Each month, Site Optimizer will discuss industry trends — most importantly, leasing issues — with experts in the retail real estate industry. This month, we spoke with Chuck Fallon, the president for North America at Burger King Corp., who explains how the home of the Whopper has been able to keep growing despite, or possibly partly because of, the bad market.
It turns out that consumers may not like to spend their cash these days, but they do still love their burgers. Burger King, the number two hamburger chain in the country behind industry leader McDonald's Corp., in February reported that in its fiscal second quarter, same-store sale rose 2.9 percent worldwide and 1.9 percent in the U.S. and Canada. That sales growth has helped allow the company to continue to grow, even as competitors have been forced to shutter stores.
Site Optimizer: Burger King is rapidly closing in on 12,000 restaurants in operation. How close are you to that goal and when do you expect to reach it?
Fallon: We're within a breath of it. We're at about 11,800 today (globally). If we keep along the pace we've been going, we could be close to that 12,000 mark by the end of our fiscal year, which is June 30.
SO: What challenges are you facing right now in terms of the real estate environment?
Fallon: It depends on your perspective. Real estate is available. It's actually more available today than it was two years ago. Franchisees like to buy real estate. Two years ago it was very hard to find real estate you could purchase. Quality sites are good too. The biggest issue we're dealing with on a global basis is developer delays. Big developments are slow in coming because of all the economic issues we're dealing with. Access to funding is also a big question in many people's minds. Generally speaking, around the world, our franchisees are generally larger entities that have more access to capital. In the U.S., we've got a lot of smaller franchisees. To the extent that our franchisees have historical relationships (with lenders), access to capital has not been a significant issue for them. The other thing that's interestingly happened--there's been a lot of franchisees re-bidding construction projects. Labor costs on construction projects have come down.
SO: Have you had to cut back on development in the U.S. or would you say you're in a growth phase right now?
Fallon: We expect to spend about $100 million in our company portfolio in North America this year which is up probably 15 percent from a year ago. We're hoping to be able to do that and then some again next year. We already have projects in the queue. We continue to keep our foot on the gas here and we have the capital to do it and we like the returns. We're full speed ahead.
SO: Have you been able to capitalize on the downturn in the market through rent reductions, better lease terms or better sites?
Fallon: Absolutely. We haven't been shy on proposing to landlords that some of the unit economics are thin in certain places. We are a somewhat mature brand. We have properties with long-term leases already that are below market. To the extent that we are off-market or have a location that is somewhat less profitable, we're absolutely having those discussions with landlords. It depends on the quality of the site, the history with the landlords, but, generally speaking, we're experiencing positive benefits from those conversations.
SO: Has the recession changed the way you approach landlords or changed the way you look for new sites?
Fallon: Certainly the economic stress has impacted a lot of retailers. Luckily we've been less affected. That's certainly something that folks look at. We're just starting to see the fruits of our labor of having really gone on a development initiative from about two and a half years ago. We weren't building a lot of restaurants three years ago. It takes time to get landlords and developers ... to know you're for real, to get brokers to engage in a market with you. We're starting to get the phone calls. I think it's allowed us to be a little more selective in what we're going after. It's allowed us to be a little bit more demanding in terms of our own teams and the kind of quality sites we're looking at.
SO: Burger King has begun buying and converting some locations that were once occupied by other brands. How receptive have landlords been to your overtures on those sites?
Fallon: My biggest hope is that more landlords will know that we're poised to do that because, I've got to tell you, when a competitive concept in a particular market or a franchisee of a competitive concept ends up at renewal … and the landlord knows us and knows that we're interested, they're more than delighted to be engaged with us. This is a 20-year lease. They sure as heck want to pitch their wagon to someone who looks like they have the stamina to make it through this environment. The nice part about it is they're fast. You don't have to worry about permitting. You can go from negotiation to opening in six months or something like that. It's typically an 18 to 24 month process.
SO: The company just opened its first Whopper Bar, a concept with a more limited menu that occupies less square footage, in Orlando, Fla. How many locations do you plan to open?
Fallon: On a global basis, I think we're hoping to have a half a dozen or so by the end of the calendar year. Domestically, I'd like to do that too. We'll move as fast as we humanly can to get that done. The biggest litmus test is going to be: How does this one perform?