Today alone, nearly half of all adult Americans will order a meal in a restaurant or a food-service outlet. The tab will come to about $875 million—and before you reach for that check—consider that this happens every day of the year. Is it any wonder that you had to wait in line for your Egg McMuffin this morning and for your table at Houston's for lunch?
From fast food to fine dining, it's no secret that restaurants play a central role in our nation's economy, with projected 1997 sales totaling $320 billion. Restaurants are the number one U.S. retail industry; one out of every four retail outlets serves food or drinks. Almost 50 billion meals are eaten in restaurants, schools, and work cafeterias each year in America.
In addition, nearly nine million people—8 percent of the U.S. workforce—are employed in the restaurant industry, according to Caitlin Storhaug, spokesperson for the National Restaurant Association (NRA) in Washington, D.C. By 2005, that number will grow to 11 million.
With more money and less time—due, in part, to the growth of two-income households—Americans continue to spend a greater portion of their food dollars on meals away from home. In 1955, 25 percent of all food dollars went to the food service industry. By 1996, that figure was 44 percent and showed no sign of slowing, according to the NRA.
Where Will We Eat Tomorrow?
With more than 600,000 commercial locations in the United States, is there room for another restaurant in your market? The answer is yes. One reason is the quintessential American quest for something new—in this case, new dining experiences.
Changing demographics also drive the market. Aging Baby Boomers with disposable incomes and educated palates look for convenience and more sophisticated cuisine, such as ethnic foods. The growing seniors market, as well as families, look to cafeteria-style buffets for value. Generation Xers, tourists, and others attracted to the big-city and other retail entertainment districts seek fun along with food at sports bars, music clubs, and adult playgrounds.
Brokers interested in serving this industry need to stay on top of trends borne of changing demographics and consumer food preferences. Helen Baxter, executive director of the Baxter Group in Austin, Texas, a restaurant consulting company, says that trends lead to the discussion of locations. "Know the trends, know what's happening in the restaurant industry, and site selection becomes a matter of common sense," she says.
What's on the Front Burner?
In terms of concepts, what's hot? Well, gourmet coffee with just about anything: coffee with bagels, coffee with books, and now, coffee with computers. Cybercafes, such as Cybersmith, a small chain in Cambridge, Massachusetts, and Apple Cafe, set to open in Los Angeles this year, offer Internet access, new CD-ROMs to preview, and video conferencing along with pastries, snacks, and, of course, coffee.
According to industry publications, other growth areas include bagel shops, smoothie shops, Asian and Mexican eateries, steakhouses, and sports-themed restaurants, such as Champps Americana. New food concepts include create-your-own stir-fry dishes and wraps-tortillas and flatbreads wrapped around gourmet fillings. And poised on the horizon to make a comeback—can you believe it—fondue.
In terms of real estate, regional franchises that are going national represent a large growth area for site acquisition. Many of the older, more established chains have saturated their markets, even to the point of establishing infill locations.
But location trends also are changing, offering potential new markets to newcomers and familiar faces alike. The downtown areas of second-tier cities such as Detroit; Austin, Texas; San Diego; and Indianapolis are undergoing a rebirth, following a trend to 24-hour cities set by New York, Chicago, and Los Angeles. As business and residential populations move back downtown from the suburbs, office workers populate these once-barren central business districts during the day, and in the evening, residents and tourists descend, attracted by retail entertainment venues. Of course, they're all looking for a good place to eat.
Franchise/Chain Strategies
Each national franchise has an expansion strategy that includes defining the primary expansion market along with submarkets in an area of the country. But before approaching a franchise or chain with a possible site, brokers need to do their homework in demographics, location, and concepts.
To find out if a national restaurant chain is interested in a trade area, brokers should put together a site submittal package for review. The primary elements should include ingress and egress, parking, zoning, an aerial photograph, the tenant mix of the development, demographics, the geographic relationship to the competition, and shopping malls. Always note environmental concerns for the site and adjacent properties. Ask the city about the availability of signage.
"By having the information first, we can maximize the value of each other's time and have a more in-depth and less sales-oriented conversation because we have a preliminary understanding of the site," says Len Kareska, national director of real estate for California Pizza Kitchen, who is based in Chicago. "Effective brokers focus on the provision of relevant data and information related to the site and trade area, and through rejected site submittals, develop a greater understanding of what works and what does not. Through that continual interactive process, understanding and effectiveness build and client-broker relationships are developed."
Once they have established a relationship with a broker, franchises often contact them for information to rank the area according to income level. Then they ask the brokers to plot the shopping malls and note the competition. After gathering this information, the national chain ranks the trade areas in order of importance.
"We rely on brokers to educate us about a location and introduce us to a site that will eventually lead to a complete deal," says Jim Kirkpatrick, executive director of real estate for Applebee's International, Inc., in Overland Park, Kansas. "Brokers have to be thorough from beginning to end."
He adds, "We tend to do our own negotiating with land owners, but we want brokers to be there when we need them. We want brokers to be up-front on all issues and concerns with a particular site. We need brokers to help us put a presentation package together, and we need brokers to do the legwork. Brokers have to deliver."
"No Surprises" Concept
Franchises follow the "no surprises" concept in restaurant site selection, so brokers should be aware of the activity in an area and learn the requirements for different restaurants.
Kareska says California Pizza Kitchen is "looking for sites within trade areas that have a significant portion of the population fitting the upscale demographic profile of our customer. Detailed local knowledge is required to identify all appropriate alternative sites within a qualified trade area. And basically, a qualified trade area is one that in addition to a strong and affluent residential base, includes a daytime population source, such as a significant office concentration, and traffic generators such as a critical mass of upscale retailers or multiscreen movie theaters."
For Applebee's, demographics, population density, and income are important. Daytime population numbers will indicate if an area can support lunch activity, so it's important to include the type of retail and offices located near the site and the area's overall employment figures.
Applebee's looks for theaters, sports complexes, or hotels nearby to generate activity. Additional retail will draw evening and weekend crowds to support the restaurant.
The chain often uses informal methods to qualify a site. "We do a field inspection by driving the neighborhoods. We learn where the income pockets are located, and we know who our competitors are and their expected sales," Kirkpatrick says.
Know the Concept
Beyond the location basics, knowing a restaurant's concept is key to good restaurant site selection. "We are barraged by brokers who do not know our concept or identify a site too close to an existing store," says Kevin R. Greve, CCIM, of Boston Market in Golden, Colorado. He tells brokers to "do their homework and due diligence," which includes visiting other restaurants in the area and taking note of the business activity during peak periods.
"It's all built on relationships," Greve says. "We know who the brokers are that we can work with because of the job they did with us before. But if brokers don't perform or complete due diligence, we won't use their services again."
The Educated Broker
It's built on demographics, as well. Leon Gottlieb, an international franchise and restaurant consultant who heads Leon Gottlieb & Associates in Tarzana, California, says simply, "Go where the money is. The demographics must show a density of population. Look for two-car garages in homes and condos."
Go on site and check out the property during the day and night, looking at traffic and other activity. Note the visibility of the pad from the road. Part of the success of site selection is the ability to visualize. Make sure you see it for yourself.
Ask your local building department about new permits for restaurants. This will give you quick information about future competition and saturation in your trade area. "Run the numbers" with your client and learn the break-even point in dollar volume for a specific location.
"When the broker becomes educated, the broker can teach the client," says Gottlieb.
Formulas for Success
The success of a restaurant can be measured in several ways.
Every restaurant expects a certain sales volume for each location. The acquisition and building costs, labor, food, beverage, and other operating costs are calculated, the expected volume is inserted into a formula, and a break-even point is generated. A restaurant can pay anywhere from $150 to $300 or more per square foot to open a site after obtaining a location. But this number varies based on the decor, the number of seats, and the equipment that the franchise uses.
"A quick-service restaurant should cost $1.2 million," says David Adelman, a restaurant analyst for Dean Witter Reynolds, Inc., in New York. "Casual dining restaurants can expect to spend $1.6 million to $3 million to open a site." But these rules of thumb change from concept to concept and it's important for brokers to communicate with their clients to learn what a restaurant can afford to pay for an acquisition.
Another way of gauging success is by a restaurant's sales-to-investment ratio, which is computed by dividing annual sales by development costs. A restaurant with $2 million in sales and a total expenditure of $1.5 million will have a ratio of 1.33. This is a typical number for casual dining, but fast-food operations will have a lower quotient. Internal rates of return should be 20 percent to 35 percent for the better concepts, Adelman says.
One analyst is skeptical of using the sales-to-investment ratio as a measurement tool. Josh Rosen, a restaurant analyst for the investment firm of ABN AMRO Chicago Corp. says that, "Just because a restaurant has a high sales-to-investment ratio does not translate directly into a restaurant's success. The biggest variable to consider is the profit margin. The profits generated in the initial investment lead to a more accurate return on the investment calculation."
Same-store sales are one of the more important variables that restaurant analysts weigh in determining the health of a restaurant franchise. "Same-store sales growth typically generates operating leverage and this provides a precursor for the future health and success of the restaurant," says Rosen.
Yet another benchmark of success is QSVC. That's quality, service, value, and cleanliness. "Restaurants that do a good job with their QSVC will have the numbers to grow and succeed," says Rosen. Adelman agrees. "Success is not only measured by profits, but by the high intent of people to return to the restaurant, the effectiveness of the marketing, and the effectiveness of evolving the concept."
Food-service industry trends change because of demographics and consumer preferences. Know the trends, establish a relationship with your client, complete your due diligence, run the numbers, and most important, get to closing.
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