Two years ago, Phil Freedman wanted to grow. The president and CFO of Ridgeland MS's McAlister's Corp. wanted to add more units of the company's McAlister's deli concept in Charlotte and Chapel Hill—two key North Carolina markets. Financially, he was ready. Logistically, he was prepared. But circumstantially, he was in trouble. The problem wasn't with him or his company. There simply wasn't a contractor in the area who'd touch the project. "It would be difficult to get people interested," Freedman recalls. "And then if we did, we'd get fewer bids than we would have wanted." The fewer the bids, the higher the costs.
In the thriving economy of late, growth in all industries was so robust that contractors were turning down jobs. Restaurant construction jobs in particular proved unpopular; contractors and subcontractors passed on the single-unit, relatively low-profile work offered by restaurateurs to work instead on larger, high-exposure projects in other markets. Says Freedman: "We had difficulties with contractors, and especially subcontractors in those specific markets that were driven by technology and financial markets."
These days, however, things are changing. The economy is slowing. Investment capital is scarce. And industries across the board, many of which were propelled by the Nasdaq bull market, are downsizing—if they're not gone completely.
That can be welcome news for restaurants like McAlister's, for which an economic bust can, ironically, mean a building boom—even if fears of a cooling economy cause them to scale back on expansion plans. But suddenly, as the more glamorous contracts dry up and construction slows in other industries, contractors are increasingly willing to bid on restaurant projects that in the last few years they've been passing on.
"As you go out into the marketplace, you find contractors and subcontractors that aren't as busy as they were two years ago," says Rick Walsh, senior VP of corporate relations for Orlando, FL-based Darden Restaurants. Darden's Smokey Bones concept alone expects to add more than 40 restaurants nationwide within the next fiscal year. "Opportunities are presenting themselves not only in terms of the contracting trades, but in all aspects of architecture and design."
According to Brinker International, which plans to add more than 100 company-owned restaurants by June of next year, costs of raw material are also easing. "Lumber, sheet rock, and roofing material are all less costly due to less commercial, and private building," says Brinker spokesperson Tim Smith. "It's not at all an unwelcoming environment."
Especially not when compared to what it used to be. "All your basic trades, bricklayers, carpenters, they all had so much work they could really hang in there on a high bid," says John Wooley, president and CEO of Austin, TX-based Schlotzsky's. Although nothing is really inexpensive now, Wooley is relieved to see the end of what he calls the "extortionate pricing" of recent years. He says the boom in high-end residential projects in Texas—not incidentally, home to many Dell Computer millionaires—drained the commercial industry's construction trade workforce.
"We'd see bids where somebody had just sold his stock options, and they wanted their mansion built right away—and he would pay whatever it took," Wooley remembers. "A few times, our builders would come to us, mid-project, and say 'Hey, I just got a bid on a billionaire's house. I'll be back in about a month.' And we couldn't find anyone to replace them."
Now, even though prices are still somewhat high, Wooley says, "That kind of activity has come to a screeching halt."
Contractors in New York also seem more open to restaurant work than they have been. "In the real boom times, they were quite cavalier about restaurant work in general," says David Swinghamer, managing partner of New York's Union Square Hospitality Group, which is currently building a new restaurant/jazz club in Manhattan. Contractors had so much work, they felt free to turn new projects down. "But now they're more open to discuss the situation and work with you," he says. "With an uncertain economic future, they feel the need to do some relationship building."
Tom Santor, communications VP for Columbus, OH-based Donatos Pizza, agrees. "When we bid jobs now, we are seeing more people interested in bidding, and the cost is starting to decline all over," he says. "It's definitely a more competitive environment."
Of course, bad news for other industries doesn't completely translate to good news for restaurants. A paucity of investment capital can choke off the growth of a restaurant chain just as quickly as that of other businesses, no matter how much easier it may be to build. And not all operators agree that the construction picture is brightening. If that's happened, Les Lockhart, real estate director for Nashville, TN-based O'Charley's, hasn't seen it.
"We're in 14 states, and we haven't found that our construction costs are coming down," he says. "The subs that our general contractors find are still pretty expensive." Lockhart also observes that, because capital no longer flows as freely, more and more developers are focussed on getting better returns out of their existing properties rather than taking bids on new ones.
Still, O'Charley's is in expansion mode and is maintaining its 20% year-over-year unit growth. Lockhart concedes that construction cost "is an area that's stabilizing," he maintains he's not seeing any substantial savings.
Moreover, Swinghamer adds that even given the economic slowdown, there are some markets—like Manhattan—where the construction bidding is still very tight. "There are still a lot of jobs in the pipeline," Swinghamer says. "They still have work, both new and backlogged."
But as the contractors work through that glut and find time on their hands, prices could come down. "In the last two years, there has been plenty of lucrative work, and because of that, they've got a backlog," says Joseph Kelly, editor of Electrical Contractor magazine. "There may indeed be a slowdown in terms of new business, but that won't be evident for at least six months."
Still, many in the restaurant business are clearly feeling a relief—or, as McAlister's Freedman puts it, "It's made a difficult situation less difficult."