Wednesday, November 13, 2013

How to Run a Restaurant

My previous three posts were serious proposals for changes that I thought worth making. This one is more nearly a puzzle. In the other cases I can see plausible reasons why the changes might not have occurred even if I am right in thinking them desirable. In this case, I take the nonexistence of what I propose as pretty strong evidence that I am missing something, that it is for some reason a considerably less good idea than I think.

When I sit down in a restaurant, I am consuming two different things—the food produced and the use of seat, table, heating or air conditioning, the part of the restaurant I occupy and the services it provides. I can choose to eat lots of expensive food fast, in which case I consume lots of the first and little of the second. Alternatively, I could order something inexpensive, perhaps a bowl of soup, and linger over it for an hour. 

Since the restaurant charges only for the food, I have no direct pecuniary incentive to economize on my consumption of space. Since the price of the food has to cover the cost of both food and space, I have too strong an incentive to economize on my consumption of food. If desert costs the restaurant a dollar to produce, is priced at three dollars, and is worth two dollars to me, I don't buy it—a net loss to me plus the restaurant of a dollar in potential surplus. 

The obvious solution to these inefficiencies is to price food and space separately. When I sit down, a clock at the table starts running. When I leave, my bill includes a certain amount per minute for the time, plus the cost of what I ordered. If I want to spend two hours chatting with a friend over tea and scones, I can do it without worrying about angry looks from the waiter—and pay for it. My total bill should average out about the same, since the combined bill still has to cover the same costs. But now the separate cost of sitting and of eating is being billed separately, giving me the right incentive with regard to each.

The puzzle is why no restaurant, so far as I know, is run that way. Some have crude approximations, such as a cover charge. But why not simply price food and space separately, just as rental cars sometimes price use of the car, mileage, and gas separately?

39 Comments:

At 3:27 PM, November 13, 2013, Anonymous gotlucky said...

The part you are missing is the hospitality factor. It's harder to feel taken care of in a restaurant if you know the meter is running.

 
At 3:35 PM, November 13, 2013, Blogger Rohan said...

It's also possible that this isn't a real problem. Perhaps the vast majority of customers take the same amount of time to eat their meal. Or perhaps the amount of time spent scales with the amount of money spent.

Perhaps the person who spends a lot of time but little money when the restaurant is full is a very rare case. And when the restaurant is empty, it might actually be beneficial to have a couple customers hanging out, as few people like going into an empty restaurant.

I'm a software dev, and one of our guidelines is to avoid "premature optimization". Instead one is supposed to profile, and find the "real" bottlenecks first.

Though I do remember seeing a story on the internet about a Turkish restaurant that did not sell Turkish coffee because coffee sales caused pensioners to hang out and take up space.

 
At 4:50 PM, November 13, 2013, Blogger Ryan said...

Russ Roberts talked about this puzzle on an EconTalk podcast with Mike Munger.

He framed it a little differently, but it was the same basic observation: why don't sit down restaurants have a discount price for people who take their food out, instead of eating in the restaurant?

http://www.econtalk.org/archives/2013/09/munger_on_milk.html

 
At 5:35 PM, November 13, 2013, Blogger Steamboat Lion said...

The other thing that you are missing is that the amount of time you spend is somewhat outside your control. If I spend a hour in a restaurant, probably 2 minutes is studying the menu and fifteen minutes is eating. The rest of the time I'm waiting...

 
At 7:44 PM, November 13, 2013, Blogger Sevesteen said...

There are psychological factors here--I want the incremental cost of my mobile phone calls and data to be zero, even if I'd be better off paying per call or per megabyte.

Some changes I'd be OK with, but a ticking meter would disturb my enjoyment of the meal even if the cost wound up less than I pay now.

 
At 9:50 PM, November 13, 2013, Blogger Power Child said...

Another issue is the tip. This sort of gets at that Russ Roberts thing that commenter Ryan mentioned. When you get take-out, there's typically no social pressure to leave a tip. That's the discount.

If you dine in, you often tip a little more to the waiter or waitress who respects your wish to take your sweet time. (Similarly, you tip a little more to the waiter or waitress who expedites your order when you tell them you're in a hurry.)

Beyond that, though, with the waning of servile domestic work (middle-class families no longer typically have maids or nannies, since they have Roombas and dishwashers) comes an increase in uneasiness and anxiety around the service industry. We don't want extra reminders that when we sit in a restaurant we're taking up resources and on someone else's time.

 
At 11:15 PM, November 13, 2013, Blogger David Friedman said...

The problem with the various explanations offered in the comments is that they explain why many restaurants choose not to do things my way, but not why all restaurants make that choice, since each explanation would apply to some customers and restaurants but not to all.

 
At 12:39 AM, November 14, 2013, Anonymous Martin said...

I recall sitting in a Chinese restaurant in New York where they did give you a discount for taking the food out. I also recall that they were very very quick with the service both when bringing the food and taking the plates away. The bill followed immediately. The place was also very busy.

So while they did not price the space as such, they did economize on it as much as possible.

I cannot however imagine that any restaurant will implement the scheme to price space as I cannot imagine anyone or a substantial number of people wanting that for it to be profitable.

In contrast, I can imagine that people go to all you can eat places however and I have done so fairly recent. I think that restaurants do not offer the right incentives when it comes to space for the same reason that restaurants do not offer the right incentives for food. Sometimes people are willing to pay a premium not to have to economize on some aspect of their consumption. In the case of space and time this is almost always the case.

To illustrate, I would find that to be exhausting had that been the case. Try going out with your significant other, while a student or on a budget, and then no matter how the evening goes you have to think about the time you are spending there. On the other hand as a restaurant you sometimes have successful dates and sometimes less successful dates and this give you somewhat of an idea what to expect. The restaurant charges you a premium to insure you for the extra amount of time spent occupying space just in case the date goes well. It is then that not having to economize on time is most valuable. Eating out is almost never about the food.

 
At 2:48 AM, November 14, 2013, Blogger Tim Worstall said...

Hard Rock Cafe (the London one) used to put an alarm clock down on the table at the same time as your main course arrived from the kitchen.

Bill arrived when it went off.

Not exactly what David is asking, but an attempt to solve the same problem.

A place I worked at in the US refused to sell deserts. They wanted to turn the tables more quickly and were willing to forgo the marginal revenue to do so. Again, an attempt to deal with the same problem.

 
At 5:14 AM, November 14, 2013, Blogger Tibor Mach said...

This is (for me) a plausible explanation:

You are in fact consuming three things - food, spacetime and status (don't know a better word to call it).

You come to a restaurand because it is a nice place and because they have nice food but also because they treat you as a guest. As someone special. Effectively, you are buying an illusion of being someone very important to them.

If they charge you for the time you spend there, the illusion breaks a bit. The value of status you buy there decreases...probably more than any sensible charge per time would fix. And so no or almost no places charge you for time.

 
At 5:15 AM, November 14, 2013, Anonymous Paul Ralley said...

I think restaurants get very close to this already. The high margin items (wine, coffee, desert) tend to be the items customers linger over, hence charging for the 'table' and the 'food' separately.

 
At 6:40 AM, November 14, 2013, Blogger Nancy Lebovitz said...

I've heard that fast food restaurants calibrate their seats carefully so that customers don't mind sitting in them for a while, but don't want to linger.

Keeping track of how long customers have been in their seats has a cost for both the restaurant and the customers, though the former is made lower by modern tech.

It seems reasonable to me that charging for time is so culturally revolting that restauranteurs know customers won't put up with it.

 
At 7:57 AM, November 14, 2013, Blogger Ryan Long said...

As Martin mentioned before me, I have been to restaurants that priced carry-out orders differently than dine-in orders. So it does happen, but it is rare.

Another point is that the majority of restaurant patrons have little willpower when exposed to impulse purchases. I might plan on a glass of wine with my meal, but I have been guilty of ordering a second glass of wine when the waiter offers one on more than one occasion. The ambiance is an enticement the restaurateur offers to induce people to purchase more food.

 
At 9:16 AM, November 14, 2013, OpenID dmorr said...

There's a guy named Jay Porter who has been in the restaurant business for a long time, and who just wrote up a detailed breakdown of the costs of running a restaurant -- and indeed, the food cost is much lower than the space.

http://jayporter.com/dispatches/paying-rent-on-a-seat/

There are a couple of other cases I can think of where what the seller is selling and the buyer is buying are two different things. One that comes to mind is new release hardback books. They're much more expensive than paperbacks, but the price isn't because of materials, it's because they can get more from a new book. But consumers don't really think that way, and therefore object when the kindle price for a book is so high when the cost of goods sold is so low.

Another example is buying a house, where the seller cares about the total amount, but often the buyer cares about the monthly mortgage payment. That disconnect matters a lot with adjustable rate mortgages and liar loans.

 
At 9:44 AM, November 14, 2013, Blogger Tibor Mach said...

David: I disagree that it has to be that way. People who only want the food but not the feeling of being special may simply all order food home (if they want something nicer) instead or buy it at a fast food (if not).

It could be that there are simply no or nearly no people who come to a restaurant for the nice place but don't come there for the "status" (or what someone else called hospitality...which is probably a better word). Not enough of them clustered enough as to make such a charge profitable for any restaurant. Would you go to such a restaurant yourself? I wouldn't. Of course people say and do different things sometimes, but I don't see why this scenario should be impossible...or even unlikely.

I also remember one conversation I had with a couple of friends. It was about a hotel which charged customers extra for parking place. Someone said it is outrageous that they do that. I replied that it is the other way around - if you want it, you pay the price including the parking place, if not, you have a cheaper room...better than to average it out. But they (I think it was more than one person who argued for the "outrageous") replied that even if this is true, you essentially come to a hotel to be pampered and you don't want to divide it all into separate payments because it does not feel classy.

However, apparently here not all people see it that way, so there are in fact hotels (quite a lot of them I suppose) who charge you for the parking place separately.

 
At 10:07 AM, November 14, 2013, Blogger jimbino said...

If restaurants charged for the table, singles might end up paying for unused space or restaurants would end up pushing eating at the bar for the singles, which is less comfortable.

What I wonder is why don't grocery stores have full bars and PC-17 flicks on wall screens? It would be a legal way to bar kids, enhancing the shopping experience for the childfree. Children pollute the aisles, run around, scream and yell, and don't select any produce, except at the candy racks.

 
At 10:45 AM, November 14, 2013, Blogger Patrick Sullivan said...

European restaurants used to do just this. There were different prices charged for those sitting down at tables and those who stood at a sort of bar, for the same food.

British pubs had two different rooms for the same drinks, with higher prices in the room with tables than in the one with standing room only.

I haven't been to Europe in quite some time now, so I don't know if it still is this way.

 
At 12:18 PM, November 14, 2013, Anonymous KrisWiner said...

In the nineties it was common for Tokyo restaurants to charge a table rent, either for groups or individuals, which allowed use for a limited amount of time (say, two hours). I remember being told it was time to go at one group feast and feeling quite chagrined at not having eaten my fill of the tempting victuals we had to leave behind after our time was up! I haven't been back to Tokyo since 1991 but one might expect this feature in restaurants in crowded cities where the demand for service and the disposable income is high.

 
At 12:56 PM, November 14, 2013, Anonymous TJIC said...

@dmorr

> There's a guy named Jay Porter who has been in the restaurant business for a long time, and who just wrote up a detailed breakdown of the costs of running a restaurant -- and indeed, the food cost is much lower than the space.

I read somewhere that a rule of thumb is that the ingredients on the plate can not cost more than 1/3 of the price charged the customer...and if they do, the restaurant will go out of business in short order.

This is a wonderful reason to take up the hobby of cooking - if you mentally reframe the food preparation time and effort as "fun", then (a) you get to have fun, (b) you get to eat $20 meals for $6 or less.

 
At 3:16 PM, November 14, 2013, Blogger Andrew said...

Bear in mind that many restaurants have plenty of off-peak time, when they are some way off being full. During off-peak time it makes little sense to charge for occupying a table, since the marginal cost to the restaurant of a table being occupied is presumably zero, there being no other customers who are prevented from sitting down and eating. A restaurant could choose to charge for time specifically during the times when there is high demand, but I suspect that many would rather avoid the hassle of multiple price lists. This might predict restaurants having special offers which are only available at off-peak times, essentially amounting to an increase in prices at periods of peak demand.

 
At 4:00 PM, November 14, 2013, Anonymous Daublin said...

Transaction costs. The effort to figure out how long to stay and how much space to use increases the cost to the customer by quite a bit.

Note that many restaurants do offer different prices for dine-in versus take-out food. Also, lower-end restaurants tend to charge very high for drinks, which indirectly charges people for dining in.

 
At 6:47 PM, November 14, 2013, Anonymous Anonymous said...

most karaoke box in hk charges like this. space, time, and food are separately charged. now in hk, some people renovate old factory building to make it a place for people to rent and hang around there. food is offered a la carte at extra cost. Some BBQ places are charging customers like David described too. strictly speaking, they aren't restaurants. but u can spend a splendid night with your friends there with food.

 
At 7:24 PM, November 14, 2013, Anonymous Rex Little said...

I've noticed a long-term trend, at least in the US, toward all-inclusive pricing instead of breaking out items separately. David mentioned car rental companies charging separately for mileage, but it's been many years since I've seen that. Disneyland and other amusement parks used to charge for admission and then an additional price for each ride; now the rides are included.

Clearly there's a deep-seated preference for all-inclusive pricing among a large number of consumers, enough that a restaurant which did what David suggests would alienate too many of them.

 
At 8:51 PM, November 14, 2013, Blogger Power Child said...

The problem with the various explanations offered in the comments is that they explain why many restaurants choose not to do things my way, but not why all restaurants make that choice, since each explanation would apply to some customers and restaurants but not to all.

Culture and social pressure address that, don't they? Our society doesn't have the stomach for too many different types of arrangements for one type of activity, so the outliers get pushed farther into the margins.

 
At 12:24 AM, November 15, 2013, Blogger Peter G said...

Here in Sasebo, Japan, one of the local all you can eat buffets charges by time. If you spend more time you pay more for the buffet.

Contrast this to US places like Golden Coral which charge just per person and on some afternoons you'll see older folks eating for a couple of hours, a bit of food now, a bit later.

 
At 11:46 AM, November 15, 2013, Anonymous AbsoluteZero said...

Actually many places do this, but they're generally not known as restaurant.

As others have mentioned, many karaoke places do this. The ones in Japan and Hong Kong certainly do. You pay by time and room size. Some basic beverages are usually included. Food is extra. In some the food is not that good, but in some it's very good. Some people go just to sing, some go mostly for the food, many go for both. In some high-end ones the rooms are full luxury hotel suites. There's a living room area with the karaoke, a large bed, and a bathroom. Some people use them like hotels, and don't even care about the karaoke part.

In Japan at least, manga kissa, or manga cafes, also do this. Basically it's a place you can go, sit down, and read the manga there. Again, you pay by time, some beverages are free, and food is extra. If you buy a large block of time, you get a discount. In some you can get a private room, and even stay overnight. Many go to read manga. But many go because they need a place to sit down and kill some time, and they need to eat. In fact, if you miss the last train, and don't want to spend a lot on a taxi, there are three main choices. You can go to a capsule hotel, a karaoke place, or a manga cafe.

Some Chinese restaurants also do this. You can get a private room. You pay the same for the good, and pay extra for the room, by time.

And of course, in a way, hotels have always done this.

 
At 6:38 PM, November 15, 2013, Anonymous Gaylord659 said...

I think the answer is stickyness of culture. In the US, coffee is often cheap and given unlimited refills, while in the UK such drinks are usually high-profit margin and without refills. And so on. Whatever systems are more efficient, it can still take years or decades to diffuse them across international lines, while public norms in various countries (and business owners) gradually shift towards efficient ways of doing things.

 
At 4:55 AM, November 17, 2013, Anonymous Simon said...

As Andrew observed, table space has a marginal cost near zero when the restaurant is not full. And in fact, the restaurant will prefer to fill the tables in order to look more popular.

In the case when the restaurant is full and a queue starts forming, diners will see the hungry people in the queue and feel bad about lingering. If that's not enough, the waiters can add to the pressure, at least in less classy establishments. I have a distant memory of a dirt-cheap (and shock full) Chinese joint in the Chelsea part of London, where the matron shooed us away the moment we were done cleaning our plates.

BTW, the practice of charging differently for different spaces (bar, indoor, outdoor) is still common in France and Italy, at least for beverages.

 
At 9:02 AM, November 17, 2013, Anonymous Anonymous said...

I think part of the reason is that the space cost is entirely sunk. It is only at certain times that a restaurant is packed with a line waiting, and during the other times turning tables isn't doesn't reduce your costs. (Cost of wait staff might be an exception, if you lower the staffing during lull times.)

Another thought on that is that American restaurants have mechanisms in place to actually do the opposite. Because they give you free refills on your coffee and various drinks, in a sense, they take away the incentive of "finished my coffee -- time to leave." This is not the case in many parts of the world where refills are usually charged separately.

 
At 8:51 AM, November 18, 2013, Blogger George Haley said...

John Lott touches on this in 'Freedomnomics,' as part of a larger exploration of price discrimination. Foods and drinks which tend to be associated with 'camping out,' as restaurant people call it, are priced to reflect the patron's consumption of heat, light, and space.

 
At 12:38 PM, November 18, 2013, Blogger Eric Rasmusen said...

Perhaps coffee fills this role. In some restaurants, capacity is not a problem, or the place is so empty they'd even pay customers to just sit there. There's a sharp discontinuity once capacity is reached. Some something subtle is needed. I do not feel guilty sitting in a fast food restaurant and ordering nothing, but I do in other restaurants. I can order coffee, and not even drink it, and that won't be very inefficient, since coffee has low marginal cost. If I don't order another coffee after half an hour, the waiter will glower at me, and I can order some more. If tables are in short supply, I expect they would tell me to leave, tho I coudl stave that off by ordering more coffee, or some high markup brandy.

 
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At 6:01 AM, November 21, 2013, Anonymous Anonymous said...

David

Some do sort of price the food and space. Often these says I'm told the restaurant wants the table back by a certain hour.

 
At 3:36 PM, November 24, 2013, Blogger maurile said...

Restaurants that severely irritate their customers won't stay in business long.

It's bad enough when a food order takes 25 minutes to come out of the kitchen. Can you imagine how much more upset people will be when, not only was their service slow, but they have to pay extra for the slowness?

 
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At 5:00 PM, November 27, 2013, Blogger geogavino said...

Do you think irrational public reaction plays a role in why a restaurant would hesitate to do this? The public reacted badly to airlines charging baggage fees, despite the economic rationality for the producer and consumer (or at least consumers who don't like checking a lot of baggage). People who buy takeout or take their coffee to go subsidize those who sit, just like people who don't check baggage subsidize those who do (unless airlines charge separately).

 
At 12:14 PM, November 29, 2013, Blogger David Friedman said...

Geogavino:

I think your explanation might work for a restaurant that was considering changing how it did things, but it's hard to see why it would explain the pattern I suggest never having developed.

So far as charging for checked luggage, that's a bit tricky. One result of doing so is that people have an incentive to take as much as possible as carry on, which slows the process for loading and unloading the passengers. One could charge for carry-on as well, and I think a few small airlines do, but that gets into line drawing problems that may be a hassle.

 
At 2:13 PM, November 29, 2013, Blogger geogavino said...

True that there are tradeoffs with every model. To some degree, the carry-on problem was already there due to the time it takes to check & retrieve baggage, but I do see how it got much worse. But the alternative, what used to be the status quo, was an incentive to take more checked baggage.

I'm still not sure this explains why the restaurant model never developed. They still have to overcome the irrationality of people who see every add'l line on a bill as add'l cost. I think perhaps a restaurant could do this by offering other things as part of the stay fee - i.e. reliable wi-fi (Starbucks & others not always reliable), outlets (a premium during busy times), free drink refills (some already do this), but I think it might be more attractive with a membership option, but for a place that is primarily dining, I think there is a large customer perception problem to overcome, which would be risky for a restaurant.

 
At 9:38 PM, February 24, 2014, Anonymous RP said...

There is a cafe in London now, Ziferblat (http://www.theguardian.com/travel/2014/jan/08/pay-per-minute-cafe-ziferblat-london-russia), that charges only for the space.

 

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