Wednesday, October 05, 2011

Sacramento restaurant closures provide a lesson in free-market economics

The Sacramento Bee ran an article today about the travails of the eateries in downtown and midtown that unintentionally provided a wonderful lesson in the concepts of what in free-market economics is called "creative destruction."

Since the economic downturn began in 2008, quite a few restaurants in downtown and midtown Sacramento - some very well known - have gone out of business. Does that stink if you work at one of those restaurants? You bet. But a cursory drive around downtown/midtown quickly dispels any notion you may have that all the restaurants are going to go out of business. Many are doing quite well, thank you very much. In fact, the closure of one restaurant means opportunity for other restaurants that are succeeding:
Still, some restaurateurs are betting things will get better. They're snapping up vacated restaurant space at bargain rates for future expansion...

The silver lining for entrepreneurs is that the commercial real estate market is now full of bargains.

"The deals are good right now," [local restaurateur Randy] Paragary said. "What used to be $2 a square foot is now $1.50, or maybe you get six months' free rent. Landlords just want to get a new tenant."

Many restaurants that recently closed are being scouted by potential new owners. For instance, the space formerly occupied by California Pizza Kitchen at 15th and L streets is being remodeled into a sports bar by the families behind Mix Downtown and de Vere's Irish Pub.

Bazett of Golden Bear and his business partners are also branching out with Hook and Ladder Manufacturing Co., a bar and eatery that will occupy the former Hangar 17 at 17th and S streets come February.

"It was too good of a deal to pass up," said Bazett. "The next five years could hold some promise for Sac, but yeah, it's kind of scary at times."
The tough part about economics is that people only see half the story. When a business goes out of business, what people see are a boarded-up building and dozens of employees out of a job. What often goes unseen, however, is the opportunity for expansion of a competing business that is obviously delivering a superior product. How do we know their product is superior? Easy - they are still in business and the other is not. This expansion means the buying up of the inventory and real estate of the business that failed, and the hiring of many of the people who lost their jobs after the other establishment went out of business; or the opportunity for those people who have learned enough about their trade to try their hand at opening their own business rather than working for one.

If these restaurants were treated like the banks that were "too big to fail," Uncle Sugar would come swooping in with Joe Taxpayer's money in order to "save" Red Lotus, Brew It Up, Spin Burger Bar, L Wine Lounge & Urban Kitchen, Celestin's Island Eats, California Pizza Kitchen's 15th and L street location, Good Eats, The Terrace, Slocum House, and any other eatery that has been unable to attract enough customers to stay open in these difficult times.

As for the restaurants that are attracting enough customers to stay open? They don't need a taxpayer bailout; they are creating taxpayers with their successful business. What sense does it make to take money from the success stories and transfer it to the failed businesses in an effort to prop them up when they would otherwise close down?

Like I said, it's a great economics lesson.

"If a nation expects to be ignorant and free... it expects what never was, and never will be." -Thomas Jefferson


Anonymous said...

You can't say it any clearer.

Darren said...

I didn't know Slocum House went under. And I thought the downtown CPK just moved :(

Jems Nichole said...

The information that you provided was thorough and helpful. I will have to share your article with others
Restaurant Marketing