THE PRINCIPLES OF RESTAURANT SITE SELECTION
Excerpted from Melaniphy's book - - The Restaurant Location Guidebook, a comprehensive guide to picking restaurant and quick service food locations (2007).
Over the years of reviewing and selecting restaurant locations, it has became obvious that the industry needed a set of guidelines regarding location selection. Formulated over the last 25 years, these guidelines are included in my book entitled, The Restaurant Location Guidebook; To select good locations, one needs to be aware of the following:
1. Know your Concept and Business
Although this book does not discuss operations (because that is an entirely different subject), it goes without saying that you must understand the foodservice business and your own business if you are an existing operator. In fact, knowing your operation is a prerequisite to any expansion. Food operators can usually recite and compare food costs, labor costs, controllables, uncontrollables, gross margins, and profits. Numbers are traded and widely discussed. Daily tallies, transactions, daypart customer counts, meals purchased, and, hopefully, profits fill numerous notebooks. Nonetheless, as mundane as it sounds, you must truly grasp the complexities of your operation and accurately gauge your management ability before expanding. Have you done your homework? If you are entering the food industry for the first time, have you studied successful food operations, and do you feel thoroughly familiar with their techniques?
Knowing your operation for multi-unit operators also includes knowing the characteristics of your best performing units as opposed to the worst performing facilities. The winners tell you what to look for in new locations and the losers tell you what to avoid.
2. Determine Your Customer’s Characteristics (Existing Foodservice Operators)
Customers are attracted to any restaurant for numerous reasons. As a food operator, you should know why customers choose your facility. Also, identifying the characteristics of your most frequent customers (heavy users) is essential. Without this data, you are going into a firefight armed with a B-B gun. I am continually amazed at the number of food executives, responsible for spending millions of dollars, who do not really know their customer profile. Often a major food operator or officer of a major food organization will tell me that “everyone” is his or her customer. When I ask, "How do you know that?” The usual response is, "Well, I observe”, or, "my managers tell me”. That is absurd! Often after my staff has carried out our Customer Profile Survey (sometimes referred to as a Customer Intercept Survey), we find that the true profile varies considerably from the executive's opinion. I cannot overemphasize the need to find out who your customers are, why they come to you, or why they do not come to you. The most important customer is usually the most frequent visitor, and that profile may differ considerably from the total customer distribution. One of the primary secrets for successful site selection is targeting areas with demographics that match your "most frequent customers” characteristics.
3. Understand Attitudes, Trends, Habits and Patterns
Consumer attitudes and trends are constantly changing. They are influenced by such variables as our ages, children, income, lifestyle, gasoline costs, professions, aspirations, opportunities, societal trends, household composition and size, our feeling of well being, and others. Most of us, for example, are very much aware of the current emphasis on health in our diet, exercise, our children’s competitive needs, our PDA/cell phone, our calendar, instant messaging, the growth of the Internet in our daily lives both at home and at work, and other personal factors. We need to be cognizant of the present and future habits and trends in considering locational opportunities.
We are all creatures of habit. Employed persons establish a travel pattern to and from work. Although it may vary occasionally, this pattern, for the most part, is easy to identify. Parents also set up a distinguishable pattern that may involve chauffeuring the children, shopping, running household errands, and participating in other recurring daily events. Working mother's busy and hectic patterns also can be identified and evaluated. Most restaurant and quick service food strips spring up to intercept all or a portion of these patterns. Retail and food facilities along the routes to major regional shopping centers hope to intercept these customers.
Thus, it is essential to evaluate and understand the patterns of people within an area. When creating a multi-unit development strategy, you must understand the varying patterns of the various parts of a metropolitan area. A misinterpretation or lack of knowledge of such habits and patterns has caused the failure of many food operations.
4. Delineate Your Trading Area
Numerous factors dictate the size of trade areas including type of food facility, type of location, income, topography, competition, traffic artery, traffic counts, physical and psychological barriers, market structure, activity generators, consumer patterns, visibility (sometimes), socio-economic characteristics, and perhaps, others. Historically, restaurants have focused on a five-mile trading area, while quick service food facilities have settled on a three-mile radius. In many instances, these distances are realistic; just as often, however, they are not. It is important to analyze the type of location and the extent of the trade area that might result from a new operation. In a major urban area, a "special occasion" restaurant may attract customers from l5 to 20 miles away, while in a rural location the right type of restaurant might attract customers from 60 to 100 miles. Moreover, quick service food facilities near major malls often take on the trading area distance characteristics of the mall. In reality, trade areas are not rigidly round, square, or rectangular. Instead, they are positively influenced by the attraction of the restaurant (and often its surrounding generators) and negatively impacted by factors such as competition, and physical barriers, limited access, parking (or the lack of it), among others.
5. Gather Factual Market Data
Restaurant and quick service food operators compete for eating-out or eating and drinking dollars, usually generated by the resident population, traffic, daytime working population, visitors to the area, or some combination of these groups. Market resources include population, socioeconomic characteristics, age structure, income, eating-out expenditures, lifestyle and household size. Through an orderly procedure, you can determine the extent of the present and future market.
How often have you heard a real estate agent say, "This is a great area! There are 50,000 people within three miles, and everybody is buying land in the vicinity. It's a hot spot. You'd better hurry up before it is all gone or the prices rise.” My advice: don’t get caught up in the hysteria; instead do your homework and determine if he is right and the area is hot for you. A small amount of investigation can clearly identify if an area meets your locational and market needs. Nevertheless, land purchases occur daily that are the result of hearsay, lack of information, or misinformation.
All cities have a structure that results from the shape of the city (fan-shaped, square, rectangular, round), barriers such as physical barriers (rivers, lakes, airports, major industrial areas, major governmental installations, cemeteries) and psychological barriers (differing socio–economics or low versus high crime areas). Cities are also composed of homogeneous and heterogeneous areas that develop into neighborhoods because of income, social structure, employment concentrations, local schools, road patterns, transportation systems, directional growth patterns, and generative facilities. These elements provide the market resources necessary to support foodservice facilities. Market resources can be inventoried and quantified to determine the share of market that a planned restaurant or quick service food operation can anticipate. It is possible to calculate demographics with a fair degree of accuracy and to compare them to customer characteristics. Also, expenditures can be estimated to determine eating-out potential. It is not the number of people in the trading area, but rather who they are and what they spend that is of paramount importance.
6. Select Adequate Accessibility
Accessibility within a metropolitan area includes the ability of motorists to move from one part of the area to another. Locationally, accessibility represents the ease with which people move into and out of an area and, more particularly, into and out of a specific location. When determining accessibility, it is necessary to consider major and minor traffic arteries, number of lanes, speed limits, turn signals, turning lanes, curb cuts, traffic backup, congestion points, and the existence of median strips. You should also evaluate automobile or pedestrian traffic counts, traffic flow, traffic peaks and valleys by hours, and other pertinent data. Traffic counts alone do not dictate accessibility; in fact, they are a misnomer. Total traffic counts, like the total population in an area, are only indictors. Rather the hourly traffic counts or the highest non-peak hour are the important ingredient.
7. Identify Generative Areas
For most foodservice operators, particularly quick service and chain restaurant operators, being near generative facilities is a must. By generative facilities, I am referring to sites that are near major generative uses, such as major malls, or major concentrations of office, hotel, industrial and other commercial facilities. For restaurants located in a downtown area, the generative conduit may be a cluster of civic, office, and hotel buildings or the downtown itself. In Orlando, Florida, Disney World and other entertainment venues are the major generative facilities, while in Minneapolis it may be Mall of America. Hotels in a beach area such as parts of Florida are generative, as are the collective casinos in Las Vegas. Similarly, golf courses in Myrtle Beach, South Carolina are generative as is a city like San Francisco. A university can be a generative area, such as University of Michigan in Ann Arbor, or a hospital complex, such as Mayo Clinic in Rochester, Minnesota. A concentration of big box retailers can be generative, as can supermarkets and for some frequently visited chain drug stores. It is essential to identify and explore the many varieties of generative facilities in your area because they increase the frequency of visit into an area and establish consumer and working patterns. Understanding their importance can represent the difference between choosing a poor location and a great sales performer.
8. Evaluate Competitive Facilities
Competition can usually be divided into two types: direct and indirect for most types of food operations. A French restaurant competes directly with other French restaurants, but indirectly with other restaurants. McDonald's, Burger King, Wendy's, Hardee's, and Culver’s are considered direct competition; whereas, they are indirect competitors to Kentucky Fried Chicken, Taco Bell, Subway, and Arby's (although recent additions to many quick service menus are, in sense, making them more directly competitive). Obviously, the more direct the competition, the greater the tendency toward saturation. Conversely, the less direct the competition, the greater the opportunity for higher market share.
Do you know what you competitors are doing? Find out! What are their weekly or monthly sales? Unfortunately, competitive analysis frequently is inadequate. How can a person determine the sales potential of a proposed new unit without thoroughly understanding the performance of the existing competitive facilities? Actually, it is almost impossible; nevertheless, would-be entrepreneurs completely ignore competition every day.
9. Understand Visibility and Exposure
Visibility is the ability of a site, building, or sign to be seen; exposure is being seen over a long period of time. Whereas visibility creates opportunities for impulse eating, exposure gradually influences patterns and decision-making. Visibility is extremely important to the quick service food industry and popular-priced casual restaurants, because high visibility allows the consumer more time to change lanes and navigate the entrance to an eatery's parking lot. For some restaurants, lack of visibility contributes to a certain uniqueness and atmosphere (a speakeasy located down an alley). Nevertheless, for most food operations, the better the visibility, the greater the opportunity to do business.
10. Identify Appropriate Locations
Appropriate locations are those that meet the principles indicated in this book or your own tested locational criteria. Examples of acceptable locational criteria generally include the following: types of locations, type of traffic arteries, trade area size, speed limits, number of moving lanes, adjacent uses, traffic flow, traffic counts, ingress and egress, visibility, competition, employment, topography, demographics, ethnic characteristics, land cost, rental rates, real estate taxes, and perhaps a liquor license. These characteristics can take on many dimensions. For the individual who is starting a new restaurant and has no locational experience, the site attributes of other similar and successful food operations can provide very important guidelines. The multi-chain operator can draw upon past experiences by analyzing their most successful units, average units, and perhaps the less successful restaurants to see which characteristics are present in the most successful units and which are missing from the less successful units. Food people tend to focus upon local restaurant management, when the problem may, instead, be the size of the market.
Another method is to examine the experiences of other operators and competitors. How have they fared? Where are their most successful units? Why are they the most successful restaurants? What is common to their locational success? Likewise, almost anyone can identify and observe unsuccessful or failing restaurants or quick service operations and probably should avoid their locational characteristics. Studying the failures often is as useful as studying the most successful food operations.
11. Estimate Sales and Parking Needs
To some degree, all restaurants and foodservice establishments are competing for the same eating-out food expenditure dollar. There are wide differences, however, between the dining expenditure of a family with children and those of a childless professional couple, or even a husband and wife dining with friends and /or business associates. Other factors can be difference in breakfast, lunch, and dinner expenditures or in the cost of casual versus upscale dining. Entertainment adds a significant dimension, as does special occasion dining.
Almost all food operators estimate sales in one manner or another. Often, however, they produce inaccurate results. Estimating sales is properly accomplished by evaluating all the factors that affect a restaurant or quick service food facility's potential. Unfortunately, sales are more often are calculated using the "back of the envelope” system, or on the building or remodeling plans. This famous, yet unscientific, approach involves estimating the cost of the land and building, computing total occupancy cost, and using that figure to determine the amount of sales needed to justify making the deal. While it is important to know these results, what a foolish way to approach such a significant risk! The cost of developing an accurate sales estimate is minuscule compared with the cost and mental and financial anguish of a failing restaurant.
Parking is critical for most restaurants and quick service food operations not located in a downtown, airport, resort area, a business district, a university campus, hospital complex, or other location that depends upon walk in or take out business. Most communities have zoning requirements that specify the number of parking spaces required to meet the code. Each food operator must evaluate his or her situation and make sure that enough parking will be available. Do not simply rely upon the zoning code; you may need more parking spaces. Otherwise, the lack of parking may place a limit on prospective sales.
12. Evaluate Site Economics and Physical Characteristics
Site economics represent the ability of a restaurant's sales and operating costs at a given location to support the cost of land, building and equipment, (or rent), while providing an acceptable profit and return on investment. There are two directions for approaching this topic. First, a careful estimate of the sales potential of a particular restaurant or quick service food operation can be used to determine an acceptable cost of land and building. Second, the economics in the marketplace, such as land and construction costs, indicate the level of sales necessary to support a specific food facility. For a unit to provide an adequate return on invested capital, its sales potential must match or exceed the site economics. More and more food companies are reevaluating their goals and objectives because their per-unit sales are insufficient to justify the current costs of land and building. Often, they must modify their operations. Sometimes the higher costs are the result of environmental requirements, over which neither the buyer nor seller has control. In other cases, the company can cut costs by redefining its goals and objectives and targeting locations that will generate higher sales, eliminating those that can no longer be economically justified in the local market. Sometimes, it is necessary to reduce the cost of the building to accommodate the higher land costs.
A final principle might be considered for chain restaurant and quick service operators regarding advertising and market saturation. My experience indicates that once a sufficient number of units have been added to the marketplace, advertising, customer acceptance, and awareness should have a positive overall impact on the sales of existing and new units. Although this works for some well-run and successful chains, it has not worked for all food operations. Lately, added competition and overbuilding in the quick service food arena have flattened or decreased the same unit sales of many, but not all, concepts.
Promotion is extremely important to the success of most food companies, but the majority of restaurants and quick service operators need to be well located before they worry about advertising gross rating points.
Unfortunately, food operators often consider application of the principles to be cumbersome, time-consuming, and costly. Instead, they apply the Tokenism Approach, which includes thinking about them, but doing little. I dare say that if we could recapture all the lost capital from restaurant and quick service food failures, we might impress them.