Article

Restaurants target real estate for growth

The focus turns to real estate as restaurants look for prime profits.

May 21, 2007

Each year hundreds of thousands of new restaurants pop up all across the country. To the "billions-served" it would seem like these locations are chosen using a blindfold, a dart and a United States map. In reality, the process considers everything from the customer base, to co-tenants, and the volume of road traffic.

For fast casual restaurants, home happens to be where white collar, college-educated potential customers live. And where those restaurants can try to keep their rent at 10 percent of overall sales.

Ralph Kinder, director of franchise development for Baker Bros. American Deli, said they prefer a more upscale neighborhood with a minimum household income of $50,000.

"We pull people from all demographics but more white collar than blue and typically our customers have a four-year college degree," Kinder said.

Once it has been established that a specific, desirable demographic is present in an area, the restaurant chain looks at so-called "drivers."

For Baker Bros., which depends heavily on lunch-time service, daytime drivers such as universities, hospitals and large office buildings are essential.

"Power centers like upscale grocery stores such as Whole Foods drive traffic to us," Kinder said. "Restaurants tend to cluster around these things because if someone doesn't have a specific destination in mind they'll say, for example here in Dallas, let's just go to the Galleria area and see what's there."

Co-tenants also can prove to be useful drivers, said Vas Lahanas, director of real estate for Salsarita's Fresh Cantina.

"We always look for other national brands that do a good job so far as build-out," he said. "Panera Bread is a good co-tenant and Starbucks is as well. We've done 10 deals with Starbuck's and they always generate a lot of traffic."

Kinder said the absence of drivers can make it extremely hard on new franchises.

"We experimented with a space on a very busy road that hasn't proven to be a heavy generator. We've made it work although it hasn't been as successful as our traditional locations. There's a lot of traffic, 50,000 cars travel that road a day, but it's really just a traffic artery. People are rushing to and from somewhere and there's nothing in the shopping center to draw people in, no anchor or major tenant like Best Buy or a movie theater. It's on the road but the traffic signal is half a mile away so there's no reason for someone to go in there."

Pick and choose

The actual process of choosing a site is often farmed out to independent brokers who present the franchisor with a variety of options. After the location has been decided, the broker will often negotiate terms of the lease.

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Some fast casuals attempt to do it all themselves and as a result fall short of expansion goals.

Jeremy Behar, chief executive officer of Cirrus Tenant Lease Services, said site selection should be done in-house by people who know best what works for the company, while the complicated task of negotiating a lease should be left to the broker.

"We have a client who had five people in-house who were supposed to put 25 new stores on the map every year. Instead, they only made it to seven or eight because they got bogged down in getting these 150-page leases and deals done," Behar said. "We went in and said, 'You don't need five people doing this you need two. Take away their keys to the office and give them year-long plane tickets.

"They should do nothing but go to one city to the next finding locations. No one knows better where the next franchise should be located than the people who know the restaurant's core values. If the receptionist has been with the company from the beginning and understands what works and what doesn't work then she can scout sites."

Eliminating brokers from the site selection process also removes conflict of interest issues.

"To most brokers it's just another restaurant looking to fill a space so let's just plug them into a place where they know the landlords will pay them real good," Behar said.

Eric Ersher, co-founder of Zoup, a soup-focused fast casual, said they use brokers to find new locations but maintain the final say in the selection process.

"We have one person in-house who is licensed as a broker but if we're going into a market we're not familiar with we'll talk to other retailers and find the best tenant retail broker in that market. But we know brokers are paid by landlords and while they definitely bring a lot of value it's important to recognize who pays them."

A brand boost

For chains looking to expand in the market, real estate selection is becoming increasingly important.

John Wright, president of San Diego-based Pat & Oscar's, said the brand has restructered its site selection process, making their method more scientific in nature and investment focused.

"I'm amazed at how casual people take site selection," Wright said. "I'm a believer it's a science."

Pat & Oscar's isn't the only chain looking at real estate selection for its growth potential.

Steve LaMastra, president and chief operating officer of Atlanta-based Raving Brands, said site selction will become an important aspect of growing the chain's Planet Smoothie and Doc Greene's concepts, among others.

Site selection includes non traditional locations such as airports, athletic stadiums and amusement parks, locations more traditional concepts refuse to enter.

** Additional reporting provided byValerie Killifer, Editor