The Principles Of Restaurant Site Selection
Excerpts from the author’s new book highlight details that developers and restaurateurs should consider before site selection.
John C. Melaniphy

After setting up KFC’s real estate and construction operation in the late 1960s, it became obvious to me that the industry needed a set of guidelines regarding site selection. Thus, my book titled Restaurant & Fast Food Site Selection was published. It is now out of print. In the last several years, I realized that there have been so many changes in the food service industry that I wrote a new book titled The Restaurant Site Selection Guidebook. The principles discussed in this article are included in my new book. Modesty, of course, prevents me from saying that this is the best book on the subject of site selection for both restaurants and quick-service food operations (fast food’s new moniker).

There is no substitution for a good location; nor is their usually any way to resurrect a poor location. The restaurant business has an initial year failure rate of over 75 percent and a second year failure rate of approximately 66 percent. Thus, you better know what you are doing when entering the restaurant business. Also, shopping center management should know how their location stands in the hierarchy of successful restaurant locations.

As a diner, when you visit a restaurant and receive poor service or bad food, you will not go back. Thus, the food operator is on trial every day at every meal. This is usually not the case in the retail business, where if what you want is out of stock or they do not have your size, you may go back to the store at a later date. Not so in the restaurant business.

The locational principles for most restaurants and quick-service food units vary somewhat by type of location. Nevertheless, in studying them all, I have established some important principles for anyone who is thinking about operating food service facilities or adding them to your shopping center project. Think about these:

Know Your Concept and Operation

You football fans know that a pass receiver can’t run with the ball until he catches the pass. Also, a food operator can’t successfully expand unless he or she knows the operation and has the right play called. And yet, although we all know this, people start up or expand restaurants without truly knowing their operation. Unfortunately, it happens every day, usually resulting in failure.

Knowing one’s food service operation means fully understanding food and labor costs, controllable and uncontrollable expenses, along with profit. If that is not under control and the unit is not profitable, expansion can be very risky.

Ascertain Your Customer’s Profile

Even more important than in retailing, knowing one’s customer is essential to success. Not everyone is a restaurant’s customer; not even in the quick-service food business. Not all teams are equal, which results in winners and losers. Each restaurant and quick-service operator has a customer that comes to the units more often than other customers and generally spends more at the facility. It is extremely important to understand not only who the customer is, but more importantly, who is the most frequent customer?  Also, if you are planning to add restaurants to your shopping center, scout the competition. How do the restaurants compare, and why will their customers come to your new shopping center’s restaurants?

Understand Attitudes, Trends, Habits and Patterns

Consumer attitudes and trends are constantly changing. They are influenced by such variables as our ages, income, lifestyle, health, professions, aspirations, opportunities, societal trends, household composition and size, and our feeling of well-being. Most of us, for example, are very much aware of the current emphasis on health, exercise, our diet and lifestyle. Also, the growth of the Internet has dramatically changed our daily lives both at home and at work.

We are all creatures of habit. Employed persons establish a travel pattern to and from work. Although it may vary occasionally, this pattern, for the most part, is easy to identify. Parents also set up a distinguishable pattern that may involve taking the children to and from school, shopping, running household errands, exercising and participating in other recurring everyday events. The working mother’s busy and hectic pattern also can be identified and evaluated. Most shopping and food strip centers spring up to intercept all or a portion of these patterns. Retail and food facilities along the routes to major regional shopping centers hope to intercept customers. Thus, it is essential to understand the trends taking place, likely to take place, and to evaluate the patterns of people within an area.

Delineate Your Trading Area

If one understands the differences in types of locations then it is relatively easy to determine the size and shape of a trading area. Trading areas come in all shapes and sizes. They aren’t actually round or square or rectangular. Instead they usually reflect an irregular-shaped pattern, corresponding to the road or street pattern, altered by competition and the demographics of the residents of the area.

Many in the quick-service food business think that a trading area is 3 miles and restaurants think that 5 miles is the magic trade area, since both ideas have been around the food service industry for decades. In some cases, they are correct and in others they are wrong. This is also true in the shopping center industry. Many do not really know what their center’s trade area truly is. For some restaurants, the trading area can be measured in blocks, while for others the trading area may be 25 miles or more. It is extremely important to determine realistically what your trading area is by type of location, in order to avoid making mistakes in location selection.

Gather Factual Market Data

Restaurant and quick-service food operators compete for eating-out or eating and drinking dollars, usually generated by the resident population, traffic, employment, daytime working population, or some combination of these groups. Market resources include population, socioeconomic characteristics, age structure, household income, employment, eating-out expenditures, lifestyle and household size. Through an orderly procedure, you can determine the extent of the present and future market.

How often have you heard someone say, “This is a great area. There are 50,000 people within 3 miles, and everybody is buying land in this area. It’s a hot spot!  You’d better hurry up.”  Do not get caught up in the hysteria, but instead do your homework. A small amount of investigation can clearly identify if an area meets your locational and market needs. Nevertheless, land purchases occur daily that are the result of hearsay, lack of information or misinformation.

Cities are composed of homogeneous and heterogeneous areas that develop into neighborhoods because of income, social structure, employment concentrations, local schools, road patterns, transportation systems, directional growth patterns, generative facilities, and physical and psychological barriers. These elements provide the market resources necessary to support food service facilities. Market resources can be inventoried and quantified to determine the share of market that a planned restaurant or quick-service food operation can anticipate. It is possible to calculate demographics with a fairly high degree of accuracy and to compare them to customer characteristics. Also, expenditures can be estimated to determine eating-out potential. It is not the number of people in the trading area, but rather who they are and what they spend that is of paramount importance.

Accept Only Adequate Accessibility

Access occurs on three levels. First, one must have access to an area. Next, access to a particular site is essential, and lastly, good access to the unit is a must. All too often, I see that one of the needed accessibility elements is violated, and a restaurant either fails or does not do well. For example, one recent situation involved a restaurant on a major traffic artery with a median strip, preventing left hand turns. Medians are the killers of the quick-service food business. However, if that was not bad enough, traffic backed up in front of the location. The median prevented a left-hand turn in to the site and the traffic back up prevented people from both getting into and out of the location. The sales will never be there no matter how many promotions the operator has. It’s a poorly accessible location!

Identify Generative Areas

Activity is people and people are potential customers. Why do you suppose that there are so many food operators located on major streets leading to shopping centers or employment concentrations? Activity! That is the reason.

Identifying activity or generative areas is important to most segments of the restaurant business. Generative areas influence the dining actions of people and their decision making process. Generative locales include: commercial areas, shopping centers, malls, office concentrations, downtowns, industrial areas, airports, hotels/motels, hospitals, recreation complexes, amusement parks, major highway interchanges and others. The best is usually near a major mall or retail big box concentration because of the high frequency of customer visits.

Evaluate Competition

Most restaurant operators think that they are unique, and some are. However, most are not. Therefore, competition is a significant factor. One must determine it and measure its importance. Unfortunately, most people note the competition’s existence and that is about it. You should wonder why customers are going to your competitor’s units. Do you know the sales of your competitors?  You should! When looking at a new area have you ever asked yourself, “Are there too many restaurants in the area?” Sometimes there are too many and your share of the business will not be enough to be successful.

Actually, very few people in the restaurant business truly analyze competition. You should know the competitor’s sales, seating, pricing, menu, services, take out vs. eat in, items most often purchased, differences by daypart (lunch, dinner and late evening) and other elements important to individual operators. If you don’t know answers to the above, how can you determine your own success?

Recognize The Importance Of Visibility And Exposure

Visibility is the ability to be seen continuously from one or more directions. Exposure is being seen and recognized over a long period of time. For most restaurant or quick-service food operators, visibility is very important — perhaps more important than most realize. There are some upscale gourmet restaurants that are not affected by visibility, but rather by word of mouth recommendations of satisfied customers. However, they are a vast minority of food service people.

Consumers are constantly being bombarded by daily advertising and promotions by numerous media methods to influence their eating out decision making. This reinforcement plays an important role in the decision. When consumers are not reinforced, they will often forget a previous experience. Adequate visibility reinforces the consumer, especially if the location is in the pattern used by a majority of the area residents.

Exposure of a restaurant sign or place over time “cements” or reinforces the memory of previous experiences, especially if the facility is in the normal patterns of the area residents. The importance of exposure is very often overlooked.

Identify Appropriate Locations

Acceptable locations are those that meet the principles indicated or your own tested locational criteria. Examples of acceptable locational criteria include the following: types of locations, compatible demographics, ethnic characteristics, traffic arteries, trade area size, speed limits, number of moving lanes, adjacent uses, traffic flow, traffic counts, ingress, egress, visibility, competition, employment, topography and perhaps a liquor license. These characteristics can take on many dimensions. For the individual who is starting a new restaurant operation and has no locational experience, the site attributes of other similar and successful food operations can provide very important guidelines. The multi-chain operator can draw upon past experiences by analyzing their most successful units, average units and perhaps the less successful restaurants.

Another method is to examine the experiences of other operators and competitors. How have they fared? Where are their most successful units? Why are they the most successful restaurants? What is common to their locational success? Likewise, almost anyone can identify and observe unsuccessful or failing restaurants or quick-service operations and probably should avoid their locational characteristics. Studying the failures often is as useful as studying the most successful food operations.

Estimate Sales and Determine Parking Needs

To some degree, all restaurants and food service establishments are competing for the same eating-out food expenditure dollar. There are wide differences, however, between the dining expenditure of a family with children and those of a childless professional couple, or even a husband and wife dining with friends and/or business associates. Other factors can be different in breakfast, lunch and dinner expenditures or in the cost of casual versus upscale dining. Entertainment adds a significant dimension, as does special occasion dining.

Almost all food operators estimate sales in one manner or another. Often, however, they produce inaccurate results. Estimating sales is properly accomplished by evaluating all the factors that affect a restaurant or quick-service food facility’s potential. Unfortunately, sales estimates are more often computed on the “back of the envelope,” or on the building or remodeling plans. This famous, yet unscientific, approach involves estimating the cost of the land and building, computing total occupancy cost, and using that figure to determine the amount of sales needed to justify making the deal. While it is important to know these results, what a foolish way to approach such a significant risk! The cost of developing an accurate sales estimate is minuscule compared to the cost and mental anguish of a failing restaurant.

Parking is critical for most restaurants and automobile-oriented quick-service food operations. Almost all communities have zoning requirements that specify the number of parking spaces required to meet the code. Each food operator must evaluate its situation and make sure that enough parking will be available. Otherwise, the lack of parking may place a lid on prospective sales.

Evaluate Site Economics and Physical Characteristics

Site economics represent the ability of a restaurant’s sales at a given location to support the cost of land, building and equipment (or rent), while providing an acceptable profit and return on investment. There are two directions for approaching this topic. First, a careful estimate of the sales potential of a particular restaurant or quick-service food operation can be used to determine an acceptable cost of land and building. Second, the economics in the marketplace, such as land and construction costs or rents, indicate the level of sales necessary to support a specific food facility. For a unit to provide an adequate return on invested capital, its sales potential must match or exceed the site economics. More and more food companies are reevaluating their goals and objectives because their per unit sales are insufficient to justify the current costs of land and building. Often, they must modify their operations or seek more regional locations to serve a larger audience. Sometimes the higher costs are the result of environmental requirements, over which neither the buyer nor seller has control. In other cases, the company can cut costs by redefining its goals and objectives and targeting locations that will generate higher sales, eliminating those that can no longer be economically justified in the local market.

A final principle might be considered for chain restaurant and quick-service operators regarding advertising and market saturation. My experience indicates that once a sufficient number of units have been added to the marketplace, advertising, customer acceptance and awareness should have a positive overall impact on the sales of existing and new units.

Although this works for some well-run and successful chains, it has not worked for all food operations. Lately, competition and overbuilding in the quick-service food arena have flattened or decreased same-unit sales. Promotion is extremely important to the success of most food companies, but the majority of restaurants and quick-service operators need to be well located before they worry about advertising gross rating points.

Summary

Unfortunately, food operators often consider application of the principles to be cumbersome, time-consuming and costly. Instead, they apply the “Tokenism Approach” — a little information and a great deal of personal opinion. I dare say that if we could recapture all the lost capital from failures, it would provide free capital for new restaurants for several years. As the Fram Filter man used to say, “You can pay me now, or you can pay me later.”  A little money and upfront effort can avoid a major loss of thousands or even hundreds of thousands of dollars.

John Melaniphy is president of Melaniphy & Associates, a Chicago-based real estate consulting firm. His latest book, The Restaurant Site Selection Guidebook will be published later this year. John Melaniphy can be reached by e-mail at jmelaniphy@melaniphy.com.