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here is a growing wisdom among retail developers and owners that great restaurants are essential anchors of a successful retail destination.
Restaurants, both full-service and quick-service, are no longer afterthoughts in retail development and are particularly prominent in projects seeking to become the center of a community's social life — as many of the new lifestyle and town center projects aim to be.
The growing prominence of restaurants in retail destinations mirrors the growing role that restaurants play in the lives of consumers. Dining out has become an ingrained part of American culture and in many ways serves as the primary form of entertainment and social activity. In 1955, just a quarter of every food dollar was spent on restaurant dining versus nearly half today, according to the National Restaurant Association. This dramatic shift has propelled steady inflation adjusted sales growth in the industry for more than three decades.
Good Indicators
The restaurant industry has not been immune from the economic recession. In fact, 2008 was the first year on record it experienced negative inflation-adjusted growth of more than one percent. However, the National Restaurant Association expects a slight improvement in 2009.
There are several indications that the economic downturn will not impact the industry's long term growth forecasts. Some evidence indicates that consumers are still eating out at high rates, but are opting to trade down from full-service to quick-service restaurants (a phenomenon already established in retail categories). Doug Schnell, Vice President, Real Estate for Panera, agreed in an interview with PLACES that they are seeing some additional diners who would have chosen a full-service restaurant before the downturn. Estimates also confirm this phenomenon. Between 2008 and 2009, quick-service restaurants are actually forecasted to grow sales slightly despite a significant decline for full-service restaurants.
There are other indications that restaurants are becoming more appealing to consumers. A November 2008 National Restaurant Association consumer survey found that 68% of adults said restaurants offer flavors and tastes that cannot be duplicated at home. Approximately two out of three consumers said the quality of restaurant meals is better than it was two years ago and that there are now more restaurants at which they enjoy dining. Even more impressive, two out of five consumers said that eating out is now just as cost-effective as cooking at home and cleaning up.
High Stakes
The long term growth indicators for the restaurant industry only suggest that their role in retail destinations will continue to strengthen. The shift is both an opportunity and a challenge for center owners.
Traditionally, restaurants are a high volume, low margin business. Their ability to generate extremely high sales per square foot often translates into higher rents and opportunities to capture additional revenue through percentage rents above a certain threshold. The downside to restaurant tenants are the extremely high build-out costs required to open them and the heavy toll they extract on common area maintenance expenses (more cleaning, waste disposal, utilities, etc.). Local operators are also notoriously susceptible to failure.
Landlords often have to provide substantial upfront tenant allowances to get a popular restaurant concept to open. However, the costs can be recaptured through long lease terms, higher rents, and the traffic they draw to the center. The other benefit is that once a restaurant space has been built out, replacement tenants are much easier to find because the initial infrastructure expenses have been incurred.
Paul Mangiamele, President and CEO, of Salsarita's Fresh Cantina, says many restaurants in today's environment are focusing on sites in great trade areas where existing concepts are not performing well. "Taking an existing restaurant space will have a considerable amount of savings from a construction standpoint. Until the lending environment starts loosening the purse strings, this will be a tactic by many restaurant chains," he said.
Finding the Right Mix
Creating the synergies between restaurants and retailers and among the restaurants themselves is critical to maximizing a center's performance.
A good restaurant mix captures various price points and cuisines. A mix of quick-service, casual dining, and fine dining concepts is important. Depending on the size of a center, it is also important to appeal to different palates with seafood, steak, Asian, Mexican, Italian and French, among others.
Centers should also have a healthy mix of local, regional, and national concepts. Often local operators are the best sources of unique and compelling menu items and ambiance. Their flexibility makes them ideally suited to capitalize on the latest trends and to cater to local tastes. Regional and national chains are best at providing a consistent dining experience that consumers crave and appreciate. They also have deeper resources and are more likely to become stable members of the tenant mix — an important element because of how expensive it is to replace restaurants.
Retailers, historically, have not always welcomed restaurants in their midst. Jay Chambers, a noted tenant representation specialist throughout the Carolinas and the Southeast, says that attitude is now changing. REI opened a store last year in Biltmore Park Town Square, a new mixed-use lifestyle center in Asheville, North Carolina. Chambers said clauses in their lease did not allow for nearby restaurants. However, REI realized how well the synergy might be with the customer segment of a restaurant interested in nearby space and is currently negotiating an amendment to their lease to allow a particular restaurant to open at this specific location. Chambers is now seeing retailers and restaurants across the country allowing this type of change as they recognize how the dynamic between them increases traffic and sales.
Carol Gilbert, a tenant representative specializing in restaurants on the West Coast, sees a similar acceptance of the harmonies between restaurants and retailers. "Developing synergy between the people who visit the restaurant and those who shop in the stores is an obvious path to enhance revenue productivity for both," she said.
Both Gilbert and Chambers also agree that location within a center is an important factor in attracting restaurants and making them successful. Chambers says they need good road visibility, signage, and access to parking. Gilbert says here clients also want to be near book stores and movie theaters, which she says can increase sales as much as 20–25%. Being near a hospital is also a draw for restaurants because they see opportunities to meet the needs of people who often come in during non-peak hours.
For enclosed malls, one of the challenges is to use restaurants to activate the center without losing connection between the dining and shopping amenities. Restaurant pad sites can be a popular option for enclosed centers. However, the drawback is that they often fail to drive diners into the mall shops. Ideally, restaurants should be located near front entrances so that they are highly visible on the exterior and yet still connected to the common area or interior of the property.
The importance of getting the synergies right between retailers and restaurants will only heighten as the restaurant industry continues to grow and diversify. As developers and owners continue to evolve retail destinations into places to live, play, and work, so too will their need to understand the role of restaurants in people's lives.
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