How restaurants can beat competition
Restaurant chains have been exhibiting a huge appetite for new store expansion in recent years. But some experts question whether that growth has reached a tipping point that will lead to a shake-out, particularly among some crowded categories.
Diners have plenty of options these days with an estimated 1 million restaurants open for business coast-to-coast. On average, there are roughly 60,000 new restaurant openings each year—and 50,000 closings for various reasons, according to the National Restaurant Association. As a result, the net gain is about 10,000 in a typical year or a growth rate of roughly 10 percent. However, U.S. restaurant trends in terms of real dollars spent on dining out has only increased by about 3 percent over the last few years, including 3.8 percent in 2014, according to the NRA.
“We have seen massive growth from the restaurant sector, but not massive growth from diners,” says Garrick Brown, vice president of research, West Region for DTZ, a global real estate services firm. According to data from DTZ, restaurants have accounted for 40 percent of all retail unit growth since 2010.
Case in point is the burger sector. It has been a great time for burger lovers recently as they have plenty of new restaurant options. Shake Shack held its initial public offering recently and is poised for more store growth. Five Guys, Smashburger, In and Out, The Counter and BurgerFi are also contenders. “I could probably name another 30 chains in the better burger or fast-food, fast-casual category. But, how many burgers can we eat?” adds Brown.
Even stalwarts such as McDonald’s have struggled against the heavy competition. McDonald’s has already closed 350 stores this year in Japan, China and the U.S. That is a small number for the burger giant. But, the market is due for a “washout” in the restaurant sector, says Brown. Consolidation is likely to occur in terms of mergers and acquisitions, store closings and even bankruptcy situations.
Pizza is another sector that could be on the verge of overheating. “I think at some point there is going to be some fallout there, because there are a lot of people chasing the same customer that are competing with the pizza-by-the-slice guys that have been around forever,” says David Orkin, executive vice president, retail for CBRE in Philadelphia.
Given the competition, it is more important than ever that concepts differentiate themselves, find good real estate and also make sure the locations fit with the customer profile. “As more competitors enter the marketplace, you have to be able to make sure that your offer stays fresh and continues to evolve to meet tomorrow’s consumer,” says Mark Siebert, CEO of iFranchise Group, franchise consultants in Homewood, Illinois.
Real estate is always important. But the added competition makes the real estate location and location analytics even more important. “Mistakes in the restaurant industry in general get very expensive,” says Orkin.
Retailers selling sneakers or greeting cards can more easily pack up their inventory and move four blocks away. Restaurants invest heavily in building out their units, which makes it very expensive to walk away. “Mistakes can be devastating, particularly to young brands and franchisees who may not be as capitalized as some of the corporate deals,” he says.
That is not to say all markets everywhere are overheated with restaurant expansion. Mature markets such as Philadelphia might be home to more restaurants or certain types of restaurants, while a St. Louis still might have plenty of room for growth.
One of the big indicators for the winners and losers will be shifts in demographics and regional growth trends, as well as shifting tastes among consumers, notes Watson. In a culture that has embraced burgers and fries, there is a growing trend toward customizable food options versus the more traditional, pre-made quick-serve menu. “This is especially common with the millennials,” adds Jennifer Watson, a senior managing director at Newmark Grubb Knight Frank in Chicago.
Tips for battling competitors
1. Choose a franchise with a differentiating menu and experience from the competition. Create an offering that appeals to the masses but is different enough to set yourself apart.
2. Look for a franchise with history of success and stability. Franchisees should research the pace of growth and success of the franchise in markets similar to the one a franchisee would consider buying.
3. Be strategic with market placement to limit cannibalization amongst other franchisee locations within the company, as well as similar competition from similar concepts.
4. Get creative. Consider a co-location or combining offerings with other brands that might complement each other or drive business during different parts of the day.
5. Understand the customer, including how and when they are using the restaurant. For example, millennials and baby boomers view dining options very differently.
6. Understand your demand generators, such as a strong daytime or office population for lunch business.
7. Do your homework on market demographics. High traffic counts are great, but it is important to find locations where the population base matches your target customer.
8. Think ahead and choose real estate locations that will hold up over time. It is always better to pick the better real estate than the cheap real estate, because restaurants are generally signing 10- and 15-year leases.