Want to beat the big guys in this game? You’d better find the right corner—or in-line or end-cap.
“Of all the decisions a new restaurant owner will make, the biggest is real estate,” says Steve Greene, COO of Camille’s Sidewalk Café in Tulsa, Oklahoma. “If you’ve got a bad site, it doesn’t matter what a great marketer or operator you are.”
But hitting that sweet spot can be a hard play for small and medium-sized chains, let alone independents. You find out fast that the real estate field is anything but level. The McDonald’s and the Chili’s always seem to have first dibs on the best locations, muscling little guys off to the sidelines.
“It’s difficult when you’re a smaller operator,” says Adam Griffiths, director of real estate for Wingstop in Garland, Texas. “A lot of the bigger chains can maneuver you out of the picture.”
But smallness has its strengths, as well. The trick is to make the most of them, using agility, creativity and a touch of technology. Every day, in fact, some small operator outflanks a bigger player and scores a prime location.
The key to a great location, of course, is locating great customers. “I think of it like the oil business: How good people are at locating it and getting it out of the ground are the determiners of their success,” says Mark Winters, CEO of consultant Prediction Analytics in Irving, Texas. “You can think of the retail landscape as the surface of the earth. There are pockets of demand out there for different types of businesses. Each concept draws on those sources of demand in different ways.”
As important as where core customers live is how easy it is for them to reach you. Instead of just drawing a circle on a map and counting up the census blocks, more sophisticated operators look at drive times.
“You can’t pick sites on demographics alone,” says Craig Bothwell, the McAlister’s Deli franchisee for Kansas. “In Wichita, a river runs down the west side of downtown. If you look at a site on the west side, it’s not going to draw from the east side. You may not have the population to support three to four million in sales. But a fast casual unit could support a million and a half.”
Co-tenants can be as important as customers. Traffic generators, like supermarkets or big-box stores, can easily draw cars to your site. So could other restaurants. Michael Kesselman, president of siting consultant geoVue, would set a casual steakhouse next to an Olive Garden. “The two of us together might pull more people in. We recognize we may not get your business every time. But we’re counting on getting it a certain percent of the time.”
To sort it all through, many operators get computerized help. Firms like Prediction Analytics and geoVue offer smaller chains the same analytic models that big chains have used for years (see page 46).
Once you’ve zeroed in on a market, says Bothwell, “Find out about the opportunities before the big guys do. Say, for example, you’re a member of a state restaurant association. Maybe the opportunity is in a restaurant location that’s going to close, and you happen to know the operator. It’s sort of a grass-roots, guerrilla-like tactic.”
If you’re new in town, it pays to hire an aggressive restaurant realtor. Marty Kotis, president of Kotis Properties in Greensboro, North Carolina, will fly over a market with a video camera. Once he’s photographed promising sites, he canvasses their owners. “We say, ‘Have you ever thought about selling? Are you happy with that location?’” says Kotis. “If you just contact properties with signs up already, you’re probably not going to see everything that needs to be seen in the marketplace.”
Attending trade shows, like the International Council of Shopping Centers show, can’t hurt either. You can put your name in front of landlords and hear about new malls while they’re still on the drawing board. “Working with national developers gives you an edge,” says James Greco, CEO of Burlington, Vermont-based Bruegger’s Bagels, with 245 bakery-cafes. “It builds relationships, puts us at top of mind, lets us hear about planned projects and network about other opportunities. I’ve learned of several planned sites this way and have received unsolicited calls from brokers about new sites.”
Even with an inside track, you might still have to wait, counsels Dallas restaurant realtor John Evans. You may have to develop a second-choice location while you’re waiting for your prime spot. “Start in the market and get known, and when something becomes available in your number one spot, move on that. No matter how tight a market seems at the time, something will eventually come available.”
Of course, when that perfect site does surface, you probably won’t be the only one vying for it. But a small chain may have the advantage of speed, able to sign a deal while a larger chain is still running it through committees.
“Our advantage is our ability to move swiftly,” says James Quackenbush, VP of real estate and development for Ninety Nine Restaurant & Pub, a 110-unit casual chain headquartered in Woburn, Massachusetts. “I sit on the executive board of the company, and I can go face to face to meet with a developer and landlord. That can’t happen with a larger chain.”
James Pilla agrees. “We have an advantage over larger companies and the bureaucratic decisions involved,” says the director of real estate and construction for Philadelphia-based Rita’s Water Ice. “From lease generation to signing, we have a target of 45 days. Landlords don’t want space not generating revenue.”
It helps if speed is backed up by a strong balance sheet. “The first question a landlord is always going to ask a small operator is to see their financials,” says restaurant realtor Andrew Moger in New York City. “Anything a tenant can do to paint the best financial picture they can offers comfort to a landlord.”
A different strategy is to offer something a larger chain can’t. Scottsdale, Arizona-based Kahala Corp. offers a developer several brands among the eight small concepts in its stable. “If it’s not a Samurai Sam’s location, it could be a Taco Time or a Ranch 1,” says real estate VP Jerry Conklin. “If a current Samurai Sam’s franchisee is doing well, and a potential location comes up in the same center, they have the ability to grab one of our other brands and develop it.”
If all else fails, you can always outbid the other guy. A national chain may have limits on how high a rent it will pay. A small chain can sweeten the pot, maybe letting the landlord benefit if you beat sales targets. Says Evans, “Norm Brinker told me years ago, ‘John, if I have to pay 6 percent of a larger amount of sales and get to keep 94 percent, I’ll do it anytime.’”
In return for higher rent, you can ask the developer to strike some offending clauses from the lease. “You spend more time deciding what you don’t want in there than what you do,” says Mike Bartlett, executive VP of Mazzio’s Corp. in Tulsa, Oklahoma, which runs 217 Mazzio’s Pizzas and Zio’s Italian Kitchens. “We won’t sign a lease that has a no-go-dark clause, which says you can’t close your location after six months even if you keep paying rent.”
Don’t be afraid to ask for changes, says Kotis. When one mall developer refused to negotiate, Kotis pulled deeds for all his other tenants. “We created a matrix of those 15 different deals, and we saw there were other people getting better deals,” he says. Faced with that information, the developer backed down.
Need data to get a leg up?
New technology is leveling the playing field
Anyone who says finding restaurant locations isn’t rocket science hasn’t talked to Prediction Analytics. Back in the 1970s, co-founder Richard Fenker wrote algorithms for NASA. Now, his firm helps restaurants hit another moving target: consumers.
“The fundamental question we try to answer is, ‘How do consumers use you?’” says Mark Winters, CEO of Prediction Analytics. “We look at your existing locations on the landscape and see how effective you’ve been at tapping demand there. When you bring us a new location, we match it up with what your concept is good at doing.”
His company is one of a new breed of siting consultants with computerized crystal balls. They maintain databases of census data, consumer surveys and traffic patterns for major metro areas. Plug in operating information for your existing restaurants and core customers, and they’ll advise you on where you can reach them. “It gives small companies an advantage, telling them where to go to position themselves so they can survive and thrive,” says Michael Kesselman, executive VP of corporate development for geoVue, a market planning company in Woburn, Massachusetts. “If they go into a market without a strategy, they can be squeezed out quickly.”
More than just animated maps, these programs perform as many functions as a Swiss army knife:
Market optimization. Calculate how many stores to build, and where to put them, to get the most revenue and the least cannibalization.
Site analysis. When a lot opens up at 531 Main Street, map its surroundings by population, median income, education level and drive times.
Sales predictions. Based on records from your other stores, how much revenue are you likely to earn at the proposed location?
Direct marketing. Now that you’re next to 20,000 people with incomes over $50,000, you can print out addresses and target mailers to every one of them.
Prediction Analytics offers a Web-based platform only, called Retail Performance Modeling™. It provides all the services above. The company declined to provide information on pricing.
GeoVue breaks up its services into modules, which can be bought separately. Its flagship product is iSITE, a standalone package that can also be used to access its web platform. A typical implementation is $25,000 for five to 10 users. Three additional modules can raise the price to $125,000 to $150,000. iPLAN does market optimization, iPREDICT forecasts sales, and iTARGET provides mailing addresses.
Others in the field include Mapping Analytics, Empower Geographics and MapInfo. Their services have names like “geographic intelligence” and “location intelligence,” and offer the same four basic functions. Empower sells a novel service: digitized aerial photographs of the United States and software for analyzing them.
Such tools make it easier for a small chain to break into a new market, says Elaine Roper, site data coordinator for Rita’s Water Ice, a geoVue user. “They give us a snapshot of the markets. We can see where the retail is concentrated and where we might want to start looking.” At Avado Brands, with 97 Don Pablo’s and 22 Hops brewpubs, CFO Kurt Schnaubelt calls Prediction Analytics “dog insurance.”
“The last thing you can do in a cash-intensive business is to take precious capital and allocate it to a dog,” he explains. “This system will process that data and give you a sales forecast so you don’t make a mistake.”
Users warn that these programs are meant to aid human judgment, not take its place. Check the quality of the data that goes into the program, recommends realtor Andrew Moger of Branded Concept Development in New York City. “We’ve tried this, pinpointing a site, using three different services and getting very disparate information. I’d like to think one of them is right.”
For restaurant sites, here are the big 7
Each is good, each is not so good. It all depends on the place you run and the customer you’re after.
Small takeout and fast-food restaurants; residential growth outpaces commercial
• Very little competition
• Less expensive real estate
• People not used to eating out here
• Sales likely to start slowly before building
Office or Industrial Park
Outskirts of town or main artery, little or no residential nearby
• Destination for workers
• Day population has little time to travel
• Few competing restaurants
• Strong breakfast and lunch
• Strong take-out
• Narrow trade area; doesn’t draw from neighborhoods
• Lose evenings and weekends
College or University
Concentration of dorms and apartments in older parts of town; mix of local and national concepts
• High visibility
• High traffic counts
• Three dayparts
• Captive audience
• If located on campus, customer base limited to students
• Inadequate parking
Department store anchors, high retail variety, restaurant sites in-line or end-cap
• Increases trade area; concentration of retail, movie theatres, etc.
• High foot traffic
• Potentially lower build-out costs
• Plentiful parking
• Harder to define trade rea and target potential customers
• Potentially higher rent costs
• Added cost of maintaining common areas
• Some high-end diners may not go to mall restaurants
Newer, big-box retail corridor
National freestanding restaurant chains; few local/regional restaurants
• Location on interstate provides large trade area
• National big box stores drive traffic
• Large number of restaurants create a destination
• Expensive real estate
• High demand makes finding locations difficult
Established retail corridor
Mix of national, local and regional concepts
• High traffic among locals
• Close proximity to high- income residential areas
• Large number of retailers generate traffic
• Large number of restaurants make corridor a destination
• Heavy competition
• Expensive real estate
Locally owned restaurants of medium size; virtually no national chains
• Less expensive real estate
• More personal-feeling environment
• Excellent weekend traffic
• Good office concentration
• Less total traffic; destination oriented
• Parking issues
• Few strong days of sales (Thurs.-Sat.)
• Fewer retailers generating synergy
Good neighbors are good business
Robert Miles likes high-rolling companies. “What allows us to become comfortable with a project is the co-tenants going into it,” says the former real estate VP of and current consultant to Cameron Mitchell Restaurants, a 27-unit collection of high-end casual concepts based in Columbus, Ohio. “We know the guest that goes to our Mitchell’s Fish Market will also go to P.F. Chang’s, Cheesecake Factory and Il Fornaio. We’ll be part of that dining circuit with them. For our price point, with a $30 to $35 check average, being next to a restaurant with a $15 average, like a Darden, is not going to drive our sales.”
He wants at least 200,000 people in a five-mile radius, with median incomes upwards of $75,000. But he also wants neighbors with high sales volumes—say, a Chang’s doing $125,000 a week. It also helps to have a bookstore next door. “They’re interactive waiting areas,” he says. “We can each walk into a Barnes and Noble and kill a half-hour.”
Because Cameron Mitchell often builds just one store in a market, Miles will wait for just the right site, one that can draw from the whole metro area. “I would like to build in Texas, in Austin, San Antonio and Dallas,” he says. “I’m going to work all those markets simultaneously until the right opportunity surfaces.”
When opportunity does arise, in a new lifestyle center or a downtown nightlife district, Miles plays up the fact that he’s not a big chain. “Smaller restaurant companies and high-end casuals use their menu creativity, the fact they’re unique. We know the developer wants something higher-end than what’s... on restaurant row.”
Camille’s Sidewalk Café
Battling for B locations
Despite ranking 208 on Entrepreneur magazine’s Franchise 500, the 100-unit Camille’s doesn’t have the clout to snatch ‘A’ locations away from larger systems. “The battle,” says COO Steve Greene, “is to pick the very best ‘B’ sites.”
In scouting sites, Greene’s magic word is “rent factor.” He’ll take a site with slightly smaller sales potential in exchange for a lease rate between 5 and 10 percent of sales. By saving on leases, he figures, franchisees can pump more into marketing.
For that strategy to work, he needs to know what sales will be. Greene relies on Prediction Analytics’ computer models. “If this site would do X dollars, and we go down two more blocks in the same center, but the rent drops $10 a square foot, can we do close enough numbers? I want to find the lowest rent with the highest upside potential.”
A good B location must still pass a demographic test: a minimum of 50,000 people within three miles. Lunch makes up 70 percent of Camille’s business, so there should be a population of at least 10,000 during the daytime within one mile. Sometimes, Greene takes a rent that’s a percentage of sales instead of a flat rate. “I love to negotiate a deal where our developer is at the table with us, where’s he’s invested in our success,” he says. “They know if we build sales, they build rent.”
Visibility is everything
With a main menu of buffalo-style chicken wings, Wingstop’s product flies out of its stores. At least 70 percent of its business is take-out. So its 270 mostly franchised units roost next to Wal-Marts and such. A location should have at least 20,000 people within two miles.
Being able to see the stores from the street is key. “If we’re buried in a power center with a big anchor, hidden behind the action, we would take a location across the street with good access and visibility,” says real estate director Adam Griffiths. To beat out the KFCs of the world, Griffiths shows landlords the chain’s operating record. “We’re often able to be the winner just by our corporate backing,” he says. “We show them the sales potential of the restaurants we do have open.”
In markets where it’s unknown, Wingstop trots out a more familiar face and name, its national spokesman, former Dallas Cowboys quarterback Troy Aikman. “His face and reputation carries a lot of water with developers,” says Griffith.
When he beats other fast-feeders to a shopping center, Griffiths tries to shut the door on them. He’ll push for a lease clause that excludes most concepts under 4,000 sq. ft. He doesn’t always get the exclusive. It’s likeliest when the center is already leased out. “But sometimes,” he says, “it’s just a matter of dumb luck or the developer’s mood that day.”