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HOW TO THINK ABOUT RESTAURANT REAL ESTATE IN AN ERA OF DELIVERY

During his visit to Chicago for the National Restaurant Association Show, Subway’s vice president of development, James Walker, toured several of his chain’s local stores.

He quickly found that foliage had covered up some of the stores’ signs. So by the afternoon, Walker had purchased a pair of shears to take care of the problem.

“The spring has created some beautiful foliage, covering up my beautiful signs,” Walker said at the Show this week. “I went from a vice president of Subway in the morning to an arborist by 1 p.m.”

Walker is a huge believer in the power of signage, and he stressed the importance of good visibility during a session on real estate. He noted the story of one Subway operator who has six signs in all directions. That operator’s unit volumes are much higher than average.

“Have as much signage as allowed by law,” Walker said. “The more sign the better.”

And if the landlord doesn’t allow signs, find a sign company to make banners and pennants that can get customers’ attention. “I’m sure there are about 1,000 sign companies here (at the Show) willing to take your business,” Walker said.

Signs are a simple but important mechanism to drive success at a location, one of many things for operators to consider as they expand.

The top consideration, Walker said, is long-term profitability.

“It’s not about being profitable in year one,” he said. “It’s about being profitable for the entire period of your commitment.”

Delivery

Delivery is a big issue that operators need to consider in their real estate decisions.

Walker believes that delivery could ultimately shift from something that generates additional sales to something that replaces existing sales, and restaurants need to be ready for it when picking real estate.

“Delivery is here,” he said. “It is the future. Take care of the guests in your restaurants because those are higher-quality sales. But as delivery grows, more of your customers will want to get their food that way, and it’ll be less incremental.”

Thus, perhaps restaurants will need smaller locations with more parking for delivery drivers. In any event, Walker said, choose locations that can have spaces for the delivery drivers to park when they’re picking up food.

“Do we need restaurants to be as big?” he said. “Do you need parking spaces for delivery drivers? You need to be thinking about this. This is the new norm for us.”

Closures

Sometimes restaurants have to close. That’s especially true in a legacy brand such as Subway, which has closed more than 1,000 locations the past two years and is expected to close more this year as it shifts to a business model focused on unit economics.

Walker told attendees that operators need to “be honest” about a closure, and do what’s best for their business. He noted that restaurants close for all kinds of reasons, and that he once closed a profitable location because the casino it was located in redeveloped and bought out the lease.

“Make a thorough decision. Be honest, especially in a mature concept,” he said. “There’s a reason to close your restaurant and move it three blocks down. If it’s healthier for your business, close the restaurant.”

Traffic

Make sure the location has enough of the customers your business is targeting to support the concept. If your concept targets millennials, go where the millennials are. If it’s a lunch-focused restaurant like Subway, make sure there is lunch traffic.

And it’s not just traffic around the restaurant. “It’s how traffic flows to your restaurant,” he said. Is it going away from the location at lunchtime?

Subway will drive to a proposed location from all angles, taking video the entire time. “We go back to the office ad play it back, because we miss things we didn’t get during driving,” he said.

Lease negotiations

Walker said that newer operators especially should get help negotiating leases, because they can be complex.

Don’t solve the landlord’s problems, he said. “They’re good at what they do. Their job is to maximize the value of their real estate. Your job is to make as much money as you can during the time of your lease,” Walker said.

Be wary of tenant improvement allowances in which a landlord will spend to retrofit a concept into a space. The landlord will get those allowances back, and then some. “It’s a double-edged sword,” he said.

And be wary of common area maintenance—or CAM—charges. Make sure that the lease charges for “leasable” space and not “leased” space. Paying those charges based on leased space could end up forcing an operator to pay higher charges if the development isn’t fully leased out.

And, Walker said, make sure the landlord takes care of the building.

“If your neighbors have chipping paint and fading signs, it isn’t going to do much for your brand,” he said.

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