Tried & True
Location still trumps all when developing restaurants
Even if you’re great at managing all the moving parts in a restaurant, few will know if they can’t easily find your front door. Our guest columnist explains.
You might think in this fast-paced world of fluctuating capital markets and restaurant finance that yesterday’s rules no longer apply. But when it comes to real estate, even up and down cycles can’t trump the old saying, “Location. Location. Location.”
After all the number crunching, after the full cost analysis of rent-to-sales ratios, after the exercise in determining price points and salaries and negotiating with merchant account vendors, POS salespeople, and FFE installers, in the end, where you end up is probably more important than what ends up on your menu.
We know of horror stories where all the pieces of putting together a great day-to-day operation were in place. But the operator chased the cheap rent thinking if he built it, they would come. They did not.
Based on our experience, you will generally fare better paying top rents in a top location than lower rents in an off-prime location. Unless your product is about destination, consumers tend to flock toward large retail areas and then figure out where they are going to eat. You at least want to get in the game.
Once in a while, a well-known chef can open a quaint restaurant in a tertiary location. His or her reputation attracts customers. The numbers are small but so is the rent. It’s a model that works for some but not for most. And not really at all for franchisees who are trying to capitalize on a name brand that’s best known for operating in locations surrounded by other well known name brands, including the direct competition.
Most of us want to be where the action is. To get rich in real estate you figure out before anyone else where the people are going, get there first and stake your claim. When you do that, your cost basis is lower and you reap the profits when everyone builds around you. That’s great if you plan to own your site. But most franchisees are thinking about running a restaurant operation, not a real estate empire.
If your business model allows you to own the real estate on which you operate your franchise, then always keep in mind your exit strategy. The best sites will command the highest prices if you ever contemplate a sale/leaseback. In a sale-leaseback, you will sell the real estate portion of your business to an investor in exchange for signing a new long-term lease. You get money to expand your operation. The investor gets the peace of mind in knowing you will take good long-term care of your business and the property you just sold.
Most franchisees will lease their sites from the beginning. Whether you lease or purchase, it’s smart to work with an experienced broker who specializes in restaurants or retail. These brokers have market knowledge and can help you find sites in your targeted demographic along with the right traffic count. Don’t worry about the fees. Most often, your landlord will compensate the broker for his or her time.
The complex world of running a restaurant has many moving parts. And as important as all those parts are, no one will know how great you managed all of them if you make it hard for them to find your front door.
Doug Aronson is a director at Calkain Companies, a net-lease brokerage firm, where he specializes in sale-leaseback arrangements with restaurant franchisees. He also helped develop large-scale Asian restaurants in the Mid-Atlantic area. Reach him at (813) 282-6000 or firstname.lastname@example.org