Common mistakes can really mess with your plans.
The tough economy has many companies pulling in their horns on expansion, but operators who are shopping for real estate could find it’s a buyer’s market. Trouble is, according to real estate pros, restaurant companies—even chains you’d think would know better—often make mistakes that cut them out of the best deals.
The most common of those missteps resemble the biblical deadly sins: Pride, ignorance and laziness rank high among errors, as does inflexibility, a tendency to over-analyze and lack of skilled representation.
When it comes to site selection, many operators do so with rose-colored glasses on, says Brian Epstein, founder and CEO of UrbanSpace Commercial Properties, an Indianapolis-based brokerage. “They get so wrapped up in their concept and convince themselves that customers will seek them out anywhere,” he says. “They cut corners on rent and ignore the mantra of location, location, location—which the majority of concepts don’t have the strength to buck. A competitor will always come in willing to pay a couple bucks more per square foot for a stronger location and immediately out-position them.”
Another common misstep is what broker Marty Kotis calls following the herd. “One area of a city may have 20 restaurants and buyers will think it’s a hot area. Maybe, but maybe not,” says Kotis, president and CEO of Kotis Properties Inc., Greensboro, North Carolina. “They’ll follow simply because restaurants they’d like to be associated with are there. But that area may only be strong enough to support 10 restaurants. The cluster gets too large, everyone starts to suffer and restaurants fail.”
Bryant Siragusa, national director of mall restaurants and entertainment for CBL & Associates, a mall and shopping center developer headquartered in Chattanooga, Tennessee, says herd mentality applies in other ways, too. In particular, emerging chains often get caught up in a desire to follow established chains into Chicago, New York, Houston or L.A.—markets with high visibility but stiff competition. “They could probably buil a much stronger bottom line if they focused instead on second- or third-tier markets where they’d be a big fish in a smaller pond,” he says.
Regardless of the size of the pond, failure to perform due diligence is another common error, Siragusa adds. “Restaurants need to get in on the front end with the city and find out about permits and fees. They need to know the signage ordinances and what they have to pay to tap into municipal sewer and water lines. In market like Florida, those fees can run $300,000 to $400,000. They need to know if they’ll have to pay for union labor, which can add 30 percent to construction costs. Liquor license fees in some cities are sky high—half a million to a million dollars in cities like Detroit. These things are all barriers to entry and they vary greatly from market to market. Restaurants often don’t do this kind of homework or they don’t do it properly.”
Pressure on chains to achieve rapid unit expansion can also lead to expediency trumping smart site selection. “It may be easy to jump into a market and knock out five deals with one land owner or to jump into the shiny new lifestyle center,” Kotis says. “But that’s a lazy approach. To get the best deals, you have to work to uncove the fundamentals of a location as they relate to your business. You need to know where your customers live, work and play and site stores in locations that take advantage of that versus skimming for low-hanging fruit.”
Chains also are commonly guilty of entering local markets with national blinders on, according to Epstein. They routinely pass up potentially great sites because at first glance they don’t fit neatly into prescribed corporate formulas.
Ignorance of the many ways that deals can be structured and a lack of flexibility are other common and costly mistakes. Here, it’s most often independents and emerging chains at risk. “They just don’t know what’s available to them in terms of the different types of transactions,” Siragusa says. “There are so many ways to make a deal happen and get to the desired end result, but they come in with their minds already made up about the type of deal they want and often walk away from different types of opportunities that could work for them.”
Kotis notes that ruling out a location simply because you can’t own it is shortsighted. “Look at the deal a couple of other ways and take the time to put some numbers to it,” he suggests. “Keep your options open, and if you don’t understand those options, hire someone who does to represent you.”