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.)
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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.
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.
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.
“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.
Are you sure it’s $362K a year, and not $362K a lifetime? Just askin’.
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.
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.
Phil,
Yes, that’s $362K per year. Details are in the Slate article:
http://www.slate.com/id/2224941/