May 10

Working With Expanding Chains

Many markets are seeing new concepts expand and grow. But are they doing it smartly? Here’s advice on working with expanding concepts to develop a smart plan of attack for a market.

Interview by Randall Shearin

More storefronts are opening than closing, and not a lot of retail space has been built over the past 10 years. In many metropolitan markets in the U.S. retail space is at a premium. That’s leading to some expanding retailers jumping to secure space, sometimes in locations that don’t fit their concepts, markets or budgets. Jason Baker, principal with Houston-based Baker Katz, recently offered some advice for working with retailers and restaurants who want to open multiple locations in a given market.

SCB: You, and your firm, have a lot of experience with new restaurants entering the Houston market. Who have you worked with over the years?

Jason Baker: Our experience started 15 or 20 years ago with a sandwich concept coming into the market and making dozens of deals. That relationship grew and evolved into something that was more fast food related. Over time, we parlayed our relationship with that retailer into other fast-casual restaurants like Chipotle, Zoe’s Kitchen, Noodles and Piada. Along with that, more into the full-service world with concepts such as Carrabbas and Outback Steakhouse. Most of those had pretty strong regional programs when we started working with them. There were certainly some exceptions — Zoe’s Kitchen didn’t have much of a regional presence here when we started and we helped them grow up to 15 deals in our market, and then there are some recent examples like Snooze that have no presence. They had ten or fewer stores in their entire chain when they hired us to help them grow in Houston. We’ve just recently opened up our third and about to open up our fourth Snooze restaurant.

SCB: When you get a restaurant client that wants to expand in the area, how do you sit down with them and develop a plan of attack? What fits your criteria? 

Baker: There have certainly been examples of where we’ve picked up a restaurant as a client and they’ve already got a Houston presence and we’re just helping them build out the rest of the market.  And then, like Snooze, there are chains that have no presence, and they want to execute a strategy. In that case, before we ever did a tour, I flew to Denver and Arizona to visit their restaurants. I wanted to see who they were serving, I wanted to see the quality of their build-out and I wanted to try their food. Because restaurant space is about as competitive of a space as there is in retail, if we don’t believe in the food and the operations, it just doesn’t make sense. We’ve got enough experience now that we’ve got to be sold before we can convince landlords that we’re the right use for the space that they’ve got available or the space that they’ve got coming online. The second thing that we do is a lot of listening. Snooze is a breakfast concept, and they were looking for something different than most of our other restaurant clients. A retailer that’s in that fast-casual segment, like MOD Pizza, for example, has enough of a track record that they know what really works for them, and they are expanding pretty rapidly. They’ve got a format and a process that works for them that they really adhere to and stick to. Oftentimes it’s a certain kind of co-tenancy, it’s a certain kind of building design, it’s a certain kind of access and visibility, and they have a much more predictable process than a chain that’s small like Snooze. Snooze approaches each market very uniquely. They understood that their ideal customer was a mix of male and female, very artsy, much more eclectic, a high-income, and a high education level. But they also were really focused on not moving into a space that was just standard construction. They wanted to operate in a space that was less traditional and felt more local. So they moved into an office space we converted to restaurant that was built sometime in the 1950s. It feels older and it’s got more of a unique design and that’s what they were looking for. A third of our clients are looking for similar space now, where they don’t want to feel like a chain, they want it to feel like they’ve been there for 25 years. That’s hard, partly because in the case of Snooze, we had to get a variance for parking, you’re in the urban core of our city and parking comes at a premium. It’s a lot tougher requirement, but that’s what they were looking for and that’s what we had to find.

SCB: What success stories have you seen using this sort of approach?

Baker: Postino. They are part of Upward Projects and they’ve got half a dozen brands inside of their company, from Federal Pizza to the Webster to Postino to Churn. They were really looking for a different type of co-tenancy than many of our clients are looking for. They wanted to start in the dense, urban core of our city — they sought out high incomes, high education levels — and that’s what we found for them in The Heights.  Some of these sites lack great access, they lack great visibility, they don’t have high traffic counts and they don’t even necessarily have big anchor co-tenancy. The Heights is a site that’s very interior focused, but the design of the location was appealing enough to help Postino overlook a lot of site attributes that other retailers would be seeking.

SCB:  What kind of locations are restaurants looking for, in general? 

Baker: It truly is a mix. There’s a continuum. You’ve got the national brands, some of them with thousands of locations open, and they tend to look for the same characteristics because historically those have worked for them. Those tenants have a very particular site selection process, and in the fast-casual world, that is sort of the same across the board. A lot of these concepts in the 2,500 to 3,500 square foot space are looking for the exact same locations. Then you’ve got the example of the full-service restaurants, who tend to want larger spaces with lots of parking. They tend to also be a bit more regional, and tend to want to front major thoroughfares. Then, concepts such as Snooze and the Postino, that are looking for sites that feel more homespun, local and older. Adaptive reuse is a word that’s been thrown around a lot, but that tends to be the kind of space that they’re looking for. Then there’s a completely separate category all together, the popular chef-driven restaurants. That segment continues to be active, and those groups tend to look for the type of space that’s appealing to Snooze and Postino. For example, Fox Restaurant Concepts, based in Arizona, has more than a dozen concepts that are all very unique, like Flower Child, Zinburger and North Italia. They are taking many of those brands across the country right now. There are chef-driven concepts. Ford Fry, based in Atlanta, is busy expanding in Houston right now. He has done extremely well with his first restaurant here and is looking to roll out several new concepts.

SCB: The two examples you just gave seem to be duplicating success in markets similar to the ones where they’ve launched and succeeded. Do you see that often, where concepts take what works for them and try to find those characteristics in other markets? 

Baker: I think so, to a certain extent. As these concepts come into the market they’re going to have a local broker. One thing that’s a constant among all retailers — and frankly every category of retail — is there are only a certain number of deals to do in any given year. For the most part with these retailers, particularly the restaurants, what they are looking at first is where the like-kind brands have been successful. And that’s even nuanced. Snooze, although primarily a breakfast concept, is looking at sales that occur at lunch and dinner to ensure they draw in enough customers during those hours. They have to be mindful of where they locate in a project because of their hours of operation. It might not make sense for them to look at a project where they go deep into a body of the project and none of those retailers open until 10:30 or 11 am. If they’re not going to have the benefit of piggybacking on the traffic that’s generated by those retailers, they need to really think carefully about their position within the project. One of the first things that a good broker is going to provide — and that a great retailer is going to look at — is the performance of other retailers in the market and their sales. Before they spend too much time turning up options in this trade area, we need to understand that the trends in this market are already strong. To me, that is the starting point for any good site selection.

SCB: Owners and developers say that restaurants are a gamble. How do you, as a broker, negotiate a lease and sell the idea of a restaurant to them? 

Baker: It is a competitive space, and in the retail world, it is as competitive as any space. Years ago, the rule of thumb in our market was that seven out of 10 restaurants close within the first four years of opening. While that’s a big generalization, my guess is it’s probably true even today. The failure rate with restaurants is probably as high as any other category of retail. One of the first things that we do in our due diligence is believe in the concept. We could work with a lot more restaurants than we do today, but we choose not to because there just aren’t that many concepts that we really believe have staying power. Kenneth Katz, my business partner, made a comment that for the most part, the restaurants that were cool 10 years ago aren’t cool today. Or the restaurants that were doing large volumes 10 years ago aren’t doing big volumes today, and it’s true. I always ask, as a consumer, is this a place I would go? A place I would take my family, or meet somebody for a business lunch? And if the answer is no on any of those things, it just probably isn’t going to make sense spending a lot of time helping them to identify sites. There’s turnover in the restaurant space and landlords are very particular in the kinds of tenants they put in there. One thing they look at is credit, another thing they look at is operating history, and oftentimes they are comparing one deal to the next. Of course, if it’s a restaurant that doesn’t have an operating history in our market, they are going to spend the time to do their own due diligence and try it out. The cost to build out a space right now is as high as it’s ever been, and 90 percent of the time when we’re backfilling, tenants will choose not to use anything that the previous tenant has left behind because the savings don’t match the cost of trying to work around what’s there. That’s a big generalization, but it is what we’re seeing.

 

Read the Original Article HERE