Priceonomics

When it comes to restaurants, the correlation between price and enjoyment can seem low to non-existent. For every great meal that justifies a splurge, how many other restaurants serve up food that can't beat a favorite deli or regular takeout place? 

Often we pay higher prices at a restaurant for the experience. Or to eat in a venue appropriately "nice" for the occasion. But if you're just interested in getting the best food for your money, it helps to think about the economics of the restaurant biz from the owners' perspective. 

Drinks focused or food focused?

The best profit margins in the restaurant industry come from drinks. Beverages offer 80% profit margins or more in a business where 4% or lower margins are common. That's why they represent, on average, 30% of restaurants' revenues.

Dunkin Donuts recently relabelled itself a "beverages company," acknowledging that revenue-wise, it is actually in the coffee business. Without admitting it, many restaurants are an overpriced drinks company in disguise. While restaurants could use profits from drinks to subsidize great food, you need to be on the lookout for restaurants that lavish their time and money on bartenders, unique drink menus, and a venue that makes you feel okay about spending $12 for a cocktail.

Are you paying for the food or the location?

When a restaurateur opens up on a prominent street corner, they are paying much higher rent in exchange for the regular stream of foot traffic that they expect to wander into their restaurant. A restaurant out in the boonies is betting that their dishes are delicious enough to lure in customers. Which do you think offers a better deal?

As we covered in our 4,000 word epic on food trucks, this explains why food trucks often offer great deals and more creative dishes: their lack of rent both allows and forces them to experiment and create unique offerings. As pointed out by economist Tyler Cowen in The Atlantic, this is also why strip malls are actually a great place to look for exceptional food.

Eat where the foodies live

Investors in restaurants caution each other that "Demographics is destiny in the restaurant business." So, a restaurant should fit the type of customers who live or work nearby. Drawing from the drinks principle, that means you should avoid downtown and any office-laden area, as those restaurants will tend to cater to the after work drink crowd. It also means that residential neighborhoods, and not trendy areas full of bars, are your friend, at least for getting the best deal on your food.

Unsurprisingly, this also means that restaurants usually match the style of the neighborhood. Don't go to the crunchy-granola part of town for a steak, and, if you want authentic ethnic food, seek out the areas where recent immigrants from those places live.

There are many more ways to apply economics to being a foodie. In the course of writing this post, this author discovered that the aforementioned Tyler Cowen has many of them covered. Check out his "frugal economist does foodie" rules here.

This post was written by Alex Mayyasi. Follow him on Twitter here or Google Plus. To get occasional notifications when we write blog posts, sign up for our email list.


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