CHAPTER
6

Choosing a Location

In This Chapter

• Finding the right site for your restaurant
• Leveraging your concept: destination and traffic
• How important is plenty of convenient parking?
• Can you make a profit in this space?
• How your monthly rent stabilizes cash flow

Like so many aspects of starting and running a restaurant, finding the right location is part art and part business. Finding the best site for your concept and market requires a lot of subtle factors coming together. At the same time, it requires unemotional analysis, math, and spreadsheet skills.

We’re going to look at the relationship between restaurant concepts and destination, and we’ll show you how to avoid common mistakes and how to find a site that charges affordable rent. In addition, we’ll discuss the importance of parking space.

Then we’ll help you do the math to understand the relationship between rent, square footage, seat numbers, and average check per customer. You’ll learn how to estimate your profit in a given space, and the conditions you need to make the profit flow in that space.

Find a Site Relevant to Your Market and Concept First

There’s an order to finding a location, and it doesn’t begin with location. It begins with concept and market. Don’t start with an emotional attachment to a location and space. Falling in love with a building shouldn’t be the beginning of your plan to start a restaurant. Your concept will determine the best location for your restaurant, and affect the amount of rent you’ll pay.

Concept

Defining your market and concept is the first step in starting a restaurant. Once that relationship has been evaluated, a restaurateur looks at location. The guiding question is, “Am I bringing the right restaurant to the right vicinity?”

This next level, analyzing the location, relies on a balance of factors that relate to your concept and how well-defined it is. Building a concept to back-fit into an existing space is a different and less credible model.

There’s a reason we stress having a strong concept that’s related to your market—because it can make the location part of the equation and become a stable factor that will benefit your bottom line.

The Relationship Between Concept, Location, and Rent

Your concept plays a big role in how people will find your restaurant. We call this destination vs. capture.

DEFINITION

In restaurant terms, destination means that people will leave their homes deliberately to visit your restaurant. Capture refers to attracting people who happen to be walking or driving by.

If your restaurant is truly compelling, it’s destination-worthy. Folks will seek you out, even in the rain. A strongly defined concept can be leveraged: customers will travel to experience your menu, style, and reputation. (And they’ll set out for your restaurant knowing exactly what they want to eat.) The good news is that with a strong concept, you don’t have to be located in the higher-rent districts in town. A strong concept can equate to paying lower rent.

A lot of people get this wrong. Restaurateurs who have a strong concept feel they need to be located on Main Street. But actually, that usually isn’t the case. They’d be better off a block or two away, where rents are lower. Away from the main drag, they might be able to find a free-standing building or more interesting architecture. Parking is probably more easily accessible there, too.

But take caution: a location too far on the outskirts can be out of sight and out of mind. One of those “We always forget about that place. Next time.” Remember, today there’s so much noise out there on the internet and social media that it’s not easy to get people’s attention. It’s not like the old days when everyone in town saw the ad you put in the local paper.

The less-defined your concept, the more you need to be in a place of high traffic. Suppose your restaurant is a friendly, casual American tavern. That’s the kind of restaurant that wants a central downtown corner—a location where people will fall in the door. Note that you’ll pay more in rent, but you’ll have greater exposure and capture more hungry passersby circling the block, looking for a place to restore themselves with food and drink.

SMART MOVE

When you’re looking at potential sites, consider your audience and the concentration of dining options in that area. Walk around; go into restaurants; look at their menus, food, and prices; and see what kind of business they’re doing.

Your concept and location will also affect your overhead and staffing. A destination restaurant needs an investment in a good communication and reservation system. For the less-defined concept on Main Street, your focus will be on service flow—getting your customers in and out.

So what it really comes down to, what you really must think about, is how much value a location will have for your concept.

Genre and Location

Let’s look at some restaurant concepts and think about the best place for those restaurants to be located. A steakhouse is an expensive restaurant with a limited menu. It speaks of power and indulgence. Steakhouses are also one of the few businesses left where the customers may still have expense accounts. Who are your customers? They’ll be mostly business people and executives—and some regular folks blowing the lock off their wallet to celebrate a special occasion.

What’s the best location for a steakhouse? Morton’s The Steakhouse locates its restaurants in the heart of cities. Many are ensconced within the solid steel and glass structures that are home to the biggest names in international business. In Chicago, Morton’s markets itself as being on the “Gold Coast” and close to many upscale hotels.

Now imagine you’re opening a restaurant that will feature lots of salads and light, healthy food. It’s a menu that appeals to women. You might look for a Main Street location near shopping, a space with an atrium and natural light that will draw the ladies who lunch and dine, according to market research.

POTENTIAL PITFALL

Thinking about paying $70 to $80 a square foot to rent space near upscale shopping? That’s not a draw for your dinner customers. Your hours aren’t in alignment and the streets are likely to be deserted at night.

Students and young urban up-and-comers prefer a raw edge to their dining experience. New music trends and contemporary ideas about organic farming and eating local foods are important to them. A traditional steakhouse in this market would be too stiff and old school. On the other hand, in a bustling midtown area filled with business, a gritty Soho-style café might not have the sense of power or energy required to make a statement. It’s about sizing up the idea to the target audience.

How Important Is Parking?

It might surprise you to hear that parking isn’t a make-or-break for a restaurant. If the thought of having to find parking dissuades your guests from coming to your restaurant, you don’t hold enough of their interest. When Jody opened Lolita, a dark, sexy tequila bar and restaurant still going strong in Boston, the concept was compelling enough to make customers figure out the parking. The Lolita experience—dark, loud, with upscale Mexican street food—created such an opiate of good feelings, customers had to come back. They still are.

If you’re opening a family restaurant, parking is more of an issue. SUV-driving customers unload caravans of children, adults, strollers, toys, and travel packs. They’ll need convenient parking to do that.

POTENTIAL PITFALL

Be aware of perceived parking issues, but don’t let that put the brakes on settling on a location that works for your restaurant concept in more important ways. People always complain about parking, but they always find a spot.

Parking accessibility is not the same as lack of parking. We all know plenty of bustling Main Streets with on-street parking that sucks. However, customers know it, and they know where the municipal parking lots are, and the side streets where parking is free. That’s the sport of it. Many people have no issue with paying a meter to park. Parking meters that accept debit cards are plentiful nowadays, but lots of folks still keep a bag of quarters in the glove compartment just in case.

Ethnic restaurants can be destinations. Think about a steaming hot bowl of pho, the herb-filled Vietnamese rice noodle soup. When people get the craving, they’re willing to drive through gritty urban streets or to a strip mall in desolate outskirts to get it. They won’t give up on parking, even if they have to circle the block to find a free space. People will deal with the lack of convenient parking to eat what they’re craving.

Valet Parking

Valet parking is cultural. It’s common on the West Coast, but not as common on the East Coast. If your restaurant is on the East Coast and you’re the only place in your area that has valet parking, it’s likely to make your guests uncomfortable even if you offer it for free—which you should if no one else in your area provides it.

A valet charge can rub customers the wrong way. They’ll dwell on it and hold it against your restaurant. Restaurateurs often hire a valet service, but we don’t recommend it. The service is just going to charge you more for hiring the same kid most people would hire to work for tips.

Instead, hire your own valet, a staff member who becomes an ambassador for your restaurant. He’ll greet people as they pull up in their cars. His headphones keep him in touch with the hostess desk. If someone without a reservation pulls up, the valet can immediately let the guest know if there’s a table or a seat at the bar where he can order dinner or have a drink while he waits. It’s hospitable, and it keeps customers flowing in.

Can Your Concept Make Money in This Space?

There’s an important equation that can help you evaluate your location and whether your restaurant model will work there.

As you remember, you’re aiming for a 20 percent profit margin. That means you’ll make 20 cents for every dollar in sales. Never forget how slim the margin is in the restaurant business.

Let’s do a little back-of-the-envelope calculation. First, we’re going to gather some numbers about your proposed restaurant location and do some simple math. We’ll walk you through each part:

1. Total square footage

2. Back-of-the-house square footage

3. Dining room square footage

4. Number of seats in the dining room

5. Average check per seat

6. Monthly rent

These figures come together in a formula that will help you run the numbers on various scenarios and see if they’ll work to create a profitable restaurant.

Let’s start with square footage. When you look at a possible space for your restaurant, keep in mind that typically a third of the total square footage is allocated to the back of the house that will run the restaurant.

DEFINITION

The back of the house (BOH) includes the kitchen, prep areas, storage, receiving, office, and restrooms in the restaurant.

Subtract one third from the total square footage to estimate the square footage of your dining area(s).

How many seats will fit into your dining room? The number of seats a restaurant has is determined by the type of restaurant it is. The square footage range for a sit-down restaurant is 12 to 15 square feet per seat. That rises to 20 square feet per customer for fine dining. Banquet restaurants are economical, fitting a lot more people at 10 square feet per seat. (That’s why they’re so popular today—they save landlords space and make customers feel cozy or intimate.)

The average check per seat is an important number. To estimate the average check per customer of your future restaurant, role-play ordering with your family and friends. Hand them your sample menu and ask them to pretend to order a meal as they would if they were in your restaurant. About 8 to 10 people will give you a good sense, but place your guests in the moment by telling them the occasion, such as it’s lunch, dinner, dinner with family, dinner on a date, or girls’ night out.

Try to mix it up to get the best data, and you’ll come up with a realistic idea of the average check. Your estimated average check per customer might be $30 to $40, more or less, depending on your concept.

We’ll talk more about triple net (NNN) in Chapter 7, when we get into the nitty-gritty of negotiating a lease.

DEFINITION

Triple net (NNN) means the tenant will be solely responsible for all the costs associated with the space being rented above and beyond the base rent. The original three item categories that made up this title were net real estate taxes, net building insurance, and net common area maintenance (CAM).

Breakeven

Now we’re going to figure out the breakeven, or the point where your expenses are covered and your profits begin. You need to establish the bare minimum sales threshold. You also need your fixed overhead numbers—the expenses that aren’t relative to sales, such as rent, insurance, and key salaried staff such as the general manager and the chef. These are the fixed costs you carry whether you’re open or not.

Then build a mock schedule based on the minimum number of staff needed to adequately serve guests in a style consistent with the concept. For example, a coffee shop might only have a counter person, server, cook, and dishwasher. A trendy café likely needs a host, but on slow nights the manager can double. The café needs a bartender and servers, but on slow nights they can get by without a busser or runner.

Cost out the mock schedule and add in the elements that are fixed—the costs associated with owning the business even if a hurricane closed your restaurant for a week.

Fixed Costs: Overhead

Since we know payroll is 30 to 35 percent of sales, and we already are spending $2,450 in salaried positions, we’re projecting that $16,000 in sales per week is our breakeven number.

This leaves $3,150 for staff. That’s only $450 per day if you’re open 7 days. Waiters average about $7 to $9 per hour (in our neck of the woods). Even on a slow night, you’ll need two waiters on 7-hour shifts, which is $120 per day, plus a 12 percent benefit multiplier, which adds up to $135.

DEFINITION

A benefit multiplier is the factor you multiply the labor schedule total by to arrive at a good estimate for the total payroll liability, including taxes, worker’s compensation, insurance, and tips.

This leaves $300 per day for the kitchen, with cooks making around $80 to $125 per day, and dishwashers $80 per day. You’re at your minimum. The manager will also have to greet people, answer the phone, and pitch in—but can’t tend bar too, so now you have to go above the payroll threshold and add another $100 per day for a bartender to staff your restaurant minimally.

Next, we add the minimum salaried staff expenses.

Now we’ll look at variable expenses. We know that overhead should be 20 percent of sales. At $16,000 per week, that gives us $3,200 for overhead. We need to subtract our fixed overhead weekly costs of rent and insurance ($2,875). That leaves us with only $325 for variable costs such as linens, credit card charges, phone bills, and printing. You can see that when your sales are lower, the overhead cannot be covered by the aspired-to 20 percent because it can be devoured by these types of expenses.

So let’s try sales at $16,000 per week. Fixed overhead is $5,325. Overhead is $16,000 multiplied by 20 percent ($3,200), less rent and insurance ($2,875) and $325 per week for variable costs such as linens, credit card charges, phone bills, and printing.

Now we’ll see if our $16,000 breakeven figure is correct. We’ll add up our weekly costs of goods—our food and liquor expenses—with labor and overhead. Our costs of goods will be higher when we’re using this minimum model because of waste and spoilage. Overhead represents our ($2,875 fixed costs plus our $2,000 non-fixed minimum).

Minimum Expenses to Reach Breakeven

Breakeven at $16,000 in sales per week is achievable.

If you have 75 seats in a site that costs $10,000 a month in rent and your average check per seat is $40, you’ll need to fill an average of 400 seats per week to break even. To be in the model of a 20 percent profit, you’ll need to fill 825 seats per week. Ask yourself if that’s a reasonable number of guests to expect. Think about the flow of guests throughout the day, evening, and week. Think about turnover. At suburban restaurants, weeknights can be “soft,” meaning they attract fewer guests and have lower sales. But on weekends, the restaurants are packed at lunch and tables have at least two seatings a night.

To make a 20 percent profit according to this scenario, your restaurant will have to do $33,000 in sales per week.

Now imagine your restaurant is a small Mexican place where the average check per person is $20 and, based on your rent, you need $20,000 in sales per month to break even. Your place is 3,500 square feet, and after allocating one third for the back of the house, you have room for 65 seats. At an average of $20 per check, it’s really going to be tough to get beyond the breakeven point. This is the reality that makes it really difficult for the little restaurant where the food is great, but there are only a couple of seats. In that situation, the owner is going to need to maximize takeout and catering, or have a hot bar scene.

The Waterfall Effect

After the break-even point, a restaurant strives for what we call the Waterfall Effect. This is the incremental increase in profit that will help you build a cushion, which will help you survive a snowy night and will create financial success.

To help understand this dynamic, imagine two scenarios. In one, 200 people descend upon your restaurant to eat at 8 P.M. It would be hard to make money if those conditions occur nightly. To feed all those people at once, you’d have to build a big kitchen and have a big staff.

Now imagine you have a 75-seat restaurant and are turning tables three times a night. You’re making big money. All your costs—labor and overhead—are static, except for food. That’s when you’ve hit the waterfall. The waterfall is when the weekly income surpasses the fixed nature of labor and overhead, so the margin of profit is based upon the cost of product—which gets lower and better for the restaurateur because all the product is used and waste is low.

SMART MOVE

You don’t pay your cooks by the chicken. Maximize your profit by keeping kitchen staff efficient and productive.

Places with big bar scenes can create a kind of waterfall with a lot of wine and bar sales.

Restaurant sales can vary depending on the time of year for reasons such as weather or school schedules. Sales can also dip on certain days. Some restaurants are slow on Mondays and Tuesdays. Lots of restaurants try to lure people in on Mondays with half-priced bottles of wine. However, Jody’s staff discovered another way to solve the issue, which made the water (profits) pour.

Jody had a very successful restaurant that was serving dinner to an average of 600 people per night. That average reflected the super-busy weekends and slow Mondays and Tuesdays. Everyone on staff kept asking, “How do we make Monday and Tuesday better?” Everyone was throwing around lots of ideas. Then one of the guys said, “We have a two-hour wait with beepers Saturday night. Why don’t we streamline our production so we can serve more people?”

The team analyzed the menu and determined what was time-consuming to make, and how to simplify making the food by looking at what could be made ahead of time. Jody and his manager re-evaluated the labor costs, the back of the house, and the front. They added staff—hostesses, servers, and bussers—and trained them to graciously and professionally move the people and the food. Once the team implemented the efficiencies, they were able to reach 1,000 covers per night. Yes, they nearly doubled production by re-examining systems and processes. This sustained the restaurant for five more years until the lease expired.

DEFINITION

Covers refers to the number of people filling the seats in a restaurant during a shift, such as dinner. “We were slammed Thursday. We did 300 covers.”

Sometimes trying to turn Monday into Saturday isn’t worth the effort or expense. Your rent cost stays the same every day. So maximize a day such as Saturday, which is more popular with hungry customers searching for good food.

The Least You Need to Know

• Never choose a location before considering other factors. Choosing your location follows defining your concept and market.
• A strongly defined concept can be leveraged when you’re seeking a location. You can get away with paying less rent because your customers want to come to you.
• Ample, easily accessible parking is less of a hurdle than you might think.
• Run the numbers to figure out how many seats the location will hold, the average check per seat, the minimum sales you’ll need per week to cover your costs, and how many customers you’ll need a week to make a 20 percent profit.