If the F&B industry is slowing down in the UAE, why is rental cost still high?
Last week, I visited a developer to scout a location for a new brand. First, I was shocked to see the number of projects that are in the pipeline to open within the next 15 months in the UAE.
The bigger shock was when I received rental prices. At this particular meeting, I only heard AED 500 ($136.14 US) per square foot. That does not include extras (Chilled water, marketing…etc.). A 300-meter location would cost around AED 2 million ($544, 543 US) How many brands can support that?
I left wondering how can they continue to demand such high prices knowing that everyone is talking about a slowdown in the F&B industry?
Please keep in mind that I am a consultant and do not wish to alienate myself, which is why I’m not naming names. I used to work for a company, however, that had a good brand. The company opened a few locations; one was in a big mall. It was open three years but never broke even. It accumulated huge losses, so the owners eventually closed it. The unit sat empty for more than two years, while more restaurants in the area also closed due to lack of foot traffic.
Recently, however, a popular international brand set up shop there. I was puzzled because that brand already had a location open in the same mall and was doing well. Since opening, this location is lucky to have three tables during the busiest time on the weekends. I expect it to close soon and don’t understand why the brand opened a second location in a low-traffic area inside a mall it already occupied.
These types of bad decisions are one reason landlords think it’s OK to keep the rental costs high.
How do we turn the tide on rental cost?
As long as we have a line of bad brands and incompetent operators who are arrogant to think that they can make the bad brand in the lousy location work, landlords will never be motivated to drop rental prices. By the way, landlords make it sound like they are doing you a great favor to even consider giving you a location. The more you call them, the more they know that you are desperate. They know a competent operator would never consider the bad location. They know that you are eager to start cashing in on your bragging rights. You can easily exercise your bragging right by renting a big hall and starting a private social club for you and your friends. That would cost you 10 percent of what you would invest (lose) at the bad location, and you can continue to brag to your friends, that you have the best private social club in town. You do not even have to call for reservations.
If we (consultants) want to stop this madness from continuing, and keep landlords in check, we must provide proper advice to those about to make the wrong decisions. We must protect them from themselves and keep their egos from hurting them. I do not believe in collective bargaining. I would rather each operator make their own decisions and live with the consequences.
As consultants, we must be honest with our clients. We must have the courage to tell them what they might not want to hear. Our clients must trust us enough to listen to us. Consultants are the gatekeepers, and they are the only ones that serve as neutral entities between the landlords and the owners. They should be able to give proper advice to both sides and stop this rental cost escalation. If not, be on the lookout for many closings and even more openings that will end in closure.
A final question to the big players in the market: How many locations can your brand handle without any risk of cannibalism? When you answer this correctly, you will be able to give others a chance to get a good location for a reasonable price.
Topics: Franchising & Growth
Murad Alnasur Mr. Alnasur is a veteran of the F&B industry. Prior to arriving in the GCC region, and for over 32 years, he operated international brands in the US. He is currently serving as the COO of FranchiseME and Managing Director of Restonalysis FZE in Dubai.