Good locations for restaurants are gett ing harder to find. Not only are operators competing against other restaurants, often they’re angling for the same spots as retail behemoths like Walgreen’s or Staples. “You’ve got to be very nimble, quick and responsive,” says Rudy Nadilo, CEO of GeoVue, a Boston- based site selection forecasting and statistical analysis firm that has helped a number of chains shape their geographic expansion plans. “If a good deal comes along, you’ve got to take it.”
But that doesn’t mean it’s a good idea to rush out and grab land, any land. Selecting a profitable site is an important business decision that requires a judicious mix of science and art. “Finding the right spot is almost as important as finding the right operator,” says Randy Romano, vice president of franchising and a partner in Pizza Fusion, a young chain.
What follows is advice from those out on the front lines.
Look at the big picture. If you’re planning to grow beyond a single location, take a cue from the major players and look at your market from a broader perspective. A real estate broker might be able to identify a super site, “but if in the future you want to add more stores in a comprehensive integrated network, you might not want to open a store in what seems to be the ideal location today,” Nadilo says. Shrewd retailers consider development from a 5- or 10-year perspective before breaking ground. Nadilo says a lot of restaurant operators make the mistake of looking at real estate deals individually rather than as part of a grand scheme; as a result, they are “leaving square footage on the table”—in other words, they are missing out on a chance to optimize their market presence with multiple units.
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| IF YOU BUILD IT: Will they come? If you do your homework, they should. |
Cereality, a young and growing concept based on everyone’s favorite breakfast food, hired GeoVue to optimize the entire country, looking at traffic patterns and demographics to determine where it would make sense to place stores. “We broke it down into larger trade areas, and since they were planning to sell a minimum of 10 stores (in development agreements), we broke the trade areas into 10-unit clusters,” Nadilo explains. Using that data, Cereality’s franchise people were able to attract developers who prefer an analytical approach.
Remember you’re not operating in a vacuum. Are there demand generators in the area? Demand generators could include your competitors, especially if they’re enjoying lines out the door. They could include arts or sports arenas open or under construction. Often, they end up being like-minded businesses; in the case of Pizza Fusion, which stresses its green operating philosophy, it means opening near a Whole Foods or Wild Oats store, since they attract similar audiences.
Obviously, geography plays a role. “Along with co-tenancy, it makes sense for Pizza Fusion to be looking for people who have that same level of sensitivity, and geographically that can be anywhere in the country,” says Russell Barnett, vice president and executive director of CBRE’s restaurant specialty practice group, which is helping the growing chain identify suitable sites. “But some of the more viable areas where you would find a large concentration of people with that perspective would be California, the Northwest and other pockets, such as Denver, Vail, Boulder, Ann Arbor and San Antonio—areas where there is some progressive urban and eco sensitivity,” Barnett adds.
Co-tenancy has a downside as well. A movie theatre might be a good demand generator, but will its patrons take up all your parking spots if you share space in a shopping center?
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| WIRED? Hasz, who helped bring Tres Agaves to life, says operators should check out utilities before committing to a space. |
Consider what it will cost to bring a site up to par. What kind of utilities will you need? What about plumbing? Hood exhausts? An elevator? “Super pay attention to what the actual costs will be,” says Karl Hasz, a San Francisco design and construction consultant. “It’s not just the site selection, but what will the total package cost to open?” Often it’s the worth the expense to hire a consultant who understands the specialized needs of a restaurant to evaluate a project—before you sink a lot of money into construction. “It’s the biggest expense and the one that can go most out of control,” Hasz advises.
Look at the right numbers. The family that runs Johnny’s Lunch, a 70-year-old hot dog stand in Jamestown, NY, recently decided it was time to branch out.
CEO Tony Calamunci knew he wanted to focus on sites that could do a minimum of $800,000 a year in sales. But where? Rather than opening at random, the family sought out help from Pitney Bowes MapInfo, which looks at a slew of factors that make people choose restaurants. Using a program that helps it extrapolate that information across the country, it identified 4,500 sites where a Johnny’s Lunch would likely thrive.
Consider the dayparts you’ll be open. How is a location going to behave depending on the time of day? “I can’t tell you how many shopping developers may say they have a great site for a restaurant,” says Devon Wolfe, managing director of strategy and analytics for North America with MapInfo. “but no one is home during the day, and if a restaurant has to do some of its business at lunch, there has to be daytime traffic.” Diners and special occasion restaurants operate under different assumptions. High-ticket places need to be in business settings.
Don’t forget that you get what you pay for. Better sites have better traffic or visibility, while less-desirable locations are off the beaten path, hard to see or hard to reach. “A, B and C locations all have different rents. You may think you’re getting a good deal in the beginning, but you’re really not,” says Pizza Fusion’s Romano. “Domino’s and Papa John’s can get away with C locations because everything is over the phone,” he notes, but Pizza Fusion is looking for in-store customers and needs an inviting location. “We’re not afraid to pay higher rents because we think it will pay off in the end.”
Read the fine print on the lease. “A lot of independent operators don’t do enough due diligence in terms of lease negotiations,” says Tom Prakas, president of Prakas Group, a restaurant brokerage with offices in Boca Raton and Orlando. “Some have open-ended rent increases after the first term, some have bad subletting clauses.” Many landlords don’t have a good understanding of how restaurants work as a business model and are more familiar with retail tenants. “A restaurant is a different animal,” says Prakas. He advises owners to get advice from a brokerage with restaurant experience as well as an attorney.
The good news, Prakas says, is more shopping center developers and other potential landlords look much more favorably at foodservice tenants than they did a decade ago. “Most would say they did’t really want (restaurants) because of the garbage, rats, parking issues, etc.—but now the pendulum has swung 360 degrees. Now developers want ‘eatertainment’ to drive their retail centers.” As a result, more are offering generous allowances to lure respected foodservice operators. “If you’re a great operator with a good track record, you can cut a much better lease deal today than at any time in the past,” Prakas says.
Before you sign, make sure you can live with the terms, says Hasz. Know where the garbage will go, whether you need to keep your operation open during specified hours, how much power the landlord promises to deliver, whether natural gas is available. What happens if you want to close at lunchtime because business is slow? Does your lease prevent you from making that decision? It’s generally accepted that the landlord will pay for or at least subsidize the cost of adding anything that’s a permanent fixture, such as new bathrooms or an elevator.
Be opportunistic. “Look at areas that have new development coming in where you can get in early before rents and real estate get expensive,” says Jacob Zimmerman, president, Restaurants for Sale Online. You should consider operations where the competition is doing well but one operator is struggling, and empty resturants, which might offer better leasing terms as an incentive. If you’re new to the game, Zimmerman suggests considering existing built-out locations. But make sure the location has everything you need and calculate any costs for added equipment and furniture, he cautions. You might be able to get some help from the landlord. “Many first-time owners put too much money into a location that doesn’t make sense. Make sure you have a good financial assessment of your return on investment.”
Be realistic. Say you’ve fallen in love with a site. Be prepared to back off if projections show it won’t work. “Gut feelings are great, but if it feels good and the numbers don’t work, don’t think you’re going to make it work. You have to give yourself a 20-percent buffer on costs,” Hasz says.