To Landlords Recruiting Restaurants, Small Is the New Big
Small restaurant chains are attracting landlords like never before. But before jumping at the next great site, they might want to borrow ideas from the big boys.
By David Farkas, Senior Editor -- Chain Leader, 7/1/2009 12:00:00 AM
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| Fast-growing Smashburger, only 15 units strong, hired a veteran real-estate executive last year to help the chain avoid picking bad sites. |
With the economy in tatters, large, highly leveraged restaurant chains are in a cash-flow pinch that's putting their ability to service debt in serious doubt. If they can't catch a break by renegotiating rents, closing restaurants may be the only way to avoid bankruptcy.
Their pain could mean a big gain for smaller chains with strong concepts, little or no debt, and an urge to grab market share. “This is the best time for small, regional companies to grow,” says restaurant consultant Fred LeFranc, a former CEO of two regional chains. “Landlords who once ignored their phone calls are now begging to have them in their space.”
Yet how can small chains ensure they're getting the best deal possible, or at least avoiding money-losing sites, unfavorable leases and high rents? According to consultants and operators, you should adapt the bold tactics large chains employ while sticking to your game plan.
Be Aggressive
Former Brinker International CFO Jim Parish suggests that operators of local or regional chains think big when they begin their due diligence on a site. “The big difference between, say, a Darden or a Brinker, and the small chain is [the big chains] give landlords a lease form, which makes things much easier,” explains the president of consultancy Parish Partners.
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| Until recently, six-unit Laughing Planet Café expanded opportunistically. Recalls founder Richard Satnick: “We were looking for neighborhood locations,off the beaten track.” |
Small chains are more likely to get a lease form from the landlord, he adds.
Before negotiations begin, make a list of everything you want: extra signage, a break on common-area maintenance fees, parking spaces, etc. “It'll be helpful if the items don't cost the landlord too much money,” Parish says.
If you think you need more ammunition, find out what's included in the lease package of a national chain in the same shopping center. “Spend a half-hour with the GM at the unit. Managers usually see every bill that comes in,” says Parish, who also suggests inviting the manager for a meal at one of your restaurants. “Don't forget, this is a very collegial environment. There are lots of reasons to become familiar with each other's restaurant.”
Negotiate Like a Big(ger) Player
Make sure you're “equipped” when you enter negotiations with landlords, recommends consultant Rod Guinn, a former Wells Fargo investment banker who specializes in restaurants.
* Have demographic data for existing restaurants in hand. “Tell the landlord, 'Here's where your site matches my best stores, and here's where it doesn't. If I move in, I want consideration for the fact the site is not ideal.' You want to negotiate from a position of strength on that point,” Guinn explains.
* Make sure your equity partners or lenders are in agreement with you about opening a new restaurant. “If they are, the operator can tell landlord during negotiations, 'Look, I have capital ready to start spending on this tomorrow,'” he says.
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Four-unit Burger Lounge is preparing to expand into franchising, and CEO Dean Loring frets site selection could suffer as a result. |
Prepare for Scrutiny
“Yes, it's a great tenant market, but there's still a lot of scrutiny,” warns real-estate consultant Daniel Lacouture, a former director of development for Portland, Ore.-based McCormick and Schmick's and currently president of real-estate consultancy Park Seven.
Landlords won't be the only ones prying into your financials; their lenders are also interested. “In this environment, banks are just as involved,” he says. “You've got individuals who don't know a whole lot about brands or restaurants or shopping centers making decisions.”
Withstanding inspection is a “fairly simple” procedure, Lacouture maintains. Two items matter most: a proven concept with good store-level economics throughout the existing portfolio and a capital base that demonstrates plenty of liquidity or strong ties to credit financing.
Know Thy Customer
“I'm an anthropologist by training,” explains Richard Satnick, founder and chief burrito officer of six-unit Laughing Planet Café in Portland, Ore. “My customers are my informants. They tell me what works and what doesn't. We've had this kind of a conversation over years, particularly in [the first unit]. I lived upstairs.”
The bike-friendly chain, which features low-fat, healthful dishes, caters to young, environmentally conscious urbanites.
Satnick says landlords are now bringing him “some pretty sweet deals.” The most recent he made was in the Jean Vollum Natural Capital Center, known as the Ecotrust building because it's the headquarters of a bank that funds environmental programs. A Laughing Planet opened in the rehabbed warehouse in January.
Because the building also houses other eco-friendly businesses, Satnick figured employees were already his customers. “A lot of these folks were familiar with us, but it's not convenient for them to come [at lunch],” he explains.
Ecotrust workers were not the only draw to the building. It is in the Pearl District, one of the city's most vibrant areas. Adds Satnick: “It's become much more residential with lots of lofts. It's one of the most interesting transformations in Portland.”
Trust Your Gut
Dean Loring is discovering his two-year-old restaurant concept, Burger Lounge, is generating substantial interest but not many good deals. Despite the “tremendous number” of sites that brokers bring him, the veteran operator gripes that they are the “same old crap they show everyone else.”
Sales at the chain's four units, all in San Diego, average $1,400 per square foot, claims Loring, who adds his site-picking skills so far have relied on personal taste. “I hate to de-sophisticate this article, but we pick neighborhoods we'd like to live in,” he says.
So far his tastes have run to neighborhoods with household incomes of $65,000-plus. “We like areas that have character and are architecturally interesting,” he notes. He's found such sites by approaching foundering businesses and asking to assume their lease, an effective but not scalable tactic, he concedes.
To grow outside of San Diego, Loring has turned to a real-estate broker for data he hopes will keep him from picking a bad site. “I share information and ask his opinion, and he gets demographic information for me,” he explains.
Loring is also planning to franchise Burger Lounge, a prospect that worries him. “This is one of the challenges. How well we can continue [site selection] outside of our own base is something we don't have our hands around,” he says.
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| Consultant Frank Steed recommends hiring a realestate firm, which will have site-modeling tools like this map showing the dollar amount households represent to units within a three-minute drive. Image courtesy Buxton. |
Hire Expertise
Growing restaurant chains can do what 15-unit Smashburger did in November: Hire a veteran real-estate executive to mitigate risk. The fast-casual burger concept and its franchisees expect to open 35 more units in 2009.
“For us, it's very important to go into a great trade area but not pay up for a brand new building and instead go across the street and around the corner,” explains CFO Ryan McMonagle.
Enter Vice President of Real Estate Max Sheets, whose resume includes Ted's Montana Grill, Del Frisco's Double Eagle Steak House, Lone Star Steakhouse and Sullivan's Steakhouse. Sheets has helped identify sites in the chain's five markets: Minneapolis, Colorado Springs, Colo., Wichita, Kan., Houston and Denver.
“[Sheets is] as good as they get in understanding growth,” McMonagle contends. “We have made an investment.”
Use Science
Former Roma Corp. CEO Frank Steed has lately been fielding phone calls from operators of small chains wanting advice on growing units given the availability of inventory.
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| Check out the Emerging Chains page for more profiles, expansion plans and brand-building tactics of new and growing restaurant chains. |
“When someone calls me and says, 'I want to franchise my business. How many units can I have?' I tell them I have no clue. Then I ask: 'Who are your customers, how many are out there, and where are they?' That's when you get a long silence at end of line,” says the president of the Steed Consultancy.
It's a tall order and likely to cost several thousand dollars to find the answers. But retaining a site-selection firm, argues Steed, can save time and the cost of a bad site. “You are looking at the same data that T.G.I. Friday's is. It puts you on total parity with the big guys,” he says.
MORE: Declares franchise consultant Ryan Cunningham: “Leases can kill businesses.” That is, unless you can get rid of damaging clauses or water them down. Cunningham offers some examples.
