It isn’t revelatory to tell a restaurateur site selection is where the game is won and lost. Understanding market fundamentals and trying to keep pace with constantly moving trends are key to any decision when it comes to real estate. So many of today’s restaurant failures and successes stem from simple location.
Granite City Food & Brewery, a brand recently acquired by Famous Dave’s parent company BBQ Holdings, filed for Chapter 11 bankruptcy protection in December. The 25-unit, full-service chain said many of its stores were located in or near shopping malls and locked into long-term leases that appeared favorable at the time, typically with options to renew.
This is a pretty common tale of woe for restaurants retracting footprints. The market shifted and a once-rosy situation flipped the other direction. Granite City simultaneously spent heavy capital building restaurants “in a manner that featured those distinctive characteristics associated with the brand.”
And then this happened. “As a result of the Great Recession that began in 2008, consumer income growth stagnated for nearly a decade. This led to an overall decline in consumer spending, including retail spending and spending to eat out,” the company said.
Consumer preference headed toward online shopping, Granite City said. That led to more guests eating takeout or ordering delivery, “as opposed to spending time for a sit-down meal at a casual-dining location.”
The after-shock was softer foot traffic in shopping malls and retail outposts where most of Granite City’s locations are or were located. As activity in malls sagged, so did Granite City’s guest counts, naturally, such “that seemingly favorable long-term rental rates the [brand] had negotiated gradually morphed into above-market rates.”
It’s an interesting and familiar challenge for restaurants. The U.S. retail and restaurant real-estate market mostly appreciated robust growth in the years following the Great Recession. Barriers to entry were lowered. Landlords started knocking on restaurants’ doors. Then, within a few years, concepts started to grow at twice the rate of the population—a dynamic that unfolded for malls from 1970–2015 and forced the course-correction you see today. (Read more on this reality here).
According to analytics platform Buxton, a widely used technology in the quick-service space that just released its 2020 outlook report, experts have predicted a gradual deterioration in retail and restaurant real estate market conditions for several years. But the question is, is that actually happening?
Buxton vice president Wes Abel believes the market has proven remarkably resilient thanks to a strong consumer. The fact contradicts dire warnings.
“Despite the daily media sirens of an impending recession, the U.S. consumer remains strong and the cost of capital is low,” he said in the report. “This is an attractive environment for U.S. retail and restaurant expansion. General business investment is weak, but domestic consumer driven companies will continue to benefit from a healthy U.S. consumer.”
Let’s dive into the data, and see what it means for the future of restaurant real estate—the place everything begins, whether it’s location No. 1 or 10,000. Also, take a look at the hottest markets in the country to target for growth, big and small.
The fundamentals, and the closures
Throughout 2019, retail real estate vacancy rates held steady. You can credit solid consumer spending. Reis reported a national vacancy rate of 10.1 percent in Q3 2019. That’s essentially unchanged from 10.2 percent to start the year. CBRE also noted continued demand for grocery-anchored neighborhood community and strip centers—something Buxton believes is supporting high occupancy levels.
Meanwhile, retail rents reflect this steady demand, which is leading to some of the aforementioned issues that didn’t exist out of the Great Recession. Average retail net asking rates increased on both an annual and quarterly basis in Q3. Gross median retail rent was $22 per square foot in Q3, per the National Association of Realtors.
This might seem counter intuitive to what we’re seeing on the ground, where it feels like far more restaurants are retracting these days than growing.
A recent study from IHL Group on 1,660 U.S. retailers and restaurants with 50-plus locations suggested, surprisingly, the industry is not actually suffering from a surplus of store closures. It found that retailers and restaurants witnessed a net gain of 8,575 combined stores from 2017–2019.
But this is something that has multiple layers.
The study said seven of nine retail segments were projected to see an increase in store counts last year over 2018. The only two segments projected to experience a decrease in total store count were department stores and specialty soft goods, like shoes.
In fact, the store closures were driven by a small number of failing chains. It isn’t an industry-wide epidemic. Twenty companies in the study accounted for 75 percent of all projected net closings in 2019.
Retailers and restaurants were actually adding more units than they were closing. There were 2,965 more openings announced for 2019 than closures.
In the worst years (2017 and 2018), sales were still up. Retail figures bumped $232 billion in 2017 and $36 billion in 2018. Amazon’s sales lifted about $29 million in 2017.
However, while the ratio of openings to closings remained positive from 2017–2019, volumes slowed. There were fewer openings and closings in 2019 than in the prior two years. Suggesting, to Buxton’s observation, we might be reaching an equilibrium.
In sum, what you’re seeing today might be less about closures and more a lack of net growth. Many chains are standing pat and trying to focus on current assets.
Take this quote from Subway business development agent Todd Carpenter: “Today, I’m proud of the organization for refocusing the brand from growth in number of locations to a laser focus on developing the franchise owner’s skill sets to run better and smarter—from profitable operation of our shops, to hiring and training staff, to how we must use technology to achieve these goals.”
Here’s a look at IHL’s data:
Net retail/restaurant openings versus closings
Net change: 4,128
Net change: 1,482
Net change: 2,965
What can we expect in 2020?
Solid market fundamentals in 2019 set the stage for continued strength, Buxton said. Despite a slowdown in pace, as seen above, overall progress remains positive.
“Demand for the right real estate is increasing,” Buxton VP Peter Healey said in the report. “Growth is slowing, but that’s because retailers can be more selective about what new locations they open. Waiting to open the right store is taking priority over opening a store just because there is availability and a gap in market coverage.”
It seems likely much of 2020’s growth will come from small- and midsized retail and restaurant concepts.
As always, follow the trends
Ecommerce forced restaurants and retail to rethink store purpose. Notably, it flooded experiential offerings into the marketplace to combat at-home dining and shopping. Delivery, too.
Buxton SVP Tim White said this goes beyond first-to-market brands hoping to capitalize on the movement. Many existing companies are either retrofitting their legacy units or launching new concepts to further market penetration. Why did Cracker Barrel invest in eatertainment up-and-comer Punch Bowl Social? This might explain it.
Something else worth tracking is the restaurant world’s continued evolution toward healthier and more convenient food options. And growth in delivery as a revenue driver is the real category disruptor.
As restaurants determine how to profitably and efficiently compete, real estate is shifting. It gave rise to the phenomenon of ghost kitchens. They’re attractive to restaurants for a variety of reasons. Chief among them, though, is the ability to fulfill delivery and catering orders through a commercial kitchen that doesn’t include dine-in space. Thus, multiple restaurant brands can be housed under one roof, and rent is cheaper because spaces are smaller and don’t need to worry about opening in heavy foot-traffic locations. Truly, they can spring up anywhere that makes sense from a delivery radius perspective. It could be a warehouse with no office complex or housing development within 5 miles.
“Ghost kitchens are going to be something to keep an eye on in 2020,” Stephen Polanski, senior vice president at Buxton, added in the report. “With customer preferences and behaviors changing, an off-the-beaten-path, lower cost option will challenge A-plus real estate options.”
Dive into the markets
Buxton deployed de-identified GPS data from opted-in consumer devices to assess market performance at the designated market area (DMA) level over a two-year period. The company evaluated consumer traffic at 1,650 restaurant brands and 2,072 retail brands nationwide.
The data only analyzed brands with at least 10 locations, with footprints in more than one DMA, to allow for comparisons across markets.
The following rankings account for six measures of performance. For instance, while overall visit volume was a factor, Buxton also considered visit volume compared to population size since achieving a high volume relative to a small population is more impressive than a high volume in a high-population market.
We’re just going to focus on the restaurant breakdown.
California featured more markets in the top 25 than any other state (four). But worth pointing out, these restaurants might be turning in high volume, but they’re also grappling with serious wage concerns.
Buxton labeled the Miami-Fort Lauderdale market as the biggest winner, moving up five places to No. 24. On the flip side, Cleveland-Akron (Canton) Ohio, dropped four slots to No. 17.
Buxton also pointed out that Atlanta and Salt Lake City cracked the top 25 for restaurants but did not make it for retail.
The main takeaway is that Florida and Texas markets are rising, while Midwestern areas are slopping relative to their peers.
And here’s a snapshot of small markets.
Of this set, the southern regional section of the U.S. showed strong. Twelve of the top 25 markets were located in southern states.
The biggest year-over-year winners were Jackson, Mississippi, up 16 places to No. 23; and Harlingen-Weslaco-Brownsville-McAllen, Texas, which climbed 10 spots to No. 12. Eugene, Oregon, headed in the other direction, falling four places to No. 22.
The real-estate crystal ball
To look ahead to 2020, Buxton developed a series of models that included market demographics and psychographics, economic factors (such as presences of certain industries), the GPS data on retail and restaurant activity, and other variables.
For this, the company combined retail and restaurants.
Large markets are projected to see fewer rank shifts than small ones, Buxton found. Dallas-Fort Worth and Austin are in line for moderate rank gains as well.
The biggest dips appear headed for the Midwest, with four of the top five located in Ohio and Pennsylvania.
On the small-market side, Florida claimed three of the top five spots for rank gains. The Sunshine State has ample whitespace ahead.
The overarching point
The simple conclusion: retail and restaurant industries are not dying. Rather, we’re in a loaded-up arena right now where the strongest are thriving. Whenever that happens, the reverse is true of struggling chains. A zero-sum game of sorts. Not much growth as restaurants battle for market share. Survival of the fittest.
It’s why, to McDonald’s CEO Chris Kempczinski’s earlier point, brands are going to gain customers today by stealing share from competitors. The opportunity lies in converting customers of other brands as much as it involves inspiring new ones. Operational execution has simply never been more important. The same is true of brand distinctiveness.
Restaurants that have adapted to the new omnichannel world are succeeding. Those who haven’t, especially in quick service, are not. Thankfully, there are far more parties in that first category than the second. And there’s always time to evolve.
Buxton laid out three questions it believes every restaurateur should ask themselves in 2020.
Do you know who your customers are and where they are located?
Healey explained this in the report.
“Developing a full 360-degree understanding of your customer will continue to be a dominant trend in 2020,” he said. “As retail giants like Amazon, Walmart, and most grocers continue to prioritize customer convenience through same-day delivery, curbside pickup, and checkout-free/no line shopping experiences, all retailers should be thinking in terms of how to be the easiest choice for that customer to shop. This means operating on the customer’s terms, not yours. Knowing where your customers and their best lookalikes live, work, shop, and play will continue to be a differentiator between those who grow and those who struggle.”
The sense of urgency is even greater for restaurants, Polanski said. “Understanding the customer will be the most important trend in 2020. Customers are changing and organizations must also change in order to thrive. Customers want to order from the couch or phone, and restaurants must find a way to accommodate. Ease of ordering and understanding buying preferences will dictate new store openings, size of location, and development strategies. If restaurants don’t know who their customers are, they lose.”
Are you making thoughtful real estate investments?
We all know the stakes are high. No matter how big or small brands are, there are too many tools at their disposal today to open without using quantitative and qualitative data to decide. Each lease renewal should be scrutinized to ensure the location is still a solid place to reach target customers, Buxton said.
“The portfolio audit is a big play [in 2020] to help retailers understand where to invest capital and where to shed underperforming locations,” White said.
Is your marketing as efficient as it could be?
As many brands are discovering, reaching mass audiences might have branding appeal, but does it actually drive traffic? Buxton said household-level targeting of best potential customers is the key to maximizing marketing investment.
Site selectors also shouldn’t overlook the importance of real estate placement in overall marketing strategy, the company said. Visible stores boost impression frequency and drive sales—even if the sale is through delivery or another channel. Real estate teams should consider the interaction between online and dine-in business as well when deciding where to close and open locations, Buxton said.
There’s a lot to think about. But the opportunities are there for the taking.