Getting into all the right places

They prove that nothing succeeds like success!

Despite all the risks inherent in the restaurant business, there are a good number of established operations—independent, chain, and franchised—that are reaping significant profits thanks to two main factors: hard work and well-chosen locations.

Although the menus may list anything from Mexican to Middle Eastern dishes, sushi to steak, the profiles of successful restaurants with good locations are relatively consistent. Their location, concept and target customer base mesh. The result is an operation that generates between $500 and $1,000 per square foot in sales and runs occupancy cost of 5 percent to 7 percent of sales. The operators have built a supportive, experienced management team that enables them to grow. They have leveraged most of their capitalization and development costs by using only a minimal amount of their own cash flow. And they are able to provide their investors with a respectable return on investment from internally generated profits.

How did they do it?

How did these operators end up with these great locations? They have done their homework, researching their specific target audience. They have positioned their location in the optimal traffic flow. They have made sure the location’s demographics match their desired customer profile. They have honed their concept so that their operation fills not just a void, but a genuine need. Finally, they have done the “numbers crunching”—completing a pro forma profit-and-loss statement that makes sense.

They know what it takes to support a restaurant. They have made sure that they have a seven-days-a-week business and at least a sound two-meals-per-day customer base, with an appropriate amount of down time. They realize that this business boils down to pennies, not dollars. Therefore, they know they must be able to exhaust every meal possibility in their environment.

Finally, they work to maintain a good comfort level with the individual or organization they are getting into bed with for the next ten to 20 years—their landlord or developer. They have found that sometimes it pays to walk away from a situation if the gut feel isn’t right.

The majority of successful operators agree that among the most important criteria in choosing a restaurant site in today’s market are:

  • minimal up-from financial risk
  • high visibility
  • access to a clearly defined customer base
  • existing traffic draws nearby

‘Recycle’ a Restaurant Site

Although other options are available, many restaurateurs are turning to either build-to-suit arrangements or conversions, “recycled” restaurant properties that succumbed to operator error, concept misplacement, or customer dissatisfaction. Either way, operators strongly prefer properties that are considered free-standing pads or that stand apart from other buildings in the real estate project. Also, they will want end cap space, rather than in-line space, to improve visibility. Another interesting trend emerging is that operators want either to own the real estate so they can determine their own destiny or to become equity partners in the project.

Operators with outstanding tract records can put themselves in the enviable position of having the landlord or developer step in as their financial silent partner. This comes about when the landlord is so confident of the operator’s abilities (and confident that they base rent will soon be supplemented by the percentage-of-sales clause kicking in) that the landlord provides a tenant improvement allowance. The tenant improvement allowance can range from $60 to $200 per foot depending on the operator’s negotiating skills. For the average size restaurant, this translates to anywhere from $200,000 to $600,000 provided by the landlord. Granted, there are different methods by which this allowance can be structured. However, when you realize that turnkey full-service restaurants cost between $450,000 and $800,000, you’ll realize that success really does pay!

Demand for westside restaurants doubled in 1st quarter

Southern California’s Westside corridor is experiencing its biggest compression factor in years, as demand far exceeds the supply of existing prime location opportunities in high-profile and entertainment venues.

The supply is so scarce, there are over double the amount of inquiries currently on the market as there are available locations. New players from throughout the world add to the focus, as the Westside comprises the ideal composition of demographics mixed with discretionary income.

Historically, the first quarter has been associated with restaurant closures. The shake out has not occurred in January/February 2001 on the Westside. Either assets are being sold or cash flow is coming in, but restaurants are not closing and there is a non-existence of turnover.

Compounding the compression factor is that renovation and shopping center construction momentum has slowed down.

The need for recycled conversions is excessive. The restaurateur looking for existing space from Brentwood, Santa Monica, Malibu and West Los Angeles will be forced to wait in line for the perfect fit. The luxury of finding a location with assets intact, entitlements approved, existing conditional-use permits, environmental reports and a coded parking lot is absent.

Consumer confidence is so high, the average casual or high profile restaurant in this area is recession-proof, depending on the restaurant’s average ticket and its developed brand identity. The success of developing a three-mile radius of customers is a winning formula for neighborhood repeat customers, and the Westside is primarily supporting, although many dining locations are also destination spots because of reputation.

The solution may be the phenomenon of the redeveloping urban villages. Suburbia was formerly the blooming retain haven, but with the triumph of Santa Monica’s Third Street Promenade, San Diego’s Gas Lamp Quarter, and the urbanization of Irvine, Valencia, and Glendale, the cities are here to stay and grow.

Similar to the metamorphose of New York’s Time Square, Hollywood is readying itself for a conversion of astounding proportion led by such prestigious developers as Trizec-Hahn, Regent Properties and the CIM Group. In progress are Hollywood/Highland, Hollywood/Orange, Sunset/Vine, Cinerama Dome and Pacific Theater retail and entertainment center projects.

The factor or time-management emphasizes the importance of urban development, with people desiring a more compact lifestyle. The “residence on top, retail on bottom” approach to development is new to our communities, but mimics east coast cities.

“Location, location, location” continues to be the mantra of the real estate world, but successful restaurants (independent or chain-owned) in their niche are committed and have achieved excellence in their back to basic approach to exceed guest expectations. They have projected a statement, a signature, and a brand that sets them apart from their competition. They have reached a balance between food quality and perceived (real) value. Their management and employees radiate “guest-driven” service. Ownership is open to reinventing themselves and adapting to change, with a passion for the business.

True, some locations should never have housed restaurants, but if the Westside is not an option due to unavailability, here are some up-and-coming prime Southern California predicted to endure”

South Bay, Burbank/Glendale/Pasadena, Studio City, Woodland Hills, Thousand Oaks, Westlake Village, Valencia, Ventura, Rancho Cucamonga, Temecula, Ontario, Montclair, Claremont, Newport Beach, Irvine, Costa Mesa, Huntington Beach, San Clemente, Carlsbad, Encinitas and Mission Valley.

There are available opportunities in these areas. Work with a knowledgeable, experienced restaurant broker to find targeted, focused opportunities to perform the due diligence and discover where the opportunities really are.

Ira Spilky can be reached at 310-558-3241. Email address spilky@mindspring.com.

Why Retain a Restaurant Real Estate Broker

  • IS A RESTAURANT CONSULTANT BEFORE A BROKER
  • KNOWS THE TRADE AREA FROM A HOSPITALITY PERSPECTIVE
  • KNOWLEDGE OF THE KEY RESTAURANT CORRIDORS IN THE TARGET MARKETS
  • A KEEN GRASP OF RESTAURANT DEMOGRAPHICS
  • HAS A CURRENT INVENTORY OF EXISTING AND NEW DEVELOPMENT LOCATIONS
  • DEVELOPED A RELATIONSHIP NETWORK FOR BOTH SALES AND LEASE RESTAURANT COMPS
  • KNOWLEDGEABLE OF COMPETITIVE RESTAURANT MARKET SHARE
  • HAS HISTORICAL DATA OF WHAT HAS WORKED AND WHAT HAS FAILED YESTERDAY & TODAY – KNOWS WHAT’S COMING TOMORROW

The Success Ingredients of Brand Development

  • Ownership’s personal passion and leadership for the Industry and his Company.
  • Stick to the Knitting – staying on course-focused to your Business and Marketing plan.
  • Handle and treat every location consistently as if it was your First.
  • Project a statement, a signature and a brand that sets you apart from your competition – Ask yourself the question – What is your point of differentiation?
  • Move forward in a properly capitalized manner having a pre-determined vested interest in your company.
  • Take a look around you and realize What Cream Has Risen To the Top and Stayed There and Why?

The Realities of Restaurant Real Estate

  • Develop your location/site selection criteria or model as a business plan.
  • Complete all due diligence including current and detailed demographic reports, traffic studies, parking field plans, and tenant mix.
  • Verify that all land entitlements, licenses and governmental permits are in place and can be acquired to open your restaurant.
  • Meet with city planning departments to achieve your construction or re-modeling plans.
  • Make sure your chosen prime location economically pencils with your financial pro-forma.
  • Analyze restaurant competition and their bottom line performance in your trade area to determine what your estimated market share percentage will be.
  • Live in the trade area for 7 days and nights to obtain maximum on site information and record accordingly.
  • Honestly and objectively determine form your research and your gut – Is there a marriage between the demographic profile of the area and your customer profile?
  • Location – Location – Location means visibility, accessibility and positioning your site selection development program.
  • Operators must create win-win relationship deals with their landlord developers.
  • Document a detailed paper trail consisting of letters of intent, counters, site submittals, governmental regs, and lease drafts.
  • Negotiate your deal so that your company does not compromise its cost of fixed overhead – knowing that cost is constant heather your restaurant is open or closed.
  • Make sure you have an existing company infrastructure in place to forward effectively.
  • WALK AWAY from a deal that does not make sense for your Company or makes you feel uncomfortable.

Success Ingredients of a Recession Proof Restaurant Concept

We have all seen a variety of restaurant concepts in all categories and segments of the industry come and go over the years. They have begun with hopes and dreams and a business plan in hand to meet the expectations of their investors/stockholders and more importantly to satisfy the ever-changing demographics, pocketbooks and tastes of their valued guests.

In light of this on-going foodservice and hospitality dynamic, both start up and multi-unit restaurateurs are eventually confronted with the reality of the marketplace, the competition, the economy, the political bureaucracy, the labor force, and the ever changing demands of the customer in meeting their “out of the home” foodservice appetite.

Since my establishing UCLA’s restaurant management extension school program in 1980, Having over 1400 students take my courses, incorporating Executive (CEO) roundtable sessions as part of my curriculum with a classic Carl Archer presentation in his “Back to Basics” approach to restaurant management, and finally, experiencing the success’s and mistakes of my multi-unit chain clients over the last 14 years, I have concluded, as my causal dining “recession proof clients” BJ’s Restaurant & Brewery/Brewhouse, Mel’s Drive-In, City Wok, and California Chicken Café have, that the following are the prime ingredients for sustained growth and prosperity in this dynamic guest driven industry:

OWNERSHIP’S PERSONAL PASSION FOR THE BUSINESS

This from within absolute has radiated time and time again. It is a must for the founders, principals and upper management to have and retain this from the get go and hand it down throughout their organizations. It is the driving force, the glue, and sometimes the band aide that holds everything together in both good times and difficult. I assure you it can be seen, felt and heard in every successful independent and chain organization – just get in touch with it and you will notice the difference that sets them apart from the rest of the pack!

STICK TO THE KNITTING

Staying on course to your Business and marketing plan is vital to the early stages of development combined with being flexible and adapting to the changing marketplace. It is important to listen to the needs and pulse of your customer, keep track of shifts in demographic trends and your competition’s performance. When operators go off course in any aspect of their planned development, it can bring down the entire organization and throw other units in economic jeopardy. On the other hand, revisions to a business plan that are well thought out, researched, and tested can prove to be a boom in all kinds of economic climates.

CONCEPT AND MENU DEVELOPMENT

The far majority of successful recession proof restaurant concepts have created and implemented concepts that focus and cater to the mainstream of America, are family oriented, are both day and night part profit oriented, have a multiple stream of profit centers, and fall into the casual dining niche. As to their menus, first and foremost, concepts are aligned with the menu – they match, fall into place, and balance one another out. There are built in quality control checks insuring the highest quality product is served and extremely important are check averages that are inviting whether it is business luncheon, a celebration, an evening out, or a weekend/night family event.

LOCATION LOCATION LOCATION

Restaurant concepts that can survive all types of economic fluctuations can control their FIXED COSTS i.e.: OVERHEAD. They have negotiated leases that are win-win for both landlord and tenant, have made absolutely sure their rent and other lease pass thru’s meet their five year pro-forma schedules, and of utmost importance their site selection criteria does not compromise with their location decisions. The reality of this is that there have been far too many bankruptcies filed over the last decade with leases that were far too rich in nature. Bottom line, you must treat every location decision as if it was your very first.

BRAND DEVELOPMENT

Sustained success poised for growth, expansion and prosperity as well as a downturn means projecting a statement, a signature, and a Brand that sets you are APART from your competition. This can only be achieved when the entire organization is on the same page, They market themselves from within and not just using outside sources such as advertising, media display, and public relations companies. Finally, ownership is open to re-inventing themselves and adapting to change with sacrificing the core meaning of the Brand.

CAPITALIZATION

Recession proof companies never establish themselves in a stressful pressurized UNDER-capitalized manner. They grow at the pace and level of comfort based upon either their internal cash flow or lines of financial resources from private investors or committed banking institutions. They also have a sizeable vested interest in their business and possibly have different incentive/bonus programs for their front line unit management. Finally, they project a healthy and vibrant image to the entire investment/banking community and are able to prove it!

In summary, in order to validate all of the above and perform a reality check on your own restaurant business, just take a look around you, read the trades and the media, are honest with yourself and see WHAT CREAM HAS RISEN TO THE TOP & STAYED THERE!

Real-estate 101: Operators sould set sights on locations that deliver long-term goals

Expansion, growth, development, bigger, better–those continue to be common buzzwords among both chain- and independent-restaurant operators as they strive to maintain a competitive edge and expose their brands throughout their industry segments and market trade areas.

To accomplish those objectives successfully–especially given the sluggish economy, the limited supply and huge demand for prime locations, and the ever-changing landscape of our domestic population–the following “scientific realities” must be acknowledged within any effective business plan:

  • Operators and tenants must create win-win deals and relationships with their landlords
  • Operators must complete thorough due diligence, including accurate and detailed demographic reports, traffic studies, and plans for parking sites.
  • Operators must verify that all land entitlements, licenses and governmental permits are in place.
  • Operators must meet with city planning departments to get assurances on being able to achieve construction or remodeling plans.
  • Operators must make sure chosen prime locations will meet anticipated economic projections.
  • Operators must analyze their restaurant competition and their bottow-line performance in a trade area to determine what the operator’s estimated market-share percentage will be.
  • Operators must live in the trade area for seven days and seven nights to obtain as much information as possible from all segments of the demographic profile.
  • Operators honestly and objectively must determine through research and instinct if there is a marriage between the demographic profice of the area and their customer profile.
  • Operators should note that “location, location, location” means visibility, accessibility and positioning as they develop their site-selection programs.
  • Operators must have a detailed paper trail that consists of letters of intent, counter offers, exhibits, site submittals, government regulations, and lease drafts.
  • Operators must negotiate deals so that their companies do not compromise the cost of fixed overhead, since that cost is constant whether restaurants are open or closed.
  • Operators must determine the availablity of both inderect and direct labor in the marketplace to facilitate staffing requirements.
  • Operators should make sure they have existing company and unit infrastructures in place to move forward effectively.

If that sounds like restaurant real estate 101, it is! You must always go back to basics to ensure that your company is traveling down a road in alignment with your business and marketing plans. It is best to walk away from opportunities or deals that do not make sense or that make you feel uncomfortable.

The bottom line is that this decade will offer an abundance of growth opportunities to review, evaluate and consider. Make sure you examine the realities of everly transaction for the long-term benefit of your company’s expansion and brand development.

Laying the groundwork for proper site selection

During the past year there has been a steady flow to talented and investor-supported chefs who have developed a loyal customer following and reputation for a specific concept or cuisine and have ventured into the ownership arena of the restaurant business.

Those determined individuals have begun the graduation journey from chef to restaurant entrepreneur. They bring with them an array of skills that usually encompass the area of the restaurant fondly know as “back of the house.” However, once the prepared menu item leaves the kitchen by way of the service staff and enters the “front of the house,” it sometimes also leaves the chef’s scope of responsibility. There are exceptions to that pattern, depending on the chef’s position in the restaurant as delegated and authorized by the principals of the business.

In the case of chefs that have been fortunate enough to actively and financially participate in the entire operation of the restaurant, the path to full ownership can be a smoother one with less surprises based on the extent of his working experiences. The front-of-the-house duties and responsibilities replete with hosting and customer relations are only the beginning of the ownership level accountability. Before a chef arrives at that point in his journey there comes the most important question of location of the restaurant.

No matter how experienced a chef may be in the restaurant business, when it comes to researching, evaluating, selecting and negotiating a lease or purchase for the best location for his operation, he seems to bring with him only the basic location requirements, such as general area of the city, size of installation and number of seats.

It would seem that when you are making the most important decision in the process of establishing your own business, there would be a need to look at a number of other site selection criteria before you reach a conclusion.

First on the agenda is the availability or inventory of choice locations in the general area of your search. That would include such operations as taking over a closed restaurant, converting an existing operation to your concept, purchasing a business opportunity, purchasing a leasehold opportunity, constructing a restaurant on ground lease, building a restaurant based on a build-to-suit arrangement and purchasing an improved parcel of real estate with restaurant built or options in place.

There is a definite trend to seek out closed restaurants since basic structural improvements, utilities and licenses are in place; however, one should be cautioned by the fact that if your renovation and remodeling program is very extensive, you will trigger the need to comply with new codes and ordinances, such as cooking line requirements and handicap regulations.

The build-to-suit or landlord participation method is sometimes a more prudent business decision based upon the financial assistance you can negotiate from the lessor.

Once you have determined the inventory available and the option you are pursuing, there is a need to have an extensive knowledge of the area where you are seeking to open your restaurant. You will need such information as the major visible and accessible streets and blocks that focus on foodservice and hospitality and the demographics of the area (such as population, income levels, family size, renters or owners of residences, ethnic makeup, consumer habits as they relate to food and restaurant purchases and what is planned for the area in the way of commercial growth).

Most recently, it has become necessary to determine the political and neighborhood climate for opening another restaurant in regard to traffic, noise, environmental, takeout and delivery factors, valet parking requirements, and other mitigating issues.

The next area of research is your anticipated direct and non-direct competition. Direct competition is classified as restaurant concepts that either have a menu similar to yours or are in the same customer profile and are vying for the same marketplace. Indirect competition is foodservice concepts such as gourmet supermarket takeout and downscaled quick-service concepts that derive their income from takeout and delivery. The key statistic is to look at is market-share for your menu and price points (check average).

It is important that you measure your ability to build your business as it relates to your direct competition in the area and relative to your pro-forma profit-and-loss projections as part of your business plan.

If you are anticipating allocating funds for a buyout of an existing restaurant, it is vital that you have a current grasp on market value for restaurant assets, such as lease value, goodwill, fixtures and equipment, and licenses, but also a knowledge of what restaurants have sold for—an analysis of comparables. Finally, once you have narrowed your choices down to the location you are ready to make an offer on, you must have that confident and motivated gut feel that you are ready to go forth.

The negotiation process involves both business and legal issues; therefore it is important that you are represented by both an attorney and a restaurant consultant-broker. Among the many issues that are involved in this process are rent, percentage rent, lease term, options to extend the term, CPI adjustments, parking, time to build or renovate, security deposits, guarantees, and landlord contributions known as tenant improvements. The latter entails a chef with an outstanding track record to put himself in the enviable position of having the landlord or developer step in a his financial silent partner.

The tenant improvement allowance, or landlord contribution, can range from $60 to $150 per foot, depending on your negotiating skills.

For the average restaurant, that translates to anywhere from $200,000 to $500,000 provided by the landlord. When you realize that turn-key full-service restaurants cost between $450,000 and $800,000, you’ll understand that having the right professional assistance does pay.