By Chris Tripoli
Selecting the right location for your restaurant is as important as creating the concept, developing the menu or designing the restaurant. In fact, it may well be more important, because location is the most permanent thing about a restaurant.
You can modify your concept, change the menu, redesign the interior, redirect the marketing and even replace the management if you want to. You cannot, however, easily change the location of your restaurant. You better get it right from the start.
In this installment of So You Want to Open a Restaurant, I present the fundamentals of choosing a good location. It is a complex process, one that the big chains study carefully. While you may not have the benefit of a skilled site-selection team on your payroll, by applying the following information and a little street smarts, you can sidestep a bad address.
DEFINE YOUR TARGET MARKET
To select a good location, one must first know the target audience the restaurant is designed to attract. Simply asked, “Who is your customer?”
Do you really know? Many restaurateurs think they do, but often their personal enthusiasm for their concept overwhelms common sense. We sometimes tend to overestimate the mass appeal of what we see as a “dream concept.” This delusion leads to a misperception that your customer base is much broader than reality would dictate. It’s a vicious cycle, since in the attempt to appeal to this broad demographic, the concept becomes diluted from the original intent. Remember that a restaurant concept can seldom be “all things to all people.”
It is important to understand not only your broad customer base, but also the profile of who you believe will become your most frequent customers. Knowing that frequent customer and his or her dining, work and shopping habits will help identify “trade areas,” which reflect the demographics you require for long-term success.
LEARN YOUR TRADING AREA DYNAMICS
Trading areas don’t appear on a map in perfect circles. They come in all shapes and sizes. Most reflect an irregular shape, altered by physical and psychological barriers as well as the demographics of the residents and employees in the area. In a zoning-free city like Houston, being able to plot out your trading area is extremely critical. There is little room for blind luck.
Therefore you must recognize the structure of the marketplace within the trade area. Every city and neighborhood has a structure. In addition to physical and psychological barriers (e.g. inside The Loop/outside The Loop) and socioeconomic characteristics, the commercial and industrial concentrations, types of employment, age of residents, income, shopping habits and other factors determine the structure of a marketplace.
LOOK BEYOND THE NUMBERS
When searching for the right location, it is important to look beyond the population numbers typically provided by a leasing agent or real estate broker. Apply all your resources, including local newspaper articles, conversations with business owners in the area and your own power of observation. While you may also review computer-generated data on population size, number of households, age and income distribution and traffic counts within a given area, such information — even if accurate — is not enough.
For example, knowing the traffic count alone is only part of the story. Knowing why the traffic is there, what time of day is busiest and where it is coming from and going to should be your ultimate goal. Consider that breakfast and lunch business is usually related to employment in the area. Thus, it is necessary to recognize company size, type, location and number of employees. The time permitted for lunch, existing commissaries in employment concentrations, food delivery offerings, food trucks and other means of servicing the lunch market are all important bits of information.
Drive the designated areas to look at the neighborhoods. Watch the traffic patterns. Observe the shoppers. Talk with the current retailers and other foodservice operators to help you develop your own feel for the market.
It is important to visit the target areas during different trade times (lunch hour, weekday evenings and weekends). Make note of the major activity generators within the area and how that activity best supports the needs of your restaurant. This same information will help you later, when you have to develop promotional activities — i.e. whether you need a special fast-lunch menu, “early bird specials” at supper or a “kids eat free” night.
Activity translates to people, and these people are your potential customers. Examples of key activity generators are commercial developments, shopping centers and major malls, office buildings, schools, hotels, hospitals, recreation complexes and amusement parks, cinemas and major roadway interchanges.
All of the above factors are important because people are creatures of habit and tend to follow certain patterns each day. Observe your prospective location at various times over a period of weeks. It will become easier to predict the patterns of your potential customers. Wise restaurant operators want to locate within the existing travel patterns of a majority of people in an area. This permits a greater likelihood of intercepting customers without requiring them to alter their habits or change their patterns. People resist change, so it is much better for you to locate yourself within their existing patterns.
Remember that the most important element in this research is not finding how many people reside or work within the area, but rather who these people are.
READ PART 3 OF THIS SIX-PART SERIES ON OPENING A RESTAURANT IN OUR JUNE-JULY EDITION.
IDENTIFY YOUR COMPETITORS
It is important to identify the existing competition and measure each competitor’s importance to your target market, both before and when you plan to enter the market. Will you enter a market that is already (or soon will be) oversaturated with your concept? Does your concept have the ability to win a significant share of their customers? Is the market growing at a substantial enough rate to justify your investment? This is particularly important if you can only take a minor share away from the competition’s loyal customer base.
Speaking of loyalty: Don’t underestimate the loyalty of customers to restaurants that have been in the market for years. And don’t think those competitors won’t take some action to keep that customer base once they learn you are invading their turf.
On the other hand, if you find a trading area that doesn’t have any restaurant like yours, it doesn’t guarantee your restaurant will be a slam dunk. I know of one full-service dining concept that entered a market totally void of any casual chain restaurants. There was only one independent, which had been there for years. The owner preparing to enter the market was thinking that his new concept would be a no-brainer. He hung on for two years and then disappeared. Even though the demographics looked good, there was a reason that only one upper-end casual dining restaurant existed in the entire trading area. It was because when the residents wanted an evening dining experience, the first thing they did was drive into town.
It is not uncommon for the residents of some suburban bedroom communities and small towns to have an “escape mentality” when it comes to a nice evening out. This is referred to as psychographics. And this true story illustrates the importance of looking beyond the numbers and into the factors surrounding those numbers.
Fast food is the market segment that first taught us the importance of the magnet site-selection method, more commonly known as the cluster effect. Fast-food operators saw that the most successful burger locations were the ones next to fast-food Mexican, pizza, chicken and sandwich restaurants. Clusters draw customers like a magnet to certain locations. This is the same strategy that retail developers use to create shopping malls. Casual and upscale restaurant concepts have learned that they are more successful when located within the same market area. You can never perform too much due diligence. Don’t settle without knowing what your target market does and where it goes.
KNOW THE COMPETITION
Most restaurant operators can easily learn the type and number of other restaurants within the immediate trade area. But is that enough?
You should know the competitor’s sales, seating capacities, menu price ranges, service levels and significant features. Observing the trading area during the different times of the day will help in determining this, as will visits with landlords and purveyors and reviewing liquor tax records. Eventually you will add up all of these factors in order to determine your estimated sales.
Estimating sales can be a difficult process. An owner must be sure to review each variable based on how it will affect sales. Then review each on how it can influence profitability. Finally apply each variable to each line of a pro-forma restaurant P&L (profit-and-loss statement).
Remember, a conservative upfront effort to forecast your restaurant’s performance can prevent the eventual loss of thousands or even hundreds of thousands of dollars. Emily Durham, president of the Houston-based realty firm Restaurant Connections, tells her clients to prepare their financial projections completely and accurately. A landlord’s most common first questions are about the proposed restaurant’s financial feasibility.
Rent may vary depending on the particular location, but normally averages between 6 percent and 8 percent of revenue.
How much (if any) tenant improvement funding the landlord will contribute toward the construction costs depends largely on the viability of the restaurant’s financial.
STEP BY STEP
So you have a site in mind that you like. What do you do to more accurately gauge the viability of the location? Begin with these steps:
IDENTIFY SITE CHARACTERISTICS.
These include the total area, grade level (does the parking lot flood when it rains?), soil conditions and existing improvements.
INVESTIGATE THE VISIBILITY.
Any sight obstructions (e.g. trees, buildings, billboards)? Check visibility from both directions, as well as “practical” visibility, as discussed earlier, and freeway visibility (if applicable).
WHAT ABOUT ACCESSIBILITY?
This includes ingress and egress turning ability; location on proper side of street (going-to-work side of street in morning and going-home side at night); any traffic control (signs); freeway access; and congestion potential.
TAKE NOTE OF TRAFFIC.
Here is where daily count information is valuable, including primary and secondary street activity during breakfast, lunch and dinner hours. Also take into consideration the posted speed limits, where commercial arteries are located and the number of traffic lanes of the thoroughfares surrounding your unit.
ARE THERE ANY ACTIVITY GENERATORS?
These include shopping activity, community centers (schools, churches, etc.), office buildings, gyms, hotels and other significant people-gathering places.
ANALYZE THE COMPETITION.
You need to plot the straight-line distances from your competitors’ sites to your location, as well as your position to them relative to traffic movement during various day parts, e.g., breakfast, lunch and dinner.
ARE THERE ZONING ORDINANCES?
Are there any nuances of zoning that might affect your business? For example, do you want a used-car dealership next door? Depending on your concept it could be a good, bad or neutral thing.
Are there any reciprocal parking arrangements, shared driveways or other rights conferred on third parties to have access to your property?
WHAT ARE THE SITE REQUIREMENTS?
These include parking, landscaping and paving, which can have a great deal of influence on the cost of construction or improvement.
WHAT ARE THE SIGNAGE RESTRICTIONS?
There will be requirements and restrictions, due to both local laws and tenant covenants. Also consider requirements and restrictions on temporary signage, such as posters and banners.
HEED THE BIG THREE
Once a general location has been identified, it is essential to select the site within that location that most benefits your operation. Some locations may offer free-standing sites on pads in front of a shopping center or other “activity generators” such as cinemas and large retail chains (e.g. Walmart and Home Depot). Others may offer in-line lease spaces only. Both can work well or become disastrous if the particular site doesn’t offer enough of the “big three”: visibility, accessibility and parking.
Visibility in this instance refers to a location’s ability to be seen and recognized. Good visibility must create clear opportunity for the impulse decision-maker. This is particularly critical for fast-food operators. In the case of fast food, when the decision to eat may not have been predetermined, visibility has to be practical. It won’t do you a lot of good if the driver sees you only after he has passed the exit to your location. So, “practical visibility” means you are viable because you are visible.
Full-service restaurants also need good visibility. Even though your regular guests may know how to find you, all concepts rely on new business to offset normal population shifts out of a trading area. For a new concept or an established concept trying to attract new business, the principle of “out of site, out of mind” applies. That bargain price on the site around the corner from Main Street may be a real estate deal, but it could be a restaurant killer.
Accessibility occurs at three levels. The first is easy access to the general location, such as the shopping center parking lot. Second, access to parking at your particular site is critical. Finally, you must have direct access from the car to the front door. Stop signs, curb cuts, easy parking and ramped sidewalks facilitate ease of ingress and egress. Reputation or promotion rarely overcomes poor access, and new concepts are particularly vulnerable.
Parking is often overlooked when all other factors seem positive. Certain cities have parking-to-seating ratios that may seem unnecessary or overkill. But I have been amazed at how some fast-casual operators open a 50-seat restaurant with just five nearby parking spaces. Or they may choose a spot in a strip center with 50 spaces, but on either side of the restaurant are a big Tex-Mex chain unit and a large fitness center. When counting the number of parking spaces, be sure to count only the ones that will be available during your peak hours.
Before committing to a location be certain you have allowed sufficient time to check on the many other details that can cause trouble if overlooked. Such areas of concern are parking requirements, signage restrictions, landscaping minimums, utility availability, noise and lighting ordinances, plus restrictions placed on liquor and building permits.
By following these general principles and seeking qualified expert assistance, you can hedge against possibly becoming another restaurant placed in a misjudged location. The last thing any restaurateur wants to do is put a good place in a bad place.