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!