Comparing restaurant real estate activity in 2010 to 2006
While cleaning my office last month, I found an article I had written for Shopping Center Business in 2006 during die “boom-time” in the economy. The article described the expansion of all segments of the restaurant industry while the economy was clicking on all cylinders. As we have just finished the ICSC ReCon show in Las Vegas in 2010, it would prudent to review the factors that caused the proliferation of dining options in 2006 and the changes that are now happening in the hospitality business/restaurant real estate world.
In 2006, we described the economy and the real estate development business as “blowing and going.” Everything was moving at 100 miles per hour. Lifestyle centers were being built with numerous full-service and quick-service options. Regional malls were adding lifestyle wings with restaurants and lifestyle retailers. And with money available to almost everyone, freestanding restaurants of all types were being developed around the country. There was also a boom in fast-casual options of all types including Mexican, breakfast, hamburger and others. Franchisees could borrow money and were eager to have their own businesses. Restaurants couldn’t open fast enough. Venture capital firms jumped in and acquired chains or helped them do leveraged buyouts. Waiting to eat at popular places was common, and long waits were expected/tolerated by consumers.
In 2007, the economy started to soften. Consumers cut back but business was still okay. And restaurant expansion kept going as the lead lime for any real estate restaurant project was gelling longer as well.
In 2008, it was the year of the crises:
financial crisis, credit crisis, securitization crisis, housing crisis, jobs crisis. Restaurants really took a hit. Consumers were dining out less. And when they did go out, they didn’t drink as much and passed on desserts/after dinner drinks. So operators got hit both in sales and in gross margins. Al the same lime, expenses such as real estate taxes, utilities and labor costs were going up. Expansion kept going, resulting in an oversupply of seals in many markets. The grocery stores saw dining at home trends increasing. They got much better at providing carry out options for consumers. Add in consumers dire economic straits and an “aversion to tipping” mode that developed for casual dining experiences and you have an ugly situation for restaurant operations.
In 2009, more of the same slow economic conditions were apparent and more scats continued to open as chains and franchisees were committed to opening units that were already in the pipeline. Consumers were still eating out but changing their pal terns to adjust to the new economic conditions. Consumers seemed to be tired of “me too” operations, complaining that too many casual dining options were the same and boring.
So what are the new rules? In 2010, how can we adjust and make deals in the new economic world?
Some bullet points to think about:
• 2010-2011 will bring more fast casual and quick-serve restaurants to the dining scene, pulling more pressure on full service operations.
• Grocers will continue to expand their options of take-out food for the consumer.
• Operating costs, like real estate taxes and utilities, will continue lo rise.
• Many full service restaurants that can’t produce volumes necessary to make money will close. Chains are/ will implement strategies to close the lowest performing 5 to 10 percent of their units.
• Unique and top of segment/class will prevail. So if you are McDonald’s or Olive Garden and at the top of your segment, you will be fine. If you are second, third, fourth or fifth in your segment/class you will be under pressure.
” Unique operations like P.F. Chang’s China Bistro and The Cheesecake Factory should be fine as well. They are both unique and top of their segment. While not immune to the slowing economic conditions, they are unique/special/fun and will maintain leading positions.
• Changing demographics will hurt older, mature chains with an older clientele. Red Lobster, always a successful operation, is now trying to attract younger consumers as Bonefish, Legal Seafood, McCormick& Schmick’s Seafood Restaurant and older seafood operators attract the younger clientele.
• New operations will emerge to lake many of the closed restaurants but capital constraints will slow this process. New operators will look to landlords for allowances to retrofit the older closed units.
• Site selection will be more important than ever, as well as lease/purchase negotiations. As opposed to opening restaurant units to please Wall Street, restaurants will have to make money from existing operations to make sense in the new economic world. In the old school world of real estate negotiations, we always talked about the four legs of the chair needed for a location to be successful: 1) strong demographics; 2) strong financial deal; 3) excellent real estate quality; and 4) assessing the amount/strength of competition. Both restaurant operators and landlords need to be sure that the deal they negotiate takes into account all four of these factors before they sign or agree to a deal. SCB