Hot-Dog Vendor Economics

A Slate article mentions that the annual price of a hot-dog stand license near the Metropolitan Museum of Art in New York City is $362,201. Licenses are very limited and are bought at auction. The price presumably reflects the economic rent associated with the particular site (the price would be a lot lower in the middle of Central Park). Yet at a fixed cost of $1,000 per day, how can a hot-dog vendor make enough money to cover his variable cost, including the value of his own time?

If, on average, he sells only one hot dog and drink every minute the Met is open, with about 500 average daily opening minutes, that’s 500 servings per day. If he charges $3 for a dog and drink, his revenue of $1,500 leaves him $500 per day to cover variable costs. Seems possible, but I would expect that he’s not making economic profits.

If the city were to issue many more licenses, we would see more vendors, cheaper hot dogs, but, in the end, no higher net returns to the vendors.

(Hat tip: T.W.)


Scott Moonen

If a stand is part of a franchise or larger business, then there may be some PR value to being the stand in front of the Met. Even if that particular stand runs at a loss, others may make up the difference.

It's also possible that he is selling something in addition to hot dogs. Unlikely in a prominent location, I suppose.

Kyle Robinson

I just visited New York for the first time earlier this year and bought a couple hot dogs for my party from a vendor in front of the Met. There were two or three stands, and the stand we bought from advertised that they only hired disabled vets (a fact that contributed to our choice of vendor).

Also remember that $3 per person is never the case. $3 per person for the hot dog. $2 per person for the drink. And considering that the drinks available was water and Gatorade, the profit margin on them is very decent.

Anna

According to the article, last year's auction winner paid $25,000 for supplies. That's less than $70 a day. If he brought in $1500 in sales each day, he'd be making about $430 profit daily. That comes to over $150,000 per year. Not bad.

The article also mentions that the owner of that stand last year paid $415,000 for the privilege. Clearly either the economy took a toll on sales, or it was perceived that it did, since the price of the license fell by more than $50,000 from 2008 to 2009.

Oh - and of course, the whole point of the article is that the license owner failed to pay his monthly rent. So maybe he's not covering his variable costs after all.

MS

"He's not making economic profits" -- that's the point of the auction, isn't it?

This posting reminds me of one main reasons to continue auctioning these licenses: if we leave it up number crunchers, they will probably underestimate the real value of the license.

Phil Birnbaum

Are you sure it's $362K a year, and not $362K a lifetime? Just askin'.

A. Patel

Or the vendor expects that the value of the license (or since it is annual, the right to maintain the license) will rise and can be sold for a nice profit. In this case, the vendor only has to make enough to run the business and the household and wait for the windfall.

Dober

Isn't this another example of Malthusian economics? All the rents accrue to the property owner, in this case the right to grant and enforce licences.

Artie

Phil,

Yes, that's $362K per year. Details are in the Slate article:

http://www.slate.com/id/2224941/

aleemb

Your estimates are conservative and I suspect that is because I see little value in operating at a loss-leader in this scenario.

Seasonal shifts as well as weekend sales could offset the costs. The article states 5 million visitors and to cover the rent the vendor would have to sell about 330 hot dogs + drinks a day or a 120K hot dogs + drinks a year which means that 2.4% of the 5 million visitors would need to purchase hot dogs. Considering that the vendor has a near monopoly this is not that far fetched. In fact, a lot of people may opt to just purchase a drink on a hot day or a 1000 drinks a day which is again very doable with 5 million visitors with a near monopoly (7% of the people would have to purchase a drink).

Then too I am certain price differentiation can drive up the Average Selling Price (ASP) over $3 by selling hot dogs that cost more than $2 and/or selling drinks that cost more than a $1.

And again the vendor could practise sheer price discrimination against willing buyers or naive tourists by just quoting them $15 for the two hot dogs he just served (not everyone asks the price before and if he is smart he won't post the price). I have seen many vendors do this.

If you bump the revenue per customer to $5 then only 1.4% of the 5 million visitors need to make purchases. Again not that far fetched.

The novice vendor that got kicked out probably didn't operate smartly enough.

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Steve

This is very similar to the taxi medallion market. The high price of the medallions and the actual taxi rates do nothing to help the economic situation of the drivers themselves.

Eric M. Jones

It's pretty easy to figure that he can make more money with the investment, so I don't believe it. Perhaps the license is resaleable like a cab medallion, perhaps the figures are wrong. Perhaps they sell a big bag of drugs carefully folded into the napkin....

But the figures as stated make no sense.

db

I bet they make pretty nice profits. They're not just selling hot dogs. Drinks, ice cream, pretzels. And all mark up "outrageously" (though considering rent it seems reasonable).

Cory

#4 for the win.

Another David

1) ad revenue.
2) there may be a franchise helping them out.
3) have you ever been to the met on a nice weekend during lunchtime?? let's say the average person spends $8 there: $5 hot dog, $3 drink - which is probably low. if they can serve two people a minute - also probably low - then they can serve 120 people an hour. that's $960 AN HOUR!

$1000 a day really doesn't seem so difficult when you look at it that way.

econobiker

You'll probably pay $3-$5 for the hotdog alone and another $2 for the drink.

And he would have bought the dog,bun, napkin, dog plate for about 50¢ total...

Ceteris Paribus

No one makes economic profits in the long run. In fact, there is probably so much rent seeking going on in the permit auction that monopoly profits are not being made, either.

Speed

Why would an economist assume that an entity buying such a license in a public auction paid too much? Doesn't the "market" know the value?

Perhaps said economist could add to the world's body of knowledge by making contact with the hot dog vendor and asking for a P&L.. Or spend a day observing and counting sales activity. Field work. Yeah. That's the ticket.

sal

I've gone to a cart at the side steps of the met three times, and each time, I've noticed the guy trying to swindle. there are so many foreign tourists who go there and who many be unused to receiving change in US dollars. Once, the guy gave a dollar back after the foreign tourist gave him a 20, and the change should have been like 6 or 7 dollars. The guy just handed over a dollar and paused, hoping the tourist would go away without asking for the rest of the change. I had to speak up and say wait, there is more change. This happened a second time when I was visiting the met about a month later, and I don't think this was a coincidence. During the third time I went there, I wanted to test the guy, and I said in a heavy accent in broken English "how much a Coke," the guy told me $5 for a softdrink, but I then switched to my New York accent and said what the ?#*&#*&^ and then he said sorry, I thought you were asking about something else and he told me the correct price. Basically, this is a spot for tourists who don't speak English well to get swindled New York style, and the high rent doesn't help.

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DJM

I feel the need to shout this: KUDOS MS!

Simple and to the point. Auctions work (most of the time).

Honourable Mention to Steve. But the windfall to the city could go to social programs for cabbies...or driving lessons :)

Neil (SM)

#3. $150,000 might not be bad for a one-man operation. But if that's the case, at $1500 per day he'd have to work all 365 days in a year to make that much. The profits would be much smaller with a 5-day workweek, and certainly paying for an assistant plus buying food,supplies, and paying taxes would eat into that substantially.

Of course, then there's the cost of living "tax" in NYC to deal with