The Perfect Spot

Fast-casual is growing up and doesn’t want industry leftovers. How is real estate availability shaping the development of the niche? By Wendy Cuthbert

A New Yorker cartoon depicts a man in a greeting card store, browsing through a section entitled: “Condolence (Real Estate).”

While it may not be dire enough to warrant sympathy cards, quick-serve chains are indeed facing serious challenges when it comes to real estate. According to industry insiders, the so-called tenant’s market—which allegedly hit after the burst of the dot-com bubble—never existed for top locations. Premium spots have always demanded top dollar by those boasting healthy ledgers, in food and non-food services.

And today’s low interest rates have created an expansion environment for those who formally had little access to capital. Translation: Welcome to another landlord’s market. But where does this leave those small-but-growing chains, particularly in the fast-casual niche, looking to secure ideal sites? Fast-casual is growing up and doesn’t want industry leftovers.

First, the bad news: It’s tough out there and ideal locations don’t come cheap. But there is good news. Shifting consumer habits and new developments are paving the way for a different definition of ideal for fast-casual players, while tools are making the critical site selection process easier.

“There’s a lot of people chasing sites right now,” says Dan Rowe, president of Fransmart in Alexandria, Virginia. And you can count on landlords to claim that there are 10 interested parties for every one piece of property, he says. Exaggerated or otherwise, this boasting can force a fast-casual player’s hand. In fact, the realization that one may well be up against some major players—think publicly-traded companies with bulging pocketbooks and the ability to sail through 30 percent returns in order to build brand equity—is enough to make any fast-casual chain choke on its own tasty fare. “We’re all looking for high character, high quality sites,” he says.

But he points out that it’s not all doom and gloom. There’s natural attrition, where older proven sites are opening up for fast-casual players, he says. “It’s a changing of the guard.” It’s one of Rowe’s favorite ways to expand his portfolio of fast-casuals, which include Z Pizza and Camille’s Sidewalk Cafe. “Doing a conversion is quicker to market and generally cheaper,” he says, adding that the sites are already equipped with washrooms, for example.

“A lot of the times, the best trade areas to be in have the highest barriers of entry,” says Rooney, who represents Crescent City Beignets and Desert Moon Café.

Another beacon for fast-casuals are the new developments that attract consumers and tenants alike. The so-called New Urban approach to retail centers—where suburban locales are given an urban feel with mixed use, pedestrian-friendly, destination sites—are a boon to fast-casual concerns, he says. They also translate into more prime locations than the older power centers.

“Landlords are starting to create a number of strong locations in their properties,” he says. Where a power center, for example, might boast only a few endcaps, the well-rounded lifestyle centers offer a higher number of premium sites. Rowe points to the Reston Town Center in the western suburbs of Washington, D.C, with its variety of services and retailers, cinema, skating rink, brick-lined paths, fountains and trees, as an example of this more dynamic environment. “In there, there’s probably the equivalent of 10-15 endcaps,” he says.

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“Lifestyle is the new answer to developing shopping centers,” says John Melaniphy, president of Melaniphy & Associates, a real estate advisory firm in Chicago, and author of Restaurant and Fast Food Site Selection.

And some centers have indeed generated excitement in the industry. Easton Center in Columbus, Ohio, for example, features 14 restaurants in a dynamic environment. But even that hotspot has seen turnover—a cautionary tale for other quick-serve operators, Melaniphy says. “Every location is not necessarily the best location for each and every food operator.” Food chains sometimes make the mistake of playing follow the leader and that’s a mistake, he adds. Dead spots will exist in every center and each chain must consider what its own concept requires, in terms of daypart business, traffic, visibility, and so on.

Every chain’s ideal consumer has a migratory pattern that is shared with other like-minded individuals.

He’s also quick to add that signing on to new lifestyle centers can be a gamble, since those in development are unproven. “All lifestyle centers are not going to be successful,” he says. “They’re the hot topic right now because they are being built right now.” But if developers are anything, it’s enthusiastic, he warns.

That enthusiasm is also rub­bing off on fast-casual operators vying for real estate. “It’s extremely competitive,” says Martin Sprock, CEO of the recently renamed Raving Brands!, which operates two fast-casual concepts, Moe’s Southwestern Grill and Mama Fu’s.

How Foodcourts fare Once the pinnacle of shiny-bright consumerism, malls were the clean, safe all-in-one shopping environment that everyone loved. And quick-service restaurants were only too keen to get into the foodcourts. Now they’re just places most of us stop by occasionally, grabbing something and dashing out. Times have changed. Last year’s figures, provided by the International Council of Shopping Centers (ICSC), indicates just how much malls have lost their luster. Only a handful of new malls opened their doors in 2002, while 36 shut their doors or changed so dramatically they were no longer classified as a mall. “[Quick-service restaurants] are totally dependent on a mall’s footprint,” says John Melaniphy, author of Fast Food and Restaurant Site Selection. And that footprint is shrinking as consumers go elsewhere. If quick-serve is going to link itself to retail, it’s going to aim for the winners—and many of the top retailers in the US are no longer aligned with malls. Consider Wal-Mart. The power center giant boasts sales that are eight times the size of the entire department store industry, according to the ICSC. But that’s not to say foodcourts are no longer viable. Mall foodcourts are simply evolving, according to Melaniphy. Smaller food areas—with eight units, as opposed to 15—and lower CAMs (care and maintenance fees) will continue to attract certain players. But non-mall food courts—such as those found in business complexes—can still be healthy and large, he says, adding that it’s not unusual to find a foodcourt in or near an office complex that sustains itself on lunch business only. “Because of the viability of the downtown, they continue to do well.” However, with the current contraction in downtown office space, they too have been hurt a bit, he adds. “There are as many bad ones as there are good ones,” agrees Dan Rowe of Fransmart. “Typically, the larger chains go into the foodcourts as a branding strategy,” he says, adding that prohibitive rent and CAMs keep smaller concerns out. The problem with many malls is that they aren’t well balanced, he says. Their hours generally cut off at least one daypart (breakfast) and their dependence on anchor stores means that a fickle consumer might decide to go down the street to a power center rather than stop in a mall. “They’re not terribly convenient.”

Sprock says that the company is in a comfortable position these days when it comes to securing good sites, having gone through several years of massaging relationships with developers and landlords, mainly through Moe’s. Having financial clout and operating experience goes a long way with landlords, he says. The fact that the company’s four brands can work together has also helped the company’s efforts with landlords. “We have deals right now where all four brands are going into one development,” he says. “Landlords are tickled pink because they have about 10,000 feet in one fell swoop and they’re done.” Landing prime sites wasn’t always this simple, though. When the company was starting out, it had to struggle to be heard over the din of larger players. “We’ve been there,” he says. “We’ve had to scrap it out to get locations.” He says that being small makes the job more difficult, but not impossible. “If you’re small and you do what you say you’re going to do and you beg and claw and scratch, you’ll generally end up getting a lot of deals you might not have gotten.”

In addition, he says that fast-casuals have an advantage, no matter their size—consumer popularity. “Landlords are starting to recognize that they don’t want the folks of old but the new brands that are cutting edge.”

But there are indeed many of these vying for the same spots, leaving landlords to choose the best of the lot. “You really need to sell yourself to landlords because there’s only so many great centers,” says Fransmart’s Rowe. He recommends spending money up front on a solid marketing package that highlights what makes a concept unique. He also says that signing on with powerful reps in each market will further help the cause. “Typically, in any market, there’s just a handful of reps handling the good deals and most landlords will seek them out when they have a project,” he says. “You want to be on that team.”

“We spend an awful lot of time and effort developing relationships with national developers,” says Gary Bryant, CEO of Bear Rock Café in Cary, North Carolina. The 18-unit chain wanted to be sure that landlords and developers understood the uniqueness of the concept—the fact that not only did it offer three meals a day but it also presented itself to each community as a gathering place. Larger than the typical sandwich eatery—at 3,500–4,500 square feet—Bear Rock encourages solo dining and lounging, with elements such as a fireplace, magazines, and internet access portals.

In order to focus on expansion and represent the chain in a positive light to land­lords and developers, the company hired a VP of real estate last year. “The real estate business is very different from making sandwiches,” says Bryant. By having a real estate specialist—someone who can talk the talk—the franchisor is showing that all-important commitment to the success of the concept, he says.

Keeping the chain’s ear to the ground is critical to secure sites, he adds. But that doesn’t mean it will get caught up in the flurry of real estate mania. “We don’t rush into real estate,” he says. “We don’t chase deals just for the sake of chasing deals.” In fact, there have been situations where Bear Rock has passed up on a location because it was unproven. In at least one situation, it was locked out of what became a hot area, thanks to economic conditions at the time. But the waiting—and relationship-building efforts—paid off. A competitor failed, the developer called, and Bear Rock moved in.

“Timing is critical,” says Dan Rooney, director of retail services for Glaze Real Estate in Kansas City, who represents Crescent City Beignets of Houston and Desert Moon Café of New York.

“A lot of the times, the best trade areas to be in have the highest barriers of entry,” he says, adding that availability, cost, and competition in the market all play a role in whether the timing is right. Each chain needs to come up with a realistic mix of strong locations and ones with future potential, he says.

Power Center vs. Lifestyle Center vs. Mall

POWER CENTER 250,000–600,000-square-foot property dominated by three or more generally freestanding large anchors. As of press time, there are 1,100 such centers across the U.S.

LIFESTYLE CENTER Open-air configuration with at least 50,000 square-feet occupied by upscale national chains. Restaurants and entertainment elements are key, and the design typically includes amenities such as fountains and street furniture conducive to leisure-time visits and browsing. A “Main Street” style ambiance.

MALL 300,000 square feet or more, typically with two or more department store or mass merchant anchors that comprise 50 percent–70 percent of the centers square footage. 1,130 regional and super-regional (up to 25 miles of trade) malls in the U.S.

So how should a fast-casual rank sites that are, in many cases, unproven? John Few, vice president of the restaurant and entertainment group, The Staubach Company in Newport Beach, California, says that it’s critical a chain understands its consumer before considering sites. Staubach offers chains an analysis of the migratory trails of that consumer. Few explains that every chain’s ideal consumer has a migratory pattern that is shared with other like-minded individuals—places they live, work, shop and play. Does your business belong in that pattern? By understanding this, restaurants can choose the best locations.

However, cautions Brian Kjos, Staubach’s national director of the restaurant and entertainment group, the rules become a little less strict when it comes to fast-food because it’s commodity-driven. “I’ll generally go to the one that’s closest to my house or place of work,” he says.

As for lifestyle centers themselves, again Few recommends that a food operator try to follow the natural habits of human beings to choose an ideal location, paying close attention to foot traffic and freeway exits. For example, people have a greater propensity for turning right than left, he says.

“Sometimes you have to bite the bullet and relocate to a more vibrant trade area,” Pulido says.

The best advice Few can offer to fast-casuals entering a new market is to follow the Starbucks model and nab the high-impact sites first. “It’s impossible to open up a location to get the visibility and awareness of your brand overnight,” he says. By spending the premium on getting a handful of iconic sites—and maintaining their quality levels—a chain can boost its awareness, making future deals easier. “You may not make your preferred returns on units one, two, or three,” he says. “But your awareness, quality levels and so forth will then allow you to go to the next tier of shopping centers.”

Building a brand from the start is something Pick Up Stix has learned, in some cases the hard way, since it opened its first unit 14 years ago. “One of the keys is that you realize that inline locations are probably not the way to build a brand at the start,” says Tim Pulido, president of the San Clemente, California-based company. “It’s important to pick sites that help build the brand.”

Pick Up Stix is very keen on entering new markets with an eye on media efficiency. “It’s important for us to build up a market so that it becomes economical to afford a certain amount of advertising,” he says.

And he points out, chains have to recognize that consumers are fickle creatures. “You come to realize that a particular area or neighborhood that may have been a real hotspot at one time has matured and there’s a new developing area that is getting all the traffic and customer excitement,” he says. That’s when a decision has to be made. “Sometimes you have to bite the bullet and relocate an existing site to a more vibrant trade area,” he says. Pick Up Stix was forced to do just that when it noticed that its original location in Rancho Santa Margarita was no longer getting the traffic it once enjoyed. In 2000, it relocated to a new power center in the same city, with strong anchor Home Depot.

Pulido says that Pick Up Stix, with 86 stores, enjoys some good brand equity but that it is still highly competitive obtaining sites. “There are a ton of new brands and new concepts and everyone is trying to grow,” he says. The business case you bring forth to a landlord can make or break the deal. “A landlord is essentially managing a portfolio,” he says. That’s why it’s critical a chain presents its unique brand positioning in a way that separates it from the pack, he adds. “You’ve got to move quick and at the same time you have to have strong consumer propositions,” he says. “You’ve got to make sure you’re a well-oiled machine.”

“A landlord is essentially managing a portfolio,” says Pulido.

Thanks to its relationship with parent McDonalds, Chipotle is most definitely a well-oiled machine. While today it relishes the partnership’s clout with a well-developed brand in the marketplace, it wasn’t always smooth sailing for the Tex-Mex chain. Rex Jones, director of real estate in Denver, says that it initially took a lot of effort to sell itself to landlords and developers. “It was a very challenging, educational process,” he says. When he joined the company five years ago, the chain had 14 units in and around Denver and, while landlords were invited to visit, many did not. Jones decided to take a booth at the International Council of Shopping Centers show in Las Vegas in ’99—and crank it up a notch. Rather than simply stocking it with material, the chain used the booth to replicate the store environment, featuring the same cool stainless steel and birch wood design.

Real estate availability has very much shaped the growth of Chipotle. While it started as primarily an urban concept, it has since expanded into strip, lifestyle, and power centers. Thanks to the influx of McDonalds capital, which allowed it to finesse its infrastructure for growth, the company has developed an aggressive growth plan at 100 stores a year. “Having the luxury of getting capital to do it right makes life a lot easier,” says Jones.