Franchises Eye Conversions to Ease Real Estate Pressures

September 14th, 2018 by Ritwik Donde

Part of the secret to success is finding the right location. When it comes to opening a business, the three most important decisions many franchise partners will make are “location, location and location.” With a signed franchise agreement, a pocket full of financing and a solid plan ready to go, waiting to get started for a year or more can be extremely frustrating.

How do you find the best location for your business? Co-tenants, nearby competition and construction requirements are all aspects of why where a business is located matters. Shopping malls, which have historically, served as anchors for a high number of retail franchises are being reimagined, due to widening middle-income gap, lease renewals rolling over and even the rise of e-commerce. Additionally, the gap between A-grade and B- and C-grade centers is widening.[1]

While there is no one-size-fits-all approach, an increasing number of franchisors are taking innovative steps to help lessen the likelihood of selecting an undesirable space for their franchisees. Take Black Bear Diners for example. In this year, the company is solely focusing on conversions to add their system. It plans to add 21 to 22 of its mountain-lodge-themed restaurants a year, and nearly all these new locations will be conversions. This eases the site selection burden as the company is targeting distressed restaurant real estate out there. According to Anita Adams, the chief financial officer of the company, “With no lack of distressed restaurant real estate out there with 5,000 to 6,000 square feet per box, it’s really a great opportunity for Black Bear Diner.” [2]

Black Bear Diners’ play for capturing “strong” sites is similar to one that by Freshii targeting approximately 900 distressed Subway locations.[3] Even McDonald’s is looking to gain from Subway’s losses.[4] This is smart strategy from these franchisors, considering that Subway franchisees are already locked into leases with their respective landlords, and as such a brand conversion would likely mean access to a readily retrofittable space.

Another concept that is looking at similar site selection strategy is Del Frisco’s. Earlier this year, it acquired Connecticut-based Barteca Restaurant Group, which owns Barcelona Wine Bar and Bartaco brands. At the time of the acquisition, Norman Abdallah, CEO of Del Frisco’s, said, “Del Frisco’s has proven attractive to landlords for the upscale consumers it draws, and the company plans to leverage that with Bartaco and Barcelona.”[5]

Earlier in 2016, the bankruptcy of buffet giant Buffets LLC, which owned Old Country Buffet and HomeTown Buffet, has been a boon for Golden Corral. Golden Corral was quick to negotiate many of the sites left empty by Buffets, the operator of Ryan’s, Old Country Buffet and HomeTown Buffet, in regions like California, Connecticut, Texas, Alabama, and Kentucky.[6] Its Senior VP of Franchise Development said in 2016, “The sizes of the sites, the locations, they’ve already met another brand’s standards for a good buffet site. The way the building is designed and laid out, it gives us the opportunity to get ahead of the competition.”[7]

It is not just the large sit-down franchises that looking at conversions. Sonic Drive-In, as far back as 2015, began ramping up its growth through conversions, with a view than repurposed sites save costs for its operators and create a faster construction cycle. The company had said that conversions had been especially useful in the expensive real estate markets of California and the Northeast.[8]

These types of innovative strategies would be crucial to brick-and-mortar franchises in the coming near-term. This is because vacancy rates both in retail and industrial real estate sector are showing a declining trend and are projected to amount to 11.4% and 6.7% respectively as of third quarter of 2019. Despite the growing trend for retailers to shift their focus to ecommerce, retail rents in many cities globally remain sky high.

[1] CBRE 2018 U.S. Real Estate Market Outlook

[2] Nation’s Restaurant News

[3] QSR Magazine

[4] Business Insider

[5] Nation’s Restaurant News

[6] Consumerist.com

[7] Nation’s Restaurant News

[8][8] Sonic Drive-In Company Press Release

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