for her Kimpton’s 28 restaurants on the West Coast and in Denver, Salt Lake City and Chicago, rose by 9 percent last year. She indicates much of that growth came from the company’s 11 restaurants and cafe in San Francisco, most notably the Masa’s and Fifth Floor fine-dining venues. High-end wine purchases drove the food-to-beverage sales ratio at Masa’s and Fifth Floor from approximately 75-25 to 60-40, the Kimpton executive says.

The continued popularity of Fleur de Lys, long considered one of the city’s finest restaurants, has inspired Keller, his wife, Chantal, and their partner Maurice Rouas to strike out in a new direction. The trio, backed by some investors, is developing a 180-seat French brasserie in a historic building on Townsend Street near Second Street in South Beach.

Keller says the “time is right” to develop a brasserie because from coast to coast “French is in, again.” He says the move is not a reflection of any downturn in fine dining, as that business just keeps “getting better.”

Charles Condy, co-owner of Aqua and Charles Nob Hill, with average tickets of about $90, agrees with Keller that “restaurants at the high level are doing great business.”

According to some sources, South Beach pioneer Osborne enjoys Mardi Gras-like business at 320-seat MoMo’s when Pacific Bell Park has day games. Despite the benefits of being directly across from the stadium, Osborne says he’s more than aware that “a business can’t survive on 81 good [game] days a year.”

“My marketing mission statement has been, and continues to be: ‘We are a destination restaurant, and there happens to be a ballpark across the street,'” “Osborne says. “It’s not, ‘We’re the restaurant across the street from the ballpark.'”

San Francisco operators and broker Steve Zimmerman of Restaurant Realty Co. say restaurant lease rates for many parts of the city are running $3 to $5 per square foot per month. However, rates are as high as $6 to $10 per square foot in some parts of Union Square, the city’s high-end shopping district, and stretches of Castro Street, they report.

San Francisco lease and sales rates have climbed steadily in recent years as the commercial real-estate vacancy rate has plummeted to less than 2 percent for class “A” space and less than 3 percent for class “A” and “B” combined.

Office space is in such short supply in San Francisco that office rents eclipsed retail rates last year, prompting some landlords to ignore the restaurant operators they once might have sought out. In at least two cases established restaurants have closed to make way for businesses willing to pay substantially higher rents.

However, that’s not to say that established operators can’t find some site deals.

“Percentage rents are going up, but the good news is that I’m seeing more landlords willing to give TI,” or tenant-improvement subsidies, reports San Francisco restaurateur and consultant Robert Puccini of Oritalia and Puccini & Pinetti Italian Grill & American Bar.

The monthly unemployment rate in San Francisco averaged 2.76 percent last year and was 2.5 percent in December. Operators say that high employment pushes up payroll and makes it difficult to keep restaurants staffed, as does the city’s status as the least-affordable housing market in the nation.

The California Association of Realtors’ officials reported in November that just 17 percent of the households in the San Francisco Area could afford to buy a median-priced home in the region, compared with 54 percent nationwide.

“My labor costs [have] really gone up,” Cypress Clubs’ Cunin acknowledges. “For a long time people would come to San Francisco almost as if they were going to Burgundy to ‘stage.’ Good, smart, clear-eyed people would come to work for $8, $9 or $10 an hour, but those days are gone.”

Leondakis of the Kimpton Group says, “In addition to having to pay people more, there is a lot of competition among restaurants to offer better benefits. Signing bonuses used to be the last resort; now everyone is offering them.”

Despite the challenges, most San Francisco operators remain optimistic.

Chef-restaurateur Adriano Paganini has opened 14 Pasta Pomodoro restaurants in the Bay Area since 1994, including nine in San Francisco. He says it is San Franciscans’ love of food that makes it possible to serve them profitably at his establishments, which seat from 25 to 100 people and generate average tickets of about $13.

“We pay more there for rent and employees,” Paganini says of San Francisco. “But people in San Francisco go out to eat a lot, so we’re able to manage it through volume.”

Restaurateur-consultant Puccini offers a different perspective on the reasons why some operators thrive in the San Francisco environment: “This is still a town where restaurants are an artistic statement, maybe even more so than a business.”


(2001 estimates, except as noted; growth rates are est. 2001 vs. est. 1999, except as noted)

Population: 1.70 million, +1.19% Population growth, est. 1999 vs. 1990: +5.00%

2006 population forecast: 1.73 million

Disposable income: $63.80 billion, +10.00%

Household income: $95,566, +9.31%

Per-capita Income: $37,619, +9.05%

Eating-and-drinking place sales (1999): $2.75 billion

No. of foodservlce & drinking places (1997): 4,889

Foodservice & drinking place payroll (1997): $856.4 million

No. of foodservice & drinking place employees(1997): 69,690

No. of residents per foodservice & drinking place (1997): 342

Hourly minimum wage: $6.25 (to rise to $6.75 on 1/1/02)

Employers’ tip-credit allowance: None

State and local sales tax: 8.25% in San Francisco County; 8.0%, San Mateo County; 7.0%, Marin County

Annual economic impact of travel and tourism (1998): Travel expenditures — Marin County, $468 million; San Francisco, $6.95 billion; San Mateo County, $2.2 billion. Jobs/payroll — Marin, 4,880/$105.6 million; San Francisco, 50,960/$1.07 billion; San Mateo, 34,940/$1 .17 billion.

(Source: California Division of Tourism)