How a Real Estate Strategy May Help Operators Survive a Downturn

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Struggling against numerous challenges, multi-unit operators may want to consider leveraging their real estate.

Operators are facing changes brought on by industry disruptors like delivery, along with rapidly-changing consumer behavior and preferences. The rise in the popularity of eatertainment can be attributed to a shift in how today’s consumer wants to experience nightlife, for example.

Selling units, closing others, and renegotiating the leases for some locations may be a winning strategy against slowed growth, economic shifts, and bankruptcy.

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Prepare for the Worst

Chain and multi-unit, multi-concept operators who own their real estate may find themselves in a position to survive slowing business and economic downturn.

Author Kevin Alexander makes the prediction that the restaurant industry is “on the cusp of a historic correction” in his book Burn the Ice: The American Culinary Revolution and its End. Alexander makes a compelling case, arguing that the past decade or so of industry growth must come to an end.

The ice at the start of the shift (explosive growth) is nearing its time to be burned (industry correction), in Alexander’s experienced opinion.

Operators have been competing against the ease and convenience of delivery for years now. We’ve addressed this industry disruptor on multiple occasions. Luring tech-savvy and tech-dependent guests out of the comfort of their homes has proven challenging for some time now.

Many operators, from the single-unit independent to the national chain, have been forced to look at their operations with fresh eyes. This has led to revamped menus, redesigns and renovations, more targeted and aggressive employee recruitment, improved team training, and even entering the delivery space.

Check this out: The Asset Protection Strategy Every Owner Needs to Know

Real estate may be another crucial component in surviving a correction in what was once immense growth for this industry.

The Power of Real Estate

A few weeks back, Modern Restaurant Management published a column written by Michael Jerbich, a principal at commercial real estate firm A&G Realty Partners. Titled “‘Portfolio Power’—Why Maximizing Real Estate Should be on the Menu for Restaurants,”1 Jerbich says in his column that operators often overlook the real estate they own when looking to leverage advantages.

It may come across as odd to view a multi-unit or multi-concept’s portfolio through the lens of real estate. It turns out it’s not that strange.

Fast-casual giant McDonald’s is an extreme example, although, as has been widely reported, fast-casual has been taking market share away from casual dining. Chase Purdy, a business reporter for Quartz who specializes in the food industry, food tech and biotech, reported in 20172 that McDonald’s has “become more a real estate company than a restaurant chain.”

In 2016, as reported by Purdy in April of 2017, the McDonald’s real estate portfolio was worth more than $30 billion. The fast-casual chain only operates about 15 percent of its locations—approximately 85 percent is operated by franchisees. McDonald’s owns the actual property a McDonald’s is located upon and leases it to franchisees for healthy sums. They also keep around 82 percent of the revenue generated by franchisee-operated units, compared to just 16 percent of the revenue from company-owned stores.

According to Wall Street Survivor3, McDonald’s capitalized on the 2008 recession by snapping up the land on which it operates, along with some of the buildings, at favorable prices. In 2015, the fast-casual behemoth owned 5,400 restaurants (15 percent) of the 36,000 that it operated worldwide, but they owned 45 percent of the land and 70 percent of the buildings in its portfolio.

Check this out: Negotiate a Mid-term Rent Reduction for Your Commercial Lease

The lesson here is the power of real estate in this industry, along with the importance of brand reputation. If McDonald’s hadn’t built a brand worthy of franchising decades ago, they wouldn’t own tens of billions of dollars in real estate today. They built a restaurant empire by focusing on the fundamentals (and an approach to business that can be described as savvy and even cutthroat): consistency, training, customer service, marketing, and visibility.

The Power of Data

Jerbich says that an effective real estate-leveraging strategy is about more than just negotiating to pay less rent. That’s certainly a part of this strategy but it goes deeper. Operators seeking to renegotiate leases “need to be armed with more facts.”

This includes knowing about demographic shifts in the operator’s market, traffic shift data, and knowing comparable rent in the area before negotiations take place. Some banks, commercial real estate firms, and resources like LoopNet can provide commercial rent data.

Closing and selling a location that has been underperforming is another option for multi-unit operators who own their real estate. This move can free up much-needed capital that can be re-invested into top-performing locations, says Jerbich.

However, the prevailing opinion is that real estate investments get more valuable over time. It may be a better move, says Jerbich, to close a slowed unit and lease the space to another tenant. This can be viewed multiple ways: holding onto real estate while creating a new revenue stream, renting to a potential competitor, or an entry into franchising if the concept is strong.

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Operators will need to evaluate the situation and create the strategy that works best for them.

Always Be Sellable

As we’ve reported before, it’s important for operators to run their bars and restaurants as if they’re always sellable. This is true for chains of different sizes, multi-unit and multi-concept operators, and single-unit operators. If a bar or restaurant is run in this fashion, it means it’s operating at the highest level, a level that’s attractive to potential buyers.

So, should operators be concerned about a possible “historic correction” looming on the horizon? Pundits have been warning about and arguing over a possible recession or slowed economy for several months now. It’s prudent for operators to review their data, research demographic changes in their markets, investigate commercial rent in their areas in which they operate, and prepare for slowed growth.

Each operator’s situation is different, and part of ownership and leadership is taking the time to create a strategy to survive lean times. This strategy may include renegotiating leases, selling the business, or closing and renting to a new tenant. In the meantime, committing to making an operation sellable can have positive effects, including improved brand reputation, more engaged team members and guests, better cashflow, and, of course, a better sale price.

Check this out: Why Your Bar Should Always be Sellable, Even if it's Not for Sale

Whatever is decided, Jerbich warns against one potentially fatal strategy: doing nothing. If an industry decline of historic proportions, economic downturn, or recession is coming, operators can’t stick their heads in the sand, they need to have a plan in place—their families, employees, employees’ families, and communities depend on it.

Resources

1. Modern Restaurant Management. (2019, August). ‘Portfolio Power’—Why Maximizing Real Estate Should be on the Menu for Restaurants.

2. Quartz. (2017, April). McDonald’s isn’t just a fast-food chain—it’s a brilliant $30 billion real-estate company.

3. Wall Street Survivor. (2015, October). McDonald’s Real Estate: How They Really Make Their Money.

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