With sales reaching a record high in 2013, the restaurant industry shows no signs of slowing down despite modest employment and income growth. The outlook is quite appetizing for 2014.
The thriving restaurant industry was the focus of the most recent episode of the “Commercial Real Estate Show.” My guests and I discussed many aspects of the sector, including sales volume, leasing strategies, site location and the potential impact of Obamacare.
U.S. restaurant sales are projected to reach a record high of $660 billion this year, up 3 percent from 2012, said Hudson Riehle, senior vice president of research and knowledge at the National Restaurant Association (NRA). On a net basis in 2013, industry sales will increase by $24 billion, 4 percent of GDP.
The economy continues to recover, creating more jobs and income growth. “When a person is employed, they have less time for home meal preparation, and they have a higher income level, so when national employment moves ahead, restaurant sales follow,” Riehle said.
On a typical day, one out of every two American adults will use a food-service option, he added. About 47 percent of total food spending in America is allocated toward the restaurant industry.
With more than 70 different segments in the restaurant industry, off-premises restaurants have experienced the most rapid growth during the past 10 years, Riehle said. This segment includes take-out, delivery, drive-through and curbside pick-up options.
Fast-casual restaurants are rapidly expanding as well. “That segment has a lot of attributes of quick-service restaurants but with food offerings and décor that are more of what has been traditionally associated with casual dining,” Riehle said.
As sales continue to rise, restaurant chains are expanding. There are several factors restaurant tenants look for when scouting a new location, including rent affordability and demographics, said Steven Zimmerman, CEO of Restaurant Realty Company. “You can’t compromise on location. I’ve seen mediocre restaurants survive because of a strong location,” Zimmerman added.
When opening a new restaurant concept or location, undercapitalization is one of the biggest mistakes a tenant can make, Zimmerman said. “I’ve seen restaurateurs project what their cash flow needs are without building in the proper worst-case scenario numbers. Several restaurants have closed because their initial startup capital didn’t meet their criteria. They ran in the negative and ate up their working capital; then they didn’t have enough money down the road to keep it running.”
When signing leases, it’s important for tenants and landlords to involve a restaurant construction expert, said Jon Neville, partner at Arnall, Golden, Gregory. “Restaurant retail is a lot more involved than traditional retail,” he said. “There are construction aspects to every lease or deal that usually are overlooked or ignored. Those can lead to a lot of expenses people don’t plan on.”
Retail leases may include exclusive rights for tenants to sell a certain product in the center. “When it comes to exclusives in leases, those can hurt restaurants more than help sometimes,” Neville said. “You want to have other restaurants around you in a big shopping center because you want it to be a destination where people come to eat. If you have exclusives that are too broad, it might block out other good quality restaurants that might bring you foot traffic.”
Heartburn from Obamacare
The Affordable Care Act will affect the restaurant industry in a big way and operators are wrangling with the costs and how to handle this complex law.
“With the Obamacare employer mandate set to go into effect on Jan. 1, 2015, it’s key for restaurant owners to understand and explore their options,” said Michelle Neblett, director of labor and workforce policy at the NRA. “It’s difficult to determine how much it will cost and, for a diverse industry like ours, what the impacts are going to be. The NRA has been involved for a long time in advocating the industry as part of the debate so that the government takes into consideration our unique workforce and characteristics of our industry.”
The NRA offers several tools, including webinars and educational sessions, to help restaurateurs understand the impact of Obamacare on their business. “For large employers, there are extensive compliance costs in reporting and tracking that they must do,” Neblett added. “Truly understanding what the costs are and what you must do to comply is going to take some time.”
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