Staying the course
Obstacles don\'t stop rollouts
Rising costs combined with intense competition for real estate are creating sizable speed bumps in the path of new store rollouts. Yet franchise groups are not letting these obstacles slow expansion.
Across the country, land and building costs have increased 15 to 25 percent just in the past year, while real estate prices have jumped as high as 300 percent. “The high cost of real estate is always a challenge. Every year it gets to be more and more expensive. There is no getting around it,” says Philip Drake, director of real estate at Max & Erma’s, a full-service restaurant chain with 78 locations.
As a result, franchise groups are now forced to work harder and smarter to find suitable real estate locations and keep expansion plans on track.
Making it happen
Despite the challenging real estate environment, many franchisors remain optimistic that they can find sites that work. “We are very confident that we will accommodate all the franchisees that we have coming on board,” says Lou Mancuso, vice president of real estate at Maaco Enterprises Inc., a collision repair and auto painting franchise with nearly 500 locations. Maaco expects to open 26 to 28 stores in 2006.
To ensure the franchise has sites to accommodate additional stores, Maaco uses a variety of tactics. For starters, the company constantly looks for new locations. “We go out and proactively find the real estate even if we don’t have a franchisee,” Mancuso says. Once Maaco finds a suitable site, they then find franchisees.
Maaco also is being more creative with its definition of what real estate sites will work. For example, the company now looks at larger parcels that allow it to co-locate with other tenants that offer complementary auto services, such as auto parts stores or muffler shops.
In addition, Maaco has invested more money on human resources to help find property. Maaco added two new hires to its four-person real estate staff whose sole responsibility is searching for real estate sites across the country. “Once we designate an area, they go out and comb the area for possible locations,” Mancuso says.
Strategies for success
Buffalo Wild Wings recently passed the 400 mark in its store count, and the company is on target to meet its 2006 goal of 74 to 77 new stores in markets such as Chicago, Phoenix and Portland.
To find locations for its stores, Buffalo Wild Wings uses site-evaluation software and also works with a brokerage firm in each market. “The importance of a good broker is magnified in the current climate,” says Lee Sanders, senior vice president of development and franchising at Buffalo Wild Wings in St. Louis Park, Minn.
Buffalo Wild Wings also plans further ahead on new store openings. In the past, a franchisee with a development package for six stores might have done them consecutively. These days a franchisee is more likely to move forward with two to three new stores simultaneously just to stay on schedule, Sanders notes.
Though it is more difficult to juggle three new stores at one time, if one location falls out or is delayed for any reason, the franchisee still has other projects that can proceed to meet the demand for new openings, Sanders says. If a franchisee only works on one at a time, and one falls through, it could significantly delay scheduled openings, he adds.
Weighing decisions carefully
While higher real estate prices may not have a direct impact on the number of stores that franchise groups roll out, costs are influencing decisions on where they put those new stores.
Real estate prices in Minneapolis, for example, have increased by 25 to 50 percent in the past year, while rates in areas such as Dallas and Denver have remained fairly stable, Sanders notes. Phoenix is one of the more expensive markets because of its rapid growth; the city ranks among the top five growth markets in the U.S. Most developers are in front of that growth, buying up land in outlying areas and waiting for the residential growth to reach it, Sanders says. That land speculation and competition has made it expensive to open stores in the Phoenix metro.
To even out real estate price highs and lows, franchises such as Max & Erma’s try to minimize their exposure in any given market, and instead spread their stores around in a number of areas. Of Max & Erma’s six new locations planned for 2006, for example, the stores will be scattered around the country in areas such as Richmond, Va., St. Louis, Mo. and Dayton, Ohio. “It’s a matter of using our resources wisely,” Drake says.