Looking for space in all the odd places
Smashburger, above left, is opening units on college campuses and in airports. Above right, Little Caesars now offers three small-format locations that can fit into 800, 625 and 415 square feet.
Ask any franchised brand what they’re doing to compete to grow in this brutal real estate market and you get the same answer: non-traditional spaces. But it’s not just the market rent driving non-traditional spaces. Efficiency in smaller spaces or new endeavors also drives revenue up and labor costs down—small spaces are just smart business in this environment.
A huge number of factors are keeping the market overheated, but the biggest is the availability of capital to buy real estate or open a business. That’s a mix of low interest rates, investors looking to hard assets in a volatile market or jitters from the horrifying election cycle.
That surplus of capital also empowers big developers to build big buildings to cater to the influx of young people moving into metro areas. Sure, big buildings often have ground-floor retail space, but they also take a long time to build, taking prime blocks off the market for years.
Using the attractive Dallas market as a barometer, it’s easy to put some numbers behind the trend. Asking prices there have climbed dramatically since mid-2014, reaching $140 per square foot in the metro area. That’s a 13 percent year-over-year increase according to commercial real estate marketplace LoopNet. Certainly asking prices and negotiated leases can look a lot different when the ink dries, but market data like that also has landlords seeing dollar signs.
Call it a bubble or call it the end of a growth cycle, these out-of-whack rents won’t last forever. But in the meantime, few entrepreneurs can sit back and wait for a pop or correction while competitors move in on coveted sites—no matter how long they’ll last.
Shrinking the footprint
So what’s a franchise to do? Just about every concept with a footprint has had to consider that. For many, it’s meant a smaller, flexible format.
Jollibee-backed better-burger slinger Smashburger is aggressively expanding with non-traditional spaces at both college campuses and at airports.
The positions on college campuses seem obvious; they put the brand in front of hungry price- and quality-conscious students, 65 percent of whom eat on campus most of the time. Locations as small as 400 square feet give the brand the ability to shrink to fit in the crowded student centers. It’s doubling campus locations with new locations at Kean University in New Jersey and Eastern Michigan University in Ypsilanti, Michigan.
Those locations and other non-traditional locations, however, serve two distinct functions: capitalizing on high-traffic areas, but more importantly, amplifying Smashburger’s “brand voice,” as Mike Nolan, the new CEO that joined in April of 2016 described.
“The single greatest success driver for us as brand ambassador has been our non-traditional brand expansion,” said Nolan. “The company made a conscious decision to aggressively pursue non-traditional locations like airports, casinos, college campuses because of the voice that those locations can speak.”
And it’s not just speaking to the burger consumer. He said it’s even more valuable to demonstrate the strength and depth of the brand to prospective international franchisees, which are often in tourist-rich areas like casinos and airports and whose children often attend American universities. Nolan said as the restaurant expands into Europe and Asia in 2017 and beyond, those leads will be important.
“We don’t intend to operate corporate stores internationally at this point. We’re looking to partner with very large, very infrastructure- and capital-strong franchise partners,” said Nolan, who said getting in front of those prospects is key. “It’s a great way to introduce the brand in a very broad manner across a broad number of geographies and nationalities.”
At the gym
For 12-location Smoothie King franchisee Paul McCulloch, flexibility allowed him to get into a pair of YMCA gyms and in front of some of his target customers as well.
“I didn’t know how much money it would make to do it. I knew my operation costs would be very low and overhead was low, so the break-even point was really low,” said McCulloch. “But even if it made just a little bit of money, it would be worth the advertising because the people that go to the Y are our primary customer base.”
He said they’ve performed well, and because of the smaller footprint and rush-resistant traffic, he can keep labor costs low and the rent is half what he’d pay in a typical location. Build-out costs were also just a third what he typically pays because he took over the space and standard equipment left by a sandwich shop. And with between 60,000 and 70,000 monthly check-ins at each YMCA, it turned out to be a smart move, despite his initial hesitations.
McCulloch toyed with very large locations too. When a defunct bank at a high-traffic intersection became available, he jumped on it, but had to do something with the rest of the building as the standard Smoothie King required just a small portion of the site.
The entrepreneur got creative and decided to put a shared office space at the other end of the building, getting himself two revenue streams and dedicating the entire façade to Smoothie King. It now looks like “one giant Smoothie King” and the shared-office workers are easy customers.
At the car wash
Branding is great, but for legacy brands like Dippin’ Dots and Doc Popcorn, non-traditional spaces are a great way to infill markets and grab traffic in unique spots. With the 2014 acquisition of Doc Popcorn by Dippin’ Dots, the two have expanded with co-branded locations and have also found some traction in, of all places, car washes.
In a franchise agreement with Las Vegas-based Fabulous Freddy’s eight car washes, both of the brands have found strong synergies from a captive consumer.
Rob Israel, co-founder and CEO of Doc Popcorn, said the “store-in-store” idea has been a lucrative one, especially as mall traffic to their traditional locations shifts in the era of Amazon. “These folks are going to a mall maybe once a year, where they’re washing their car 12 times a year,” said Israel.
“The aroma is wafting through the complex and makes customers think, Hey I can grab a snack and get some other things as well,” said Israel, who called it a “great 10-second vacation.”
The tactic has worked. Fabulous Freddy’s reported a 7 percent bump in in-store purchases since adding a very small format (about 200 square feet) co-branded location inside the car washes. It’s also easy to operate for existing clerks who pop the corn, scoop it and can then ring everything up at the standard carwash counter.
No more fighting
Little Caesars found similar synergies with gas stations and convenience stores when infilling market landscape between their standard inline locations. As convenience stores put more emphasis on providing prepared food, it’s become an aggressive competitor to snack and quick-service concepts. Little Caesars is among a handful that have decided instead of fighting the trend, it’s better to create a symbiotic relationship.
The brand had already created an 800-square-foot prototype to co-locate with convenience stores but with a separate entrance. But that wasn’t enough.
“We learned from all these convenience store trade shows that we had to shrink that down to about half the size,” said Bryan Ketelhut, manager of strategic concepts for Little Caesars.
The brand now offers three small-format locations, which they’ve dubbed Express A, B and C. They can fit into 800, 625 and 415 square feet and each contains a different mix of offerings. The 800 square foot restaurant is a standard location in a smaller space, but the 600 and 415 square-foot prototypes can be run with fewer employees. The smallest layout can be run with just one or two dedicated employees and consumers help themselves and pay at the standard counter.
Costs differ significantly too. The 400 square-foot location starts at $85,000, an easier investment for current convenience store operators and a good way to get into the brand, especially for land-owning convenience store operators.