The retail space is at an interesting cross-road in recent times. While commercial rents are falling, there’s a rapid increase in number closures at anchor stores like Sears, Toys R Us and Kmart. This climate is forcing traditional sit-down dining concepts to come up with innovative ways to disassociate their topline from being anchored to malls. One such strategic innovation that is evident off late is the focus on spin-offs and offshoot concepts, that focus on smaller real estate options.
For instance, The Cheesecake Factory announced last week that it will open the first location of its new fast-casual spin-off concept, Social Monk Asian Kitchen. The concept embraces the “fast fine” model of service where guests order at the counter and be served at their table. Such a spin-off concept would require significantly less space and size than its legacy concept, which adopts a sit-down dining model, separating it from the anchor brands in malls.
Franchisors are more focused than ever on giving franchisees flexible space options. Satellite locations, kiosks and smaller store alternatives are just a few of the ideas franchise groups. Not only do smaller store alternatives help franchisees manage costs and boost profitability, but it is an important way to promote franchise expansion amid a rapid number of mall closures. For example, Denny’s introduced a smaller unit alternative, called “The Den” in 2015. While Denny’s traditional prototype occupies 4,000 – 5,000 square feet space, The Den lowers the footprint size to 2,500 square feet. This spin-off Denny’s, traditionally a sit-down all-day breakfast concept, has allowed its franchisees to lower occupancy costs, and in turn lower the initial costs.
While lowering occupancy and initial costs sounds great, that alone is not enough. To attract more franchisees, franchisors would need to present costs in a context that resonates with potential franchisee candidates, who are increasingly more analytical and research oriented in their decision-making. One such measure, that FRANdata regularly cites as a best indicator, is the sales to initial investment ratio. In a recent study that we conducted on contextualizing initial costs, we found that the higher the sales to initial investment ratio the more able brands are to add units. So, if a brand lowers initial investment by shrinking their footprint, the predictive relationship between investment cost and franchise sales could lead to an increase in unit sales.
The ability to cut occupancy overhead is a huge advantage for franchisees, particularly in the current economic climate where there is more pressure to reduce operating costs.