Q: I haven’t yet found the right A location for my second unit. But there are plenty of B sites—at really great prices. Should I consider opening in one of those?

 

The first thing that has to be understood is your risk tolerance. Your emotional risk tolerance (Can you operate a business well if it struggles?) and your capital risk tolerance (How much capital do you have available if that site that’s not an A site doesn’t come on strong?). Do you have the ability to withstand the six to 12 months it might take to turn a B site into an A performer? Which does happen. That’s how many good concepts are made.

Our first site was a B site, and it did B- numbers to start. Our second site was an A site. Our third was a C site, maybe a D. We were fortunate in that we weren’t too afraid of failing because of the economy. What would happen today if we were to open that same site, we’d shut it down a year later. But back then, despite the fact that every indicator said, “This thing is not going to work,” we stuck with it because we believed in the concept, and we had support in terms of capital. We didn’t have a ton, but we had enough that we knew we could withstand some losses. That’s the key.

If you take an A site and you know your concept is well received, your risk is going to be less. You’re going to pay a little bit more in rent, but I would definitely recommend it. If I could go back, I would’ve taken A sites the entire way. The most expensive thing to do is to take a less-than-B site and try to make it work. You’re taking a ton of time and that’s costly beyond belief. If I were to start a new restaurant concept today, I would be looking at A sites for my second location.

The locations we’ve struggled with are the non-A’s we justified moving into because we had a sweetheart rent deal or because the existing tenant was struggling and willing to hand it over to us. Those are where we get the horror stories. The only restaurant we ever shut was the very best deal we ever got. In many cases you get what you pay for.

However, if you are thinking about growing your concept beyond that second one, you might want to prove that the economics work in a B site because you’re going to run into B sites. You might be OK if you said, “Look this doesn’t need to be a home run. I’m willing to take the risk. And, oh, by the way, my unit economic model happens to work in B sites and I can prove it.” That’s a good reason to consider a B site. There are investors who are going to ask, “Well, what happens when your sales numbers aren’t that high? How does your business perform then from an investment standpoint?”

There are other reasons, too. One of the reasons we took our less-than-B site was because we wanted to be part of an emerging neighborhood. We thought there would be some benefits that would pay off in the long run. So far, they haven’t.

The reality is even a B site needs to have a basic level of staffing and basic level of customer support. A lot of people look at labor as very low cost, but it’s really not. It’s a stepped cost. There is only so far down you can go before you’re not able to serve customers. And customer expectations are pretty high these days.

An A site and B site are often going to have the same bottom level of staff needed to execute the basics. But the percentage of sales that takes at a B site is much higher. That’s part of the struggle: You’re making an investment to develop a B site to a basic level of service. You’re not having to make that same investment at an A site.

For the same basic level of service, at an A site that’s 25 percent of sales, while at a B site it could be 35 or 40 or 50 percent. You get stuck in a cycle. If you try to lower that labor percentage, you’re never going to be able to serve customers when they do try to come. You’ll end up in a vicious downward cycle if you aren’t careful.

I’m a big believer in clustering as you’re trying to build your brand. Stores feed off each other. That’s a very powerful form of advertising. And you really help your labor problem because you’re not 100 percent dependent on the people scheduled for that particular day and particular restaurant. You get some efficiency. If someone doesn’t show up, you have a larger roster of people to pull from. When you’re opening restaurants, you can get veterans in there from day one and have a much stronger opening, much better customer experience.