Niche properties

Catering to Consumers

Restaurants Cook Up New Concepts as Americans Seek Dining Variety.

Disenchanted with hamburgers and french fries that have dominated quick-service and casual restaurant menus for decades, consumers now demand more flavor and variety when they go out to eat. But there's a catch: They want it fast.

What drives these current consumer preferences? Lack of time is an overriding factor. As Americans juggle work and family responsibilities, they don't have the luxury to linger over long meals, especially breakfast and lunch. Value is another consideration. In today's economy, consumers can't afford to patronize high-end restaurants frequently, but they still expect quality when they go out to eat.

Also, “the population is better educated from a health standpoint,” says David B. Orkin, president of RAS Brokerage in Feasterville, Pa. Americans now realize that daily consumption of burgers and fries has detrimental effects on their waistlines and hearts.

Restaurants consistently evolve to meet new customer demands. In response to this desire for healthy food, speed, and choice, the food-service industry developed its hottest current trends — fast-casual restaurants, ethnic diversity in menus, and multibranded facilities. Commercial real estate professionals can find unique opportunities in the restaurant real estate market by monitoring these concepts. To better understand how to capitalize on these trends, look at what has taken the restaurant industry by storm.

Healthy Fast Food

Enter fast casual, the restaurant industry's hottest current concept. Now more than ever, people need a quick and healthy alternative to fast food, which this phenomenon delivers.

Due to its growing popularity, almost every major restaurant company is staking out a seat in the fast-casual arena. McDonald's owns Chipotle, famous for its stuffed burritos, and Jack in the Box recently purchased Qdoba Mexican Grill. In June 2002, Wendy's International acquired Baja Fresh, a Mexican fast-casual chain; it also controls 45 percent ownership of Cafe Express, a Texas-based self-service concept. In fact, “[Quick-service restaurants] like Popeye's now describe themselves as fast casual because they want to jump on the bandwagon,” says David C. Mayo, CCIM, principal of Vector Realty Advisors in Louisville, Ky.

Despite its popularity, fast casual's precise definition is elusive. “Everybody says they are doing it, but no one knows exactly what it is,” says E. David Harrison, president of EDH Associates in Washington, D.C., and a member of the Council of International Restaurant Real Estate Brokers. However, most experts agree with Mayo's description: “Fast casual is the ability to obtain a full-fledged menu in a very short amount of time at a reasonable price.”

The most successful brands package made-to-order menu items in an upscale atmosphere. The food must be prepared quickly, usually within seven minutes of placing the order. “Any longer than that, the customer doesn't want to go [to the restaurant], but they realize it takes that long to make quality,” Harrison says.

Although check averages — around $7 to $10 per meal — are slightly higher than at quick-service restaurants, or QSRs, today's adults are willing to spend a few extra dollars for the level of quality they perceive fast-casual restaurants offer. “They have attracted a consumer basically fed up with QSRs,” says Paul G. Fetscher, CCIM, president of New York-based Great American Brokerage. “It's no longer a price game; now it's a quality and value game.”

Adults aren't the only consumers looking for fast-food alternatives. A trickle-down effect is occurring: Parents influencing their children's tastes are creating a new generation of consumers who expect and enjoy fresh food choices. Young professionals also are attracted to the concept. “It's cool and expensive-looking without being overdone,” Mayo says.

What factors make fast casual so appealing? The most important aspect of fast casual is the customer's belief that he is being good to his body by foregoing the burger and fries in favor of a veggie sandwich or salad. Also, as most brands have counter service or open kitchens, “the visual aspect of food service,” or the customer's ability to see her meal being prepared from fresh ingredients is an enticing factor, says Penelope Cheroff, president of the Atlanta-based Cheroff Group, which specializes in restaurant and retail brokerage. The meal's presentation is attractive as well. Patrons eating in fast-casual restaurants enjoy their food on china with silverware, rather than a Styrofoam box and plastic utensils, says Gordon Matthews, a site selection specialist with Griffin Properties in Southfield, Mich.

The choice to eat in or take out also appeals to customers. In fact, carryout is an important element of the fast-casual concept. “You can make more money without having to seat people,” says Rick DeKam, CCIM, a principal with Midwest Realty Group in Portage, Mich. Most fast-casual brands have developed special carryout bags and containers to differentiate their items from what customers receive from QSR drive-throughs, Mayo says.

To take advantage of this trend commercial real estate professionals must learn fast- casual restaurants' site selection requirements. “Do research about the concept and then provide [the owners] with everything needed to analyze a site,” Mayo advises. Many fast-casual restaurants provide their concept, target audience, and site selection requirements on their Web sites, making the process easier than ever.

For example, Chipotle prefers 2,400-square-foot urban storefronts, shopping center end caps and pads, or freestanding buildings with 25 feet minimum frontage and patio seating, according to the company's Web site. In fact, since they don't require drive-through access, most fast-casual restaurants can take end-cap locations and are more willing to go inline than traditional QSRs, several experts note. They seek daytime population generators such as offices and big-box retailers and are most successful near heavily traveled locations, Mayo says. Also, despite seeming contradictory, fast-casual restaurants prefer to have one or two indirect competitors nearby to draw customers, a practice called clustering, Matthews says.

Spicing Up Life

Despite the upswing of fast-casual restaurants, the perception of healthy food as bland and unfulfilling persists, and many consumers are unwilling to purchase it at a restaurant unless they think they are getting some bang for their buck. Thus, restaurateurs are looking beyond the borders to infuse their healthy offerings with exotic new flavors.

“People are starved for new tastes,” says Robert A. Zache, CCIM, president of Central Place Real Estate in Middleton, Wis. Instead of balking at unfamiliar flavors, customers now expect these options. “Americans are more sophisticated in their dining preferences,” Mayo says. “They are tired of bland, boring food.”

Due to this expectation, restaurants are embracing ethnic flavors to retain their customers. “Customers are looking for diversity, something different,” Orkin says. If they don't find it at a particular restaurant, they will go somewhere else.

Also, the rise of celebrity chefs has made ethnic flavors more accessible, Matthews says. “Emeril Lagasse has made food more fun than anyone else,” Fetscher agrees. As younger generations grow up with such exposure, they are more accepting of new flavors. “Kids especially are more comfortable with ethnic foods; they want to try new things,” says Warren Bruno, a broker specializing in restaurants with Vantosh Gordon Real Estate in Atlanta.

Move Over Spaghetti and Meatballs

Consumer acceptance of these exotic flavors has begot a variety of new restaurants. Instead of the basic Chinese restaurants and Mexican and Italian chains — many of which have become so Americanized that they have lost their authenticity — restaurant entrepreneurs are embracing a diverse collection of ethnic cuisines.

In fact, if a Washington, D.C., Italian restaurant served spaghetti and meatballs, customers probably wouldn't patronize it, Harrison says. “If people go out they want to eat something they wouldn't make at home,” he explains.

The country's expanding foreign-born population is primarily responsible for this attention to authenticity. Ethnic groups bring their food with them as they move to the United States and spread out, Cheroff says. For example, Detroit now has the largest Arab population outside of the Middle East, which has spawned a plethora of local Middle Eastern restaurants, says Scott Griffin, president of Griffin Properties and Griffin Restaurant Group in Southfield, Mich.

Immigrants' influence is “educating consumers about other types of foods,” says William Hugron, CCIM, CIPS, CPM, managing director of the Charles Dunn Co. in Irvine, Calif. Thus, restaurants are forced to focus more on flavor rather than presentation. Whereas Mexican restaurants previously could overshadow a lackluster menu with flashy décor, strong margaritas, and mariachi bands, they now must deliver authentic food items as well to remain competitive.

Large restaurant companies quickly are revamping their menus to meet this new reality. For example, Olive Garden, owned by Darden Restaurants, rolled out a new menu in mid-2002 offering spaghetti delle rocca, tomato and mozzarella caprese, and other specialties from 20 different regions throughout Italy.

More Choices Under One Roof

Yet QSRs still dominate the scene, despite the recent growth of fast-casual and ethnic restaurants. Many fast-food companies capitalize on consumers' desire for more variety by multibranding several concepts under one roof.

Although this idea is not groundbreaking — Baskin-Robbins and other QSRs were cobranding in the mid-1990s — combining more than two brands is a relatively new phenomenon. The main goal is to combine “concepts that peak at different [times of the day],” Fetscher says. For instance, by multibranding its three restaurants — Dunkin' Donuts, Togo's, and Baskin-Robbins — Allied Domecq can offer breakfast, lunch, dinner, and dessert options in one store, thus sustaining day-long traffic.

Another goal is to appeal to families or groups trying to satisfy a variety of appetites in one stop. Multibranded facilities “try to create more critical mass,” Cheroff says. Yum! Brands, owner of KFC, Long John Silver's, Pizza Hut, Taco Bell, and A&W All-American Food, exemplifies this concept with its ability to offer chicken, seafood, pizza, Mexican, and hamburger options in multiple scenarios. The brands should be “complementary, not competitive,” Griffin says. “They should drive traffic to each other.”

Restaurant companies multibrand to reap economies of scale such as lower land, construction, equipment, and labor costs. Multibranding also is “a function of real estate constraints,” Orkin says. “There just isn't enough real estate to build free-standing stores.” To this effect, he sees more multibranded facilities on pods in shopping centers.

Although fast-food brands work best in these setups, fast-casual restaurants also can be multibranded if they have different menus, so as not to cannibalize each other's sales, Zache says. Also, Orkin is noticing an offshoot of multibranding: Although their restaurants aren't feasible for the traditional concept, casual restaurant companies are placing two or three of their brands in a row, thus capitalizing on shared infrastructure and liquor license costs, he says. He terms such arrangements “restaurant parks.”

The Broker's Role

A lucrative way to take advantage of these trends and break into the restaurant brokerage industry is to “hook up with franchisees and make new territories for them,” Hugron says. Fetscher agrees: “Figure out [what restaurant] should come to your market and get on the bandwagon. Better yet, get out in front of it.” Although fast-casual restaurants are experiencing strong growth, fast-food chains, especially those that can be multibranded, still dominate the franchise industry. Only one fast-casual concept, Panera Bread, broke into the top 100 franchises in Entrepreneur magazine's 2003 ranking (see “Top Restaurant Franchises” chart).

A growing challenge for real estate professionals is that many new owners and franchisees are investors, not restaurateurs. “People don't understand the [restaurant] business and don't realize they won't make the profits to pay for a site,” Harrison says. “Do you just find the site and leave it up to the owner to figure out how to pay for it?” In such cases, a broker's real estate expertise is invaluable. “Most restaurateurs don't know the real estate aspect,” and it's up to the broker to provide help with leases and zoning, as well as “find clever ways to get [a restaurant] into the site,” he continues.

To set themselves apart, brokers should learn about restaurant building requirements, such as fire walls, grease traps, and waste removal. Also, many municipalities require restaurants to obtain conditional-use permits. “Brokers should be well informed of the process to assist a [restaurant] with obtaining a conditional-use permit,” Hugron says.

And Mayo has a final word of wisdom to consider before embarking on restaurant brokerage: “Actually eat at a restaurant before working with it.”

Gretchen Pienta

William T. Adams, CCIM, CRB, is owner of Adams Realtors in Atlanta. Contact him at 404.688.1222 or [email protected] Pienta is associate editor of Commercial Investment Real Estate.

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