Even experienced area developers can get emotional about locations, says Jeremy Behar, president and CEO of Cirrus Tenant Services, a Toronto-based company specializing in real estate negotiations for various businesses, including franchises. As a consequence, he says, "They will do what it takes to sign the deal and get it done."
Unfortunately, that can cause significant problems. A poorly performing location can sink not only that franchisee, but also hurt the franchisor, particularly a new one. And in today's market, finding good commercial sites is difficult, with rents higher than ever.
Smart franchisors have developed a number of approaches to ensure both appropriate, affordable sites and profitable, happy franchisees - not always an easy balance.
"Our biggest competition is not for customers, but for finding the right kind of location," says Ralph Kinder, director of franchise development for Baker Bros, a fast-casual upscale deli based in Dallas. "People do get emotional about sites," he agrees. Baker Bros is a heavy lunch vehicle, so franchisees think they need to be in an area with offices, a hospital, lots of weekday traffic.
But, says Kinder, "We're looking for a power center with an upscale grocery that will drive people in during the evenings or weekends. Sometimes franchisees lose sight of that. We've had to turn down sites where the franchisee was in love with them. They think it's great, but it doesn't have what we need for parking or visibility, and we know it won't be an A location," he says. "Sometimes they fall in love with a cheaper rent."
Turning down a location (and many franchisors don't retain that right) can upset the franchisee. But, Kinder says, "I would rather have someone mad at me for a few days than for 20 years."
"Franchisees do get emotional about sites," echoes Vas Lahanas, vice president of real estate for Salsarita's, a Charlotte, N.C.-based fast-casual cantina. "We take the view that these are our partners and it's a 'we' thing, and we try collectively to make the best decision." Another step Salsarita's takes is to do all the negotiation on real estate in-house, rather than leaving it to the franchisee.
"We shield the franchisee," he says. "We keep open lines of communication with what the landlord is offering, but we rarely put them in the same room. Something the landlord might say, the franchisee might take the wrong way. We do the negotiation with the landlord, but we're negotiating with the franchisee's blessing about what is to be discussed. Before a final decision is rendered, we go back to the franchisee and say, 'Is this okay, or do we do another round?'" And that, he says, takes a lot of the emotion out of the site selection process.
"Usually the best locations are that for a reason," says Brian Smith, vice president at Cirrus Tenant Services. "In every market there are A, B, C, and D locations, and a good real estate consultant or broker gives you that information. We know in each community where the good malls are. From the point of view of sales, profitability is important. A Papa Murphy's might not want a Galleria in Dallas; it might not be worth going into even if they could."
Ari Wurmann, founder and CEO of Franktitude, a new franchise with five locations in Florida, says when the company started it was hard to get real estate developers to talk to him. "Developers want a well-recognized brand," he says. "There are thousands of good concepts and few good locations."
Adds Behar, "The best sites are the most expensive, and if it's a new concept you'll pay a premium for those top sites."
Since Franktitude has a small footprint (yes, it sells hot dogs "with attitude"), the company works with a partner to license locations in food courts and airports.
And because A sites - as each franchise defines them - can be hard to find in prime franchising areas (especially for food concepts), franchisees can be tempted to grab any location that looks good.
"Whatever the brand is," says Salsarita's Lahanas, "if you're third in the marketplace nationally, real estate becomes a tough vehicle. When you're low in the marketplace you have to ask if you should really be in that location. The franchisee's desire is to get a store open. You have to be disciplined to say, 'We can't do this at this time.'"
Since Salsarita's depends heavily on the lunch trade, Lahanas seeks very specific demographics for its locations. "In a perfect world, our A location is an outparcel building on a main road at a light with 50,000 population within three miles, a daytime population of about 30,000, and traffic around 25,000 to 30,000 cars," he says.
Baker Bros looks for "upscale power centers," says Kinder. It also looks for similar fast-casual concepts like Panera Bread, Chipotle, Corner Bakery, or McAlister's Deli.
"Traffic counts don't matter as much to us," he says, "but there has to be a reason for someone to go to that center; people will not drive 5 to 10 miles out of their way. They will pass competitors to get to us, but we are not a destination restaurant. We'll pay better rent to be where the action is."
Franktitude has a different set of criteria, says Wurmann. "We pay some attention to demographics, but for us it's more important to know what other brands are there, whether in the mall or in general in the area." Preferred locations are near upscale supermarkets or other high-traffic areas. Wurmann likes to piggyback on others' research.
"We like to be close to Starbucks," he says. "We have a product that doesn't compete with them, and the best thing about them is they change the atmosphere of a location. They are company-owned, so they really do their homework before signing a store. If they sign a location, there's a reason."
Behar suggests that this is a good strategy if your business model has reasonable profitability, because of exactly what Wurmann says. Behar says a chain like Starbucks has a very high "risk quotient": "They redefine the market and push rents up," he says. Because they can do enough sales, Starbucks can deal with higher risk and close a store if it doesn't make the desired profit. "Some other tenants with their first store want a risk-free deal, so they won't get a top location," says Behar.
Garlic Jim's Famous Gourmet Pizza is a "gourmet" carryout and delivery pizza chain, that also offers sit-down service in some locations, which gives the brand two standards for sites. According to Bob Smith, vice president of franchise development, the company prefers neighborhoods over high-traffic areas because they don't need the impulse-buy consumer. And since their concept is "gourmet, right away," they need to have minimum drive times and no sitting in traffic.
No matter the criteria, the landlord still must be convinced that the franchise fits their location. Salsarita's took an interesting approach to this problem when starting up.
"Early on, we met with a large real estate developer, and we listened," says Lahanas. "We found out what he particularly likes or dislikes in a certain tenant of our size, and we based our model on that conversation and with others in his position. When we call on a particular site, we try to build a reputation that we're not going to waste time, that there will be a quick yes or no on the merits of the site."
When a concept is new, or new to an area, says Cirrus's Behar, sometimes a landlord might insist that you take a lesser location. The Papa Murphy's area developer in Texas mentioned above ran into exactly that situation. Although the franchise was well known in his home state of Idaho, Austin developers and landlords had never heard of it.
"I had a unique situation in that our first store is really struggling," says Austin area developer Doug Miller. "I didn't get a great location; not the one you want to start with. My business strategy was that in order to convince a landlord what we're about I needed to bite the bullet and show him what we could do.
"After we were open for about a month, I had him come down, and he watched people walk in, buy two pizzas, and then say, 'I'll go to the grocery store to get some stuff and be back in 10 minutes.' So we generate business for the other businesses. At that meeting, the landlord said, 'Let's get these other three leases done.' They will be home runs."
All three companies - Baker Bros, Salsarita's, and Franktitude - are interested in area developers; and when entering a new market usually work in tandem with a developer who already understands it.
Since Franktitude still is early in development phase, Wurmann is not waiting until it has franchisees signed for a given area to nail down a site. "We sign leases as soon as we find a location, even if we don't have a franchisee for that location," he says. "Then we sign a franchisee if he wants to be there. Otherwise, it's company owned."
Baker Bros takes a cooperative approach, says Kinder. "The first thing we do is work with the franchisee and commercial broker and spend four or five days in their market to see existing developments and new ones that might be a year or two away. We make sure the broker understands the kind of trade area we're looking for. Once they come up with half a dozen locations, we'll drive those and study parking, visibility, access, demographics, and then either steer them toward or away."
Garlic Jim's Bob Smith takes a similar approach: "We do an extensive real estate orientation with the broker and the franchisee so that everyone involved understands what the ideal real estate is for our use. The Broker then presents sites that meet our criteria to the franchisee. Occasionally the franchisee will see a site that they are interested in and will ask the broker to check on availability. In the end, we always verify that the site meets our requirements and must approve it before the franchisee can move forward with lease negotiations."
"The prime location for an area franchisee is a location where you make the most money, not necessarily the highest profile or the most sales," says Cirrus's Brian Smith. "As an example, Church's is not going to open a store in the top malls in the country. Their best location is a C site. They know their demographic. In 10 words or less they know their perfect customer."
Baker Bros basically takes that approach too, says Kinder. "It always comes down to the business model," he says. "For years, you could go out and build a 6,000-square-foot restaurant and they would come. Now the competition is fiercer, the economics have changed from the bottom up. You can charge only so much until the value point goes away. So you'll start seeing smaller footprints, and people trying to tweak the economic model."
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