Craig Dunaway, chief operating officer of Penn Station, shares the strategies he uses to help franchise owners make smart location choices.
Entrepreneurs who want to open a fast casual restaurant face rising costs that are anything but appetizing. Real estate and construction expenses, compounded by elevated interest rates and insurance, make it increasingly difficult to find and afford suitable spaces.
With 25 years at Penn Station East Coast Subs, I’ve learned that the recipe for success in this business is carefully managing costs. Although this concept sounds simple, the reality is far more nuanced, particularly in today’s challenging economy. For example, to acquire land and construct a restaurant, you could make a $2 million investment before a single meal is served. Without control over food costs, labor, and your lease terms, you risk working for your employees, suppliers, or landlord, rather than cultivating a profitable business.
Right now, the biggest challenge is to secure the right location. Every restaurant concept searches for the same highly desirable spaces—a 1,500-square-foot unit with a drive-thru at an end cap. To discover a location like this, it is necessary to work with brokers who have insight about when this ideal space could become available.
Below are three strategies I share with franchise owners to navigate these challenges.
1. Consider existing spaces instead of new builds
Franchise owners should not always consider that a new build is better. It’s often wiser to seek a highly visible location in a strip mall, where rent tends to be more predictable, and established neighboring businesses offer stability. One of our Penn Station franchise owners near Cincinnati recently faced the new-build dilemma. When the landlord raised rent, the owner explored available space rather than invest in new construction. The franchisee found a comparable, more affordable space just a few blocks away. Now, that franchise can easily maintain its customer base and avoid high construction costs. The franchisee is in a better position to manage their long-term lease costs. Further, they were able to negotiate a tenant improvement allowance from the landlord, which helped offset the franchisee’s initial investment.
2. Be flexible with space but cautious with rent
Securing prime real estate — high traffic, great visibility, and drive-thru capabilities — is not easy. Many franchisees think they need the perfect location, but that often comes with steep rental prices. I always advise our franchise owners to search for a space that stays in the range of 1,300 to 1,500 square feet with rent priced at around $20-$30 per square foot. Larger spaces incur higher labor costs for cleaning, increased utility expenses, higher insurance rates and other hidden costs, all of which magnify over time. Most importantly, larger spaces do not necessarily indicate sales will be higher. Thus, you could find that your sales volumes do not justify the cost of rent. Before you sign a lease, keep in mind a variety of financial scenarios, including worst-case, best-case, and average sales projections, to ensure a sustainable business model.
3. Adapt to changing customer preferences
The COVID-19 pandemic fundamentally altered the dynamics of the restaurant industry. At Penn Station, approximately 80% of our business shifted to off-premise, including third-party delivery, online orders and carryout. We are launching a new loyalty app with enhanced technology, designed to strengthen the one-on-one connection with every customer. If you are not focused on online orders and third-party platforms, you are at risk of losing business to competitors who are using them. The deliver and online order shift also reduces the need for expansive dine-in spaces. Restaurants no longer need large seating areas for 40 – 50 people; 20-25 seats should be sufficient for many fast casual brands with a majority of their sales coming from off premise consumption.
Fast casual franchise owners can find success in a challenging economy. The key is to focus on what drives profitability—efficiency, cost management and control, and meeting the current desires and needs of today’s customers.
