The biggest mistake that the leaders of a growing restaurant can make after witnessing brand success is to rush into a real estate rollout program unprepared. Successful companies plan time to build a strategic foundation and systematic approach to expansion. So before you start eyeing new locations, take a moment to partake in this six pack of real estate fundamentals that will help to minimize the risks associated with executing a development program for your brand.
1. Analyze your customer
Most good (and bad) real estate decisions can ultimately be traced back to how well you know your customer. A flawed profile of the brand’s customer will, inevitably, result in flawed real estate decisions. Conduct a professional analysis of the consumer traffic at your currently operating units to get a deeper picture of the demographic composition, spending habits, trip origination tendencies and lifestyle (psychographic) characteristics of your brand’s most loyal customers. Research can identify consumer characteristics and patterns that contribute to brand success, and this research often contradicts internal management assumptions grown from instinct, expectation and observation. Customer exit surveys, zip code pin maps and credit card data will help to build an accurate profile of what types of characteristics define the brand’s proven customer base. Use consumer research as a benchmark to evaluate potential markets and sites, and gain validation from by your financial partners.
2. Pack the war chest
Waiting until after signing the letter of intent to seek project funding, or hire and train key employees, is simply a recipe for disaster. Sign a deal without financing in place and you’ll lose credibility in the development community and with your own team. Make the investment up front to build bench strength and secure funding for the initial phase of expansion before the real estate site selection process is initiated. This will provide greater credibility with the development community and enhanced leverage at the negotiating table.
3. Build a work letter
In most real estate transactions the landlord tries to dictate not only the amount of rent and tenant allowance, but also the condition of delivery for the real estate premises. Tenant allowance money evaporates quickly if it has to be applied to the cost of developing base building components and infrastructure that will ultimately become and remain the property of the landlord after the tenant vacates. The architect and contractor should collaborate with your real estate team to develop detailed “restaurant ready” shell specifications required of the landlord for delivery of the leased premises unique to the concept’s requirements for nonproprietary improvements, such as utility- and infrastructure-related components.
4. Invest in due diligence
Before incurring costly legal and design fees, conduct a market analysis to thoroughly vet the real estate decision. Residential demographic analysis is only one facet of that study. For example, only a third of customer visits to full-service restaurants originate from home. Understand where your target customer works and plays in each market under study. Experts can help research the permitting and licensing process for each locale to ensure that there are no hidden time and cost issues associated with accessing utilities, zoning, liquor license, etc. Construction professionals can evaluate existing site conditions, infrastructure and development costs to ensure they comply with your pro-forma.
5. Don’t chase deals
Be proactive, not reactive. Real estate expansion strategy should follow a strategic plan defined by logistical, physical and demographic considerations unique to the concept. Access to distribution channels, travel time and cost for management to visit sites and access to your target customers are just a few of the many factors. Stick to the plan and refine it over time, but don’t be tempted to plant a flag far from home every time a developer drops a flattering call, enticing you to consider a vacancy or new development in a project far outside your comfort zone.
6. Assemble a development team
The focus of the CEO and COO should not be responding to, and investigating calls from, brokers, developers and contractors. Small to medium-sized restaurant companies cannot typically justify the cost of hiring experienced real estate team members. Consider outsourcing real estate functions (site selection, construction, due diligence, design, legal) to free up senior management empowering them to remain focused on operations, profitability and strategic/critical path decision-making, without abandoning focus on keeping the company healthy and profitable at the operating level.
Steven Graul is CEO of Innovative Concept Associates, a real estate advisory firm specializing in restaurant development growth strategies.