The El Farolito saga set off intense debate over S.F.’s rules on chain stores. Here’s how critics want to see them changed – San Francisco Chronicle

Home-grown restaurant El Farolito’s denial by the city to set up shop in the North Beach neighborhood has some thinking if formula retail laws are hurting smaller businesses instead of big chains. The restaurant is shown in a 2019 file photo.
When San Francisco officials rejected beloved homegrown taqueria El Farolito’s plan to set up shop in North Beach, citing the area’s ban on chain stores, it set off an intense debate around “formula retail” laws in San Francisco. Critics asked if the laws intended to keep big chains out of neighborhoods, are hurting, rather than helping, local and fast-growing small businesses.
A business, retail or restaurant that has more than 11 locations worldwide is considered a chain in San Francisco, even if it’s a locally grown small business rather than a multinational corporation with hundreds of outlets. Rules around chain stores vary by neighborhood. Most require a special permit for chains to open while three ban them altogether and several others have a partial ban, which only targets chain restaurants. El Farolito, which has 11 locations, wanted to open in one of the neighborhoods with a ban.
“Despite its noble intentions, the laws have never really done what they set out to do,” said Pamela Mendelsohn, a realtor with San Francisco-based Maven Commercial, a retail-focused real estate firm. “In some cases it’s kept out big chains, yes, but it’s also pushed out small local businesses simply because they have more than 11 locations. That’s not right.”
The question of whether chain laws are ripe for rethinking is particularly urgent now, as San Francisco small businesses struggle due to the pandemic and many commercial corridor deal with a glut of empty storefronts, critics of the law argue. They say local businesses with more than 11 locations could help fill those vacant spots. But proponents of the laws say banning chains preserves a retail corridor’s character by favoring small, local businesses.
Except for downtown and Union Square, all chain stores and restaurants are required to go through what can be long, expensive and complicated permitting before they can open a location in the city. But North Beach, Hayes Valley and Chinatown ban them completely. At least four neighborhoods —including Upper Fillmore, Central SoMa, Taraval Street and the Mission District — do not allow chain restaurants.
When considering what is a chain, San Francisco takes into account whether standard looks apply to merchandise, facades, color schemes, signage, worker dress and decor. Stores with a recognizable “look” — like a Rite Aid, Whole Foods or Macy’s — constitute a chain.
But there is a difference between a McDonald’s and an El Farolito, said Kazuko Morgan, realtor with Cushman and Wakefield in San Francisco.
“The idea of the law makes sense for bigger corporations,” Morgan said. “We don’t want the city to have the big chains on every block but when local, smaller businesses get displaced simply because they’re increasing in storefront count in the region, and not even worldwide, that’s a problem.”
Starting in 2004, San Francisco enacted chain stores regulations through a series of laws and a ballot measure. In 2014, amendments to the law included counting international locations and other changes.
El Farolito is far from the only restaurant with Bay Area roots that’s come up against the city’s stringent rule. Blue Bottle Coffee tried to open a location in the Lower Haight neighborhood in 2017 but couldn’t since it had 34 locations at the time, including international ones.
Jennifer Sarver, who started San Francisco Soup Co. in 1999 with her husband Steve, said the laws made expanding her business difficult. Now known as Ladle & Leaf, the business counts 10 locations across the Bay Area. But there was a time when the couple grew their local business to 20 locations and felt the chain store laws kept them out of some neighborhoods.
“For us it wasn’t worth it to go into neighborhoods to fight the fight,” said Sarver. As they expanded in the region and met the threshold of the 11-store limit that defined them as a chain, the couple almost exclusively opened new locations downtown, where there are no chain restrictions.
“It is still completely unreasonable that homegrown businesses are not able to expand in this city,” she said.
Chain stores have found a way to filter through into some neighborhoods that ban them — retailers Warby Parker and Allbirds for example, have stores in Hayes Valley, a neighborhood that bans chains. But because the digital native brands opened locations in that neighborhood before rapid expansions that led to more than 11 locations globally, they were grandfathered in. Trader Joe’s in Hayes Valley recently received an exemption and is estimated to open in the next year or two.
Supervisor Aaron Peskin, who represents North Beach, defended formula retail laws this week, arguing they protect neighborhood businesses. But he also said in a statement he looked forward to finding a way to welcome El Farolito.
“I’m very proud of North Beach’s diverse community of mom & pop small businesses, and am always excited to welcome new small businesses to the neighborhood. Formula retail laws have been broadly supported since their inception and help support San Francisco’s resilient small business community, and in fact, there have been many good case studies over the years for strengthening those laws,” the statement read. “I am optimistic we’ll figure it out – and that North Beach will be able to accommodate El Farolito while preserving the neighborhood’s unmatched uniqueness, which has done remarkably well despite the challenging pandemic.”
El Farolito’s owners did not respond to repeated requests for comment.
A new petition calling on the city to reform “broken” zoning restrictions has more than 1,600 signatures since last week.
Sharky Laguana, the president of the Small Business Commission, said the law doesn’t make sense if it unwittngly makes it difficult for home-grown businesses.
“We need to be more encouraging and welcoming to businesses that want to fill these vacant storefronts,” he said. “We want to get folks in there so that we can restore these commercial quarters. Why is this so hard to understand?”
Laguana is proposing one possible fix to the system. In 2007, San Francisco voters passed a ballot measure that expanded the need for a special permit for chain stories to all neighborhood commercial districts. He thinks a charter amendment should be put on the ballot that would, if approved, turn those restrictions into an ordinance. That would allow supervisors to change aspects of it as they see fit.
Supervisor Matt Haney has come out in support of Laguana’s proposal. If passed, Haney would support adding different definitions for locally grown versus national or international business chains.
“A locally owned and grown burrito shop that has (more than) 11 stores shouldn’t be treated the same as a Starbucks or McDonald’s. If our laws prohibit that, then we should change our laws,” Haney said. “El Farolito is absolutely a small business, by any common sense reasonable definition except for the one codified in law.”
Haney said more flexibility was needed especially as the city recovers from the pandemic.
“We have a vacant retail crisis in our city right now and small businesses are suffering, let’s get out of their way,” he said.
Supervisor Myrna Melgar agreed with the need for nuance. She said small business owners in West Portal like the formula retail ban, but residents also shop at the Stonestown Galleria mall full of chain stores. She said she would support going to the voters to tweak the definition of formula retail.
“I don’t think that we intended to have a ban against El Farolito and the best burritos,” Melgar said. “It’s all about what makes sense. Sometimes it doesn’t.”
Supervisor Ahsha Safai recommended having looser rules for locally based businesses with multiple locations, but keeping restrictions for national or international chains.
Supervisor Gordon Mar said he supports the ban on formula retail restaurants in the Sunset’s commercial corridors, but agreed the definition of formula retail could be updated to distinguish between corporate chains and growing businesses that are locally based. The definition of formula retail was set by the Board of Supervisors in 2004.
Other supervisors differed on the need for change.
Supervisor Hillary Ronen, who represents the Mission where El Farolito got its start, said she felt the restrictions in her district were working. It requires chain stores to go to the Planning Commission to get a special permit, which adds extra scrutiny and input from the community, before potentially being approved.
Ronen said there shouldn’t be a “one-size-fits-all” approach, but tailored for each neighborhood’s needs.
“The fact that in San Francisco we have extra scrutiny at the very least for formula retail is a good thing,” Ronen said.
Supervisor Connie Chan defended the law.
“It’s premature to be talking about changing a policy that has been extremely popular and effective at protecting our small businesses,” she said in a statement.
Mayor London Breed’s spokesman Andy Lynch did not answer specifically which, if any changes, to the chain store laws she would support but did say in a statement, “we should look at further reforms to ensure that our laws aren’t punishing successful small businesses, especially ones that started here in San Francisco.”
“San Francisco’s economic recovery is dependent on the success of our small businesses,” he said.
Shwanika Narayan and Mallory Moench are San Francisco Chronicle staff writers. Email: shwanika.naraya[email protected], [email protected] Twitter: @shwanika @mallorymoench
Shwanika Narayan covers workplace discrimination, income inequality, and poverty, at The San Francisco Chronicle. She previously covered retail and small businesses on the business desk. Before joining the paper in 2019, she worked at The Los Angeles Business Journal and freelanced for AJ+, NBC News, Quartz, and Hyphen magazine, covering national and global news and writing about Asian American identity. Shwanika has a master’s degree in journalism from Columbia University and a bachelor’s degree in political science from UCLA.
Mallory Moench is a San Francisco City Hall reporter. She joined The San Francisco Chronicle in 2019 to report on business and has also written about wildfires, transportation and the coronavirus pandemic.
She previously covered immigration and local news for the Albany Times Union and the Alabama state legislature for the Associated Press. Before that, she freelanced with a focus on the Yemeni diaspora while studying at the City University of New York Graduate School of Journalism.


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