Growth and gripes in gotham: operators have plenty to gain from tourism and emerging neighborhoods if they can stand their ground amid aggressive regulators and rising rents

Nation's Restaurant News, Nov 12, 2007 by Paul Frumkin

[ILLUSTRATION OMITTED]

New York City restaurateurs are factoring an increasingly significant variable into their marketplace mathematics. Where once strong sales minus increased costs and fierce competition equaled uncertain margins, today municipal regulatory fervor is adding a new level of complication to the calculation.

Over the past year, New York City officials have lined up the foodservice industry in their crosshairs by mandating menu labeling for some operators, eliminating trans fats from restaurants, intensifying the inspection process and making it more difficult to obtain liquor licenses and sidewalk dining permits.

"This has been a particularly difficult year," says Chuck Hunt, executive vice president of the New York City Chapter of the New York State Restaurant Association. "It's almost like the city government is trying to decrease the number of establishments by discouraging people from opening new ones."

Even the busiest restaurants are finding it more difficult to earn a meager profit, Hunt says.

"Restaurateurs as a group generally have a strong sense of optimism," he says, "but even that's been seriously challenged."

Over the past several years, New York operators have learned to adjust to the give-and-take dynamics of an expanding local economy offset by unrelenting competitive pressures and the mounting costs of ingredients, labor, energy, real estate and insurance.

But stepped-up regulatory pressure from the city has given even many of the most experienced operators new hurdles to overcome. In July a ban on the use of partially hydrogenated vegetable oil containing trans fats was enacted across the city, requiring operators to switch to other--sometimes more costly--substitutes.

In addition, a nationally publicized rodent infestation at a KFCfraco Bell outlet in Manhattan prompted an embarrassed city health department to embark on a rigorous inspection crackdown that led to the temporary closing of hundreds of restaurants and the levying of steep fines aimed more at "revenue generation than correcting food safety problems," Hunt says.

Calling the rat incident an aberration, he accused the health department of launching a blitz, saying: They were penalizing operators for conditions that had never been cited in previous inspections and minor items that drove up the point score, demanding mandatory inspections that could have been avoided."

[ILLUSTRATION OMITTED]

Meanwhile, the New York City Department of Consumer Affairs has been denying renewals for sidewalk cafe permits to restaurateurs who might have been only minor shareholders in ventures that went out of business and left unpaid fines. Those operators have been forced to spend money on legal fees and required to pay all outstanding fines to renew their permits.

A growing number of operators also have been turned down for new or renewed liquor licenses because of resistance from powerful community boards seeking to limit the number of restaurants in their neighborhoods.

"City officials concerned with votes are heeding [the community boards'] recommendations," Hunt says.

But even more dramatic has been health commissioner Dr. Thomas Frieden's campaign to mandate menu labeling at some restaurants throughout the city, characterizing it as an effort to address the obesity problem. A citywide regulation passed in December 2006 was slated to take effect in July 2007 requiring that operators already offering calorie content on the Internet, food wrappers, tray liners or in brochures also must list it on their menu boards and menus.

However, the regulation was challenged in court last summer by the New York State Restaurant Association and subsequently struck down in September by a U.S. District Court judge who ruled that the health department lacked the authority to impose such a policy.

Following the initial setback, the city vowed to recraft the regulation and introduced a second version in late October. The new iteration now requires all chain restaurants operating in New York that have 15 or more outlets nationwide to post the calorie content information on menus and menu boards. Health department officials estimate it will affect about 10 percent of the city's approximately 23,000 restaurants. The NYSRA has not indicated whether it will challenge the new proposal in court.

Meanwhile, Hunt is not optimistic about the near-term rapport between the city and its restaurant community.

"We have a health commissioner who is trying to do social engineering," he says. "I predict more of the same until [Mayor Michael] Bloomberg and his crowd disappear into the sunset."

But while observers characterize the regulatory forecast for New York's foodservice industry as being generally cloudy, operators nevertheless predict that the city's business climate will remain bright, at least throughout the remainder of the year. Nick Valenti, chief executive of Patina Restaurant Group, which recently purchased the eight-unit New York-based Smith & Wollensky steakhouse chain, is upbeat about the city's economic picture.