Restaurants and retail complement one another like a fine red wine and a juicy steak. Just ask any mall owner who has watched droves of stuffed customers migrating from Cheesecake Factory throughout the rest of the center after a meal. Moderately priced, full-service restaurants (which comprise 20 percent of the casual dining market) are in-demand anchors now that department store sales are slumping.
The full-service food industry, including retail-anchored restaurants, is expected to increase 4.6 percent from 2003, to $157.9 billion this year, according to the National Restaurant Association. Compare that to department stores' sliding market share — from 3.5 percent of all retail sales compared to 6 percent a decade ago — and you see why leasing agents are fired up about food.
With people working longer hours and more women with full-time jobs, dining out has become part of the American lifestyle, says William Blair & Co. analyst Sharon Zackfia. The most loyal casual dining customers are aged 40 to 57, a booming demographic that spends the most per capita at restaurants.
Top-tier restaurants “bring in 8,000 to 10,000 people per week, which not only adds significant sales to the center, but significant foot traffic,” says Herky Pollock, executive vice president at CB Richard Ellis in Pittsburgh, noting that 80 percent of his business is spent representing sit-down restaurant companies. “Sears may bring in that many people, but the difference is that restaurants are a destination. Customers will shop, eat, then go shopping again,” he says. According to reports cited by Pollock, shoppers stay 20 percent longer if the retail property has good dining options.
One newly renovated, 1.1 million-square-foot shopping center in northern California increased traffic between 6 p.m. and 11 p.m. after expanding its sit-down restaurant promenade. “Before the expansion, we received 20 percent of the volume during that time,” says a representative for the shopping center. “Now we're getting between 33 percent and 35 percent.” Restaurants make up about 13 percent of total sales, she adds.
“Diners will travel far — and are willing to wait — to be seated,” says Wendy Liebmann, president, WSL Strategic Retail, a New York-based consulting firm.
And palates are changing. Spicier food is more popular. Restaurants serving Chinese, Indian and Italian foods are attracting bigger crowds than those that serve all-American cuisine, says Lee Peterson, executive director of brand strategy at WD Partners, a design and engineering firm in Columbus, Ohio.
Just as retail centers combine retail and entertainment to broaden the shoppers' options, restaurateurs benefit from the exposure to attract new diners. “Sit-down chain restaurants and shopping centers have the same ideas in mind,” says Britt Beemer, chairman of America's Research Group, a marketing strategy firm in Charleston, S.C. “They've got a variety of price points, multi-course meals and tons of selection for the shopper,” so the marriage between the two entities work, he says.
“You eat more than you buy shoes, so sit-down restaurants are still our most important tenants,” says Nicholas Lillo, director of leasing specialty restaurants/entertainment at Simon Property Group, adding that Simon's Mall of America added 11 more sit-down restaurants since the property was conceived 12 years ago. “Restaurants can make anywhere between $10,000 and $45,000 per seat,” says Lillo. “That's significant.”
Everyone's dream tenant is Cheesecake Factory, which can lure more than 3,000 diners a day, make up to $1,000 in sales per square foot and average about $11 million annually. But with only 16 new Cheesecake Factory restaurants opening this year (for a total of 92 locations nationwide), not every mall developer will land a lease. So they're filling space with an assortment of sit-down restaurants, including BRIO Tuscan Grille, Brinker International's Maggiano's Little Italy concept, and P.F. Chang's China Bistro (each with entrées no more than $22) that pull in hungry shoppers and increase traffic volume.
P.F. Chang's restaurants, which average $800 per square foot in sales, are gaining ground on Cheesecake. The chain, which has 97 restaurants now, anticipates operating as many as 200 by 2010. The company is also opening a smaller prototype in Wichita, Kan., next year, which could launch a new avenue of growth. The smaller prototype will be about 5,800 to 6,000 square feet compared with the original prototype's 7,000 square feet, and costs roughly $1 million less on a fully capitalized basis. “P.F. Chang's is getting an earlier crack at the best mall sites while enjoying even more favorable rents and landlord contributions,” Zackfia says. Management plans to open 17 or 18 bistros per year. All restaurants are leased.
For developers with properties ranging from 600,000 to 800,000 square feet and targeting the lower-to-mid income demographic, mid-volume restaurants such as Red Lobster, Olive Garden, Chili's and T.G.I.Friday's are top choices, says Richard Strauss, vice president of leasing at Taubman Centers.
But the next generation of full-service restaurants use a more sophisticated approach, offering wider selections of alcoholic beverages and exotic menus. Blue Martini, a sushi bar, and Red Star Tavern, a Portland, Ore.-inspired American restaurant, are prime examples. Seasons 52, Darden Restaurants' contemporary new concept, is described as an upscale Houston's with a more eclectic menu. The Orlando restaurant currently brings in more than $5 million annually, with 20 percent of sales from alcohol. The next Seasons 52 is slated to open in June in West Palm Beach, Fla.
Not all restaurants are going gangbusters. California Pizza Kitchen, with 50 percent of its locations in or near major malls, is likely to close some restaurants and open fewer. New management recently reduced openings from mid-teen growth rates to less than 10 percent. For the third quarter of 2003, consumer traffic was down for the fourth quarter in a row. California Pizza Kitchen has lost relevance in terms of product offering, price and value, says JMP Securities analyst Dean Haskell.
Another poor performer is the Mexican casual segment. Brinker International's On The Border units are being remodeled to the tune of $150,000 per unit in an attempt to reverse decreasing traffic.
Applebee's and Ruby Tuesday exited the space after unsuccessful attempts at creating national brands, and the two largest U.S. casual dining Mexican brands — Chevys and Chi Chi's — are currently in Chapter 11 bankruptcy. “We highly doubt a national Mexican chain will emerge out of the casual dining sector at all,” says Prudential Financial analyst Larry Miller. Consumers are unwilling to pay high prices for food such as rice and beans that they view as being inexpensive and food that is widely available at other restaurants, he says.
Meanwhile, Asian casual dining is a hotbed for expanding concepts. The competitive landscape is fragmented, with moms and pops running nearly all the 35,000 Asian restaurants across the United States. One new contender is Brinker's Big Bowl Asian Kitchen, which opened two new units in 2003. Paul Lee's Chinese Kitchen is being co-developed as a joint venture between Outback Steakhouse and P.F. Chang's founder Paul Fleming. The chain is expected to serve only dinner, with an emphasis on takeout orders. The first three locations are expected to open this summer. And Yum! Brands' concept, SensAsian — created by Martin Yan of “Yan Can Cook” — currently has only one location in Irvine, Calif. But William Blair & Co.'s Zackfia says Yum! Brands' deep pockets are capable of financing a major expansion of the concept.
Placing the Order
Landing the top food titles is no easy feat, developers say. “Some restaurants who have great leverage demand specific demographics,” before leasing a property, says Jeffrey Bayer, president of Bayer Properties in Birmingham, Ala., which leases to a variety of restaurants, including Fleming's Restaurant, Johnny Rockets and Tavern on the Summit. “They want to be in a retail center that reaches several hundred thousand people within a five-mile radius, with an average household income of at least $75,000.”
Restaurants rarely stray from prototypes, so many request freestanding buildings or pads attached to the retail center, says Bob Michaels, president and COO at General Growth Properties. “If this is a restaurant that appeals to a broad market, and if they are a tremendous draw for the properties, you'll accommodate them,” says Michaels. General Growth's dining list includes Morton's, Longhi's and California Pizza Kitchen.
Unlike traditional retail anchors that are given raw tenant space by the developer, restaurant owners build their own properties and pay for construction, utilities and supplies (such as major appliances, extra ventilation, grease traps and electrical outlets). If the retail center is new, sit-down restaurants are usually the first to be placed, and are given ground leases and monthly payment cycles, which is normal for any retailer, Lillo says.
Although the cost of constructing these properties vary by prototype, the investments on the restaurateur's end are significant. Depending on the structure of the retail center and the size of the restaurant (which can range between 3,000 square feet and 14,000 square feet), “it can be more expensive to build a restaurant on a pad than an independent restaurant,” says Lillo. “These sit-down restaurants want to be in a shopping center environment, so they make big financial commitments,” he says. Including building and equipment and pre-opening expenses, P.F. Chang's invests about $2.7 million in cash for each new unit. An average investment of $5.2 million is required to open a new Maggiano's.
Depending on the terms of the agreement, most developers will offer tenant allowances to help with finances. That is the only major investment made by the developer. “It's common for successful restaurants to receive between $50 and $100 per square foot in tenant allowances,” Lillo says, adding that retail anchors would generally have no need for such a deal. Other demands include: highly visibility, easily accessible parking, patio space access, and lighting and signage for late-night dining. “These elements are paramount for the restaurants' success.” Zackfia adds that, when possible, P. F. Chang's management prefers to forego landlord contributions in favor of lower percentage rents.
Restaurateurs not only want the ideal location and setting, but they're looking to match profiles and agendas with the developers. “Our restaurants are in high volume malls with $450 in sales per foot,” says William B. Baumhauer, president and CEO of Champps Restaurant & Bar, which earns around $475 in sales per square foot. “Retail developments would have to be newer, either lifestyle centers or mixed-used structures,” says Baumhauer. “And never inside,” he says. “We always have a freestanding store or pad.”
Other sit-down favorites, such as Maggiano's, request to be near office buildings or universities. “We offer banquet service, so a lot of our business happens during lunch and early evening hours,” says Louis Adams, spokesman for Brinker International.
Another common goal for developers and restaurateurs is keeping the synergy alive among competing venues. Most major shopping centers have an average of at least three sit-down restaurants and finding the right space for each can be tricky, says Joe Boehm, senior vice-president of retail leasing at Forest City Enterprises.
At the recently opened Short Pump Town Center in Richmond, Va., Boehm arranged his tenants as carefully as a society hostess arranging placecards for a dinner party. Restaurants have strong opinions about which tenants they should be close to, and which tenants should be on the other side of the center. Shoppers may see an Ann Taylor Loft and California Pizza Kitchen together, he says. Another common pair is P.F. Chang's and BRIO Tuscan Grille, “because the two ethnic concepts have a similar customer base and they work well off each other. After all, says Boehm, “we want to drive their sales up just as much as they do.”
Mall owners need new anchors to fill the void made by failing department stores. Eateries such as the Cheesecake Factory are popular. But with only 16 new Cheesecake restaurants planned next year, most malls have to find alternatives.
Champps, Maggiano's, P.F. Chang's, Macaroni Grill and BRIO Tuscan Grille are popular and looking for new locations. And up-and-comers Seasons 52, Blue Martini and Red Star Tavern are ripe for expansion.
At Easton Town Center, sources say, combined sales for restaurants, such as Smith & Wollensky, and BRIO Tuscan Grille, surpass the retail tenants, including Nordstrom and Virgin Megastore.
Full-service restaurants, many that are retail-anchored, will increase 4.6 percent from 2003, to $157.9 billion. Industry analysts expect sales to reach $1.2 billion a day this year. Sales for 2005 will reach $440.1 billion, according to the National Restaurant Association.
Carraba's, Outback Average Biggest Checks
|Joe's Crab Shack||$15.50|
|California Pizza Kitchen||$11.50|
|Source: company reports|
Cheesecake Factory is capable of at least doubling its current size in the U.S. marketplace, according to Piper Jaffray analyst Peter Oakes. The chain has no presence in several major league sports franchise communities, including Cincinnati, Detroit, Nashville, Pittsburgh, St. Louis and Salt Lake City. “Given its impressive consumer appeal, we're confident that Cheesecake can expand into these and other communities,” Oakes says.
Cheesecake Factory Units Make Almost Double Nearest Competitor, P.F. Chang's
|Chain||Units||Average Sq. Ft.||Seats||Annual Sales ($millions)|
|Joe's Crab Shack||138||8,000||215||$3.10|
|California Pizza Kitchen||135||5,000||150||$2.90|
|Source: company reports; for latest fiscal year.|