In real estate, second time around feels just right for some
At Lumberjacks, founder Jeff Garrett appreciates that recycled locations mean every spot is unique, but there is plenty to look for before signing on the dotted line.
The restaurant industry has a real estate capacity problem. The symptoms are all there: rents are out of control, landlords don’t need to offer any improvements to entice tenants and open spaces are the subject of all-out bidding wars.
Still, few brands are ready to slow growth or let a competitor swoop in to a great location.
To keep up, savvy brands are getting more and more creative to find choice locations while still keeping costs in line. Second-generation spaces are nothing new to the industry to keep costs right-sized, but finding them has gotten a lot harder.
Bar Louie CEO John Nietzel said as they continue to grow, their flexible footprint ranging from 4,500 square feet to 11,000 square feet helps them fit in whatever space is available, and it also helps each location have a unique design.
“Historically two thirds of our locations have been second generation. They help two-fold: They’re a little less investment, and one of our guiding principles is that no two Bar Louis are the same,” said Nietzel. “So this forces us to stick to our principle.”
And while he said they don’t communicate the benefit to customers, going into a second-generation space helps operations stay environmentally friendly.
“I would say we reuse 80 percent of what’s in the back of the house,” said Nietzel. “So HVAC, the hoods, the walk-in coolers, oftentimes the kitchen equipment is still in good shape. Oftentimes we’ll come in and gut what’s in the middle and keep what’s on the exterior. But if there’s a beautiful brick wall, we’ll find a way to keep the brick wall.”
In general, it saves about 30 percent in costs. Other concepts could see more if they reuse some of the furniture, but Nietzel said the sound system and furniture is always new. He said that’s what makes a handful of converted Applebee’s and even a Chucky Cheese feel fresh and new.
At Lumberjacks, a brand expanding throughout the West, founder Jeff Garrett appreciates that second-generation locations mean every location is unique. But he says there is plenty to look out for when getting into such a spot. Jumping at a good location without taking a close look at the property is a recipe for disaster.
“There’s nothing worse than opening on the first day and nobody can use the bathroom, or the AC is out, or power is going down,” said Garrett. “Some people will sign the lease and the grease trap is bad, and they have to tear up the whole floor and they don’t have any money to open. So do your research before you sign on the dotted line.”
He said in the early days of the brand, they made that very mistake of jumping at a great location, only to find out there were major renovations necessary just to open, slowing things down and blowing opening costs out of the water. Now they’re much more careful. When a second-generation location is under consideration at company locations or franchisees, they’ll take a closer look.
“We make sure to look at everything with them and show them the things that we made mistakes on,” said Garrett.
Once the due diligence is done, he also said it cuts costs significantly, sometimes slimming costs from $1.1 million for a freestanding location to $500,000 for buildout and construction in an existing space.
The benefits of going into second-generation spaces are pretty clear. But finding them is difficult. Not long ago, it was just a matter of waiting for the spaces to show up on the various lists or calling a broker for a long list of spaces.
But now that occupancy is so tight and nobody is slowing down, operators are investing more in real estate teams in and out outside of the company. “We have three really, really good real estate people that work for us, and they are each responsible for different regions,” said Nietzel. “We know were we want to be in every market and they spend a lot of time in those markets.”
Both Nietzel and Garrett said they’ve approached current owners as well, something that was largely unheard of just years ago. Forging relationships with large landlords or real estate investment trusts is one way to find operations that are on the brink of failure. But the conversation can be tricky.
“Sometimes we approach individual owners and say, we don’t want to be rude, but it doesn’t look like the business is doing well,” said Nietzel. “Sometimes they holler at you. But most of the time, if they’re really not doing well, they’ll say, as a matter of fact…”
But as Garrett says, the difficult task of finding these locations isn’t even enough. He has a network of outsourced brokers helping find them, but he also wants to know why the former operators are getting out.
“We try to find out the history of why sales went down, and there are some situations where the town moved and that location is just no good anymore. There are other locations where they just ran it poorly,” said Garrett.
And if it’s a good location and a good operator stuck in a tired brand, he’ll try to convert them to Lumberjacks franchisees. Two of his current operators kept their leases, but changed concepts. So it never hurts to ask.