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Transcript

Rent is a big deal for anyone, but it's an even bigger deal for the restaurant industry than you probably already realize. All restaurants, regardless of if they have 3 Michelin stars or just serve coffee, have three major categories of expenses, rent, labor, and food. Well, restaurants can own their facilities. It's not the norm. And even if they do, it's highly unlikely that they're going to own those facilities without a mortgage. So this video is going to apply to 95% plus of restaurants. So why is rent so important for restaurant owners? Basically, it boils down to this basic dilemma. If you spend as little on rent as possible, you might. That with a bad location, and if you're in a bad location, you won't be able to generate sales. And of course, if you can't generate sales, you're not going to be in business very long. On the flip side, if you spend a ton of money on right, you might get a great location, but even though your sales now might be high, they might not be high enough to pay for that giant rank bill. And this is the basic dilemma all businesses face when making real estate decisions. And when you're in the restaurant business and margins are really thin and revenues can be easily impacted by things going on in the economy, it's even more important. Let's dive into an example. Ben, that's me, wants to open a burger restaurant. I'm trying to decide. Between two different locations. Location one costs $4000 a month and it's a little hidden and kind of small. Location 2 is very visible, a good size, but it's $6000 a month. Now I expect a better location to help me sell about $5000 a month. More burgers, fries, and drinks. So now I need to figure out how much margin I'm going to generate from those extra sales. If after staff and food costs, I make about 50% gross margin, which is actually slightly high for the industry, then on those extra sales I'm going to make about $2500 a month to pay for things like those extra rent costs. And since $2500 is more than two. $1000 it makes sense for me to choose the more expensive space. But say for example, the nicer space only generated an extra $3500 a month of revenue. In that case, because I'm only making an extra $17150.00 a month in gross profit, it doesn't make sense to move to that nicer space. And so even though my sales would always be higher if I went for the more expensive space, my actual profits will be lower. And this brings us to a really important lesson. While revenue definitely matters, it's gross profit and net profit that you need to be laser focused on as a restaurant owner. You're running a restaurant, not a venture backed software company, so you do actually. Have to make money. Now, another important consideration here is property taxes. In a place like Toronto, Canada, where I am now, commercial property taxes are actually three times higher than residential property taxes. And for a lot of commercial leases, it's often the tenant who's responsible for the property taxes. And so in that situation, even if the rent is really cheap, if the building you're in is very valuable, your property tax bill could still be very significant. Of course, most restaurants these days will also offer some form of takeout or delivery. And depending on what percentage are your revenues come from takeout and delivery, it can really sway your real estate decisions if you do a lot of takeout. Delivery, you don't really need to worry about curb appeal or how big the space is because people aren't dining in and you don't need people to just wander in off the street. Plus, if you have to pay 30% of your revenue as a fee to these platforms, you need to be even more laser focused on getting the cheapest real estate possible. So what's a restaurant owner or an aspiring restaurant owner to do? You have a few options now. Real estate is one big area where working with the franchise partner can be really helpful. If the brand has a good track record and have experienced real estate and development teams, they're likely going to be able to help you quite a bit in terms of choosing a location. Oftentimes they already have locations chosen or they even own the locations themselves. And so you don't even have to worry about exactly where to put your restaurant. The flip side of working with a franchiser, of course, is that you're gonna have to pay your percentage of your revenues in perpetuity to them in exchange for that and other services that they provide. And that's in addition to the initial fee that you'll have to pay. But considering how critical those real estate decisions can be to the success of your restaurant, it can still make a lot of sense to work with the franchise partner. If you're opening an independent restaurant or you're working with a franchise or that doesn't have that much experience, you're going to have to do a lot more of the leg. Check yourself now, if possible, when you're doing due diligence, don't just take a landlord's word for something. Actually go out there, see for yourself, see what the area is like, see what foot traffic's like, all of that good stuff. And after you've gathered some of that data, then it's time to do the math that I talked about earlier. You'll do your best to calculate what an average check size is, how many extra customers you think will come in because of a nicer location, and then ultimately how much extra margin you're going to generate. And if that number is bigger than the additional rent, then you should go for the nicer location. I will say that you should add a significant buffer to your numbers because once you sign a lease, that number is fixed. But revenues. Easily go up and down, and while you can potentially reduce staffing costs, potentially reduce food costs, you have no flexibility on rent once that lease is signed. So if things take a turn and your rents too expensive, you're stuck. And now you know why rent costs are so uniquely important for restaurant owners. Make sure to subscribe from our Restaurant and Quick Service Focus contact.