How Sale Leasebacks Provide Restaurant Owners With Capital To Grow
Unlock capital that is tied up in the real estate. While many restaurant operators have invested in technology and automation to support the post-pandemic rebound by increasing efficiency and addressing staffing challenges due to soaring labor costs, higher interest rates and tighter lending regulations have created challenges for restaurant and foodservice operators to access the capital they need to fund these initiatives. A ready source of capital that operators can consider is a sale leaseback of the restaurant properties they own. A sale leaseback is essentially the sale of owned property to an investor and the simultaneous leasing back of that same property from the new owner under a long-term lease. This transaction effectively unlocks capital that is tied up in the real estate. This capital can then be deployed to drive growth with investments in equipment and technology, new locations, the hiring of skilled staff, or used to reduce debt. Many restaurant and foodservice operators may be familiar with sale leasebacks but are less informed about their nuances and advantages. One misconception about sale leasebacks is a perceived loss of control over the property. In reality, sale leaseback transactions are negotiated under a long-term lease. This long-term lease component offers restaurant operators a similar level of control as if they still owned the property. A typical sale leaseback term generally spans 15 years or longer, with optional renewals extending for an additional 20 years or more at the tenant’s discretion, providing effective control for at least 35-40 years. Restaurant operators can also utilize several levers to optimize sale leaseback structure and value. These include the lease structure itself, where to set the base rent, as well as the percentage and frequency of rent increases. Further, restaurant owners can negotiate change of control provisions, providing the optionality to pursue an eventual exit or sale of the business.
The New Hospitality
Customers can sue restaurants over pricing. The Southern California restaurateur Kwini Reed has spent years tying herself — and her business model — in knots trying to meet the competing needs of her customers and her staff. Sometimes it seems like everything from state law to inflation is conspiring to force her to charge $35 for a hamburger, which Ms. Reed says she won’t do, even if it means she and her husband, the chef Michael Reed, take a financial hit. The only fee at their Los Angeles restaurant, Poppy, and Rose, is a 20 percent automatic gratuity for large parties, which helps ensure her servers are fairly compensated for tables that demand more skill and time. Now, a new state law in California, which goes into effect July 1, makes those charges illegal. If Ms. Reed continues the practice, a customer could sue her. “It’s a slap in the face for business owners in California,” Ms. Reed said. “We have so many other ways we can be sued for no reason. We don’t need another lawsuit that is just going to incur more fees, which could put someone on a path of closing. As a human being, why would you do that?” The law, Senate Bill 478, is aimed at fees tacked onto a bill beyond the listed prices, whether a resort fee at a hotel or a service charge that inflates the cost of a concert ticket. The law also bans restaurant service fees, which small restaurateurs across the country say they’ve come to rely on in a historically challenging market, but which many consumers say they find bewildering and unfair. Since the pandemic, small restaurant owners in California have faced the same array of disruptions as restaurateurs nationwide: a challenging labor market, rising inflation and the attendant consumer skepticism about higher menu prices. Many small restaurateurs are seeing more dollars go out the door than come in, while restaurant goers expect more than ever as dining out becomes a pricier occasion.
Bielat Santore & Company – Restaurant Industry Alert
MONMOUTH COUNTY, NJ – BYOB RESTAURANT FOR SALE
Monmouth County, NJ – Jersey Shore BYOB Restaurant; blocks from Atlantic Ocean and heavy summertime tourist destinations; all year business escalated by summer traffic; 40 seats plus 10 outdoor seats; full kitchen with kitchen staff that may be willing to stay on; potential sell financing available to qualified.
Contact Richard Santore 732-531-4200 for additional information.
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Three Strategies to Increase Customer Retention
How can you keep customers returning to your restaurant when so many choices exist? Today, customers find restaurant brands through influencers, social media, review sites, and multiple channels. Brands like McDonald’s, Pizza Hut, Domino’s, Starbucks, and others invest and implement customer retention strategies to hold the market share. A five-percent increase in customer retention boosts profitability by 25 percent. Thus, loyalty programs are the best ROI-driven strategy for customer retention. It increases the restaurant sales and builds a loyal customer base. This customer loyalty stays strong, negating the changing market landscape. Hence, we need to understand the key aspects of developing a loyalty program to increase restaurant sales and explore the ways that can be adopted. How to increase customer retention at restaurants? At the core, customer retention focuses on improving the restaurant’s ability to build long-term relationships and sustainability in the industry. It is not just about bringing in the diners but ensuring they return to you repeatedly. This commitment to keeping customers satisfied and engaged sets thriving establishments apart from those struggling to survive. Additionally, when the restaurant possesses a satisfied base of customers, the following benefits can be gained:
- Increased Revenue From Repeat Business
Repeat customers ensure the restaurants that they not only gain a loyal base but also help in increasing the revenue. These loyal customers not only tend to visit the restaurant quite frequently but are also the ones who spend more on every visit. This kind of repeated business is a source of stable revenue essential for improved financial health.
- Word-Of-Mouth Marketing Boosts New Customer Acquisition
Loyal customers are the ones who prefer your services over the others. These are your brand ambassadors who are more expected to share their positive dining experiences with others through word-of-mouth. Additionally, people tend to act more on personal recommendations as this is more trustworthy for them. Any new customer acquired through this has the potential to offer repeated business.
- Reduced Marketing Costs Due to Focusing on Existing Customers
It is a more cost-effective plan when the restaurant targets the existing customers. Additionally, the restaurant can save on costs and ensure a higher return on investment. Also, you have around 60-70 percent chance of selling to existing customers compared to just 5-20 percent for new ones. With the least marketing efforts, the results in such a situation are quite high.
More Than Ever, Restaurant Growth Is Impacted By Geographic Variations
Dominating trend continues to be the repopulation of urban markets. As we zoom out to look at the changing — less linear — approach to growth, it becomes clear that geographic variations matter more than ever. At least, that is the perspective of Hudson Riehle, senior vice president of the research and knowledge group at the National Restaurant Association. During a recent interview, he noted one of the industry’s biggest trends in the near term will be how city centers/urban markets continue to repopulate after experiencing a significant retrenchment during Covid. Many restaurant concepts hitched their wagon to a vibrant lunch and after-work office crowd that used to permeate such neighborhoods, but those office workers disappeared by up to 80% in 2020. Those workers’ return has been slow, to put things conservatively. “The outward migration changed the business economics of these city center restaurants’ operations, and many have had to adapt. Some operators followed that migration, but as re-migration happens, we look at employee occupancy levels and they still remain extremely low,” Riehle said. “This has introduced another element of uncertainty and variability to operators located in these city center areas. Perhaps one of the biggest questions facing the industry’s growth now is whether, when, or how that trend proceeds.” Restaurants with a heavy urban presence have a long road to recovery, in other words, and even more factors, like labor costs, are now impacting their strategic growth plans. The differential between weekdays and weekends, and the uncertain foot traffic created by hybrid work models, have also added challenges, and many operators have had to reengineer their business models to remain viable, Riehle said. “Unit economics at city center restaurants — occupancy, labor, utility costs — vary widely, and margin pressures have become even higher. It’s not a ‘now’ thing, but ongoing,” he said. R.J. Hottovy, head of analytical research at Placer.ai, agrees that return-to-office trends in urban markets remain a headwind for many restaurant concepts.
The Restaurant Industry Is Projected To Add 525K Summer Jobs
The power of specialty beverages. If the National Restaurant Association’s jobs forecast is accurate, it would be the first time on record that the industry added at least 525K in consecutive summers. The restaurant industry is typically the nation’s second largest creator of seasonal jobs in the summer – June, July, and August – ranking only behind construction. In other words, busy season is almost here, and job postings have picked up accordingly. The National Restaurant Association’s 26th annual Eating and Drinking Place Summer Employment Forecast predicts that the restaurant industry will add 525,00 seasonal jobs. Should this number come to fruition, it would be the first time on record that the industry added at least 525,000 jobs in consecutive summers. And though that number would represent a decline from last year, in which 552,000 jobs were added during the summer, the 2023 season was the second strongest hiring season on record, behind 2015’s 555,000 jobs. The accelerated hiring pace throughout the past two years comes after a historic labor shortage gripped the industry in 2021 and 2022. In April, there were 900,000 more 16-to-19-year-olds in the restaurant labor force than there were in 2019 and the 6.2 million employees in that age group was the second highest reading since 2008, when there were 6.5 million in the industry. The association expects that number to surpass 7 million during the summer season, as more teenagers have entered the workforce. Teenagers now make up 21% of the restaurant industry’s overall workforce, while nearly 35% of all working teens, or nearly 2 million, are employed by the industry. The industry also heavily employs 20-to-24-year-olds, who make up nearly 21% of the sector’s workforce, or nearly 2 million people. Older adults are also a bigger part of the overall workforce, with 11.5 million adults ages 65 and older in the labor pool – up from 10.4 million in April 2019. This age group makes up about 3% of the restaurant industry’s workforce, and the association expects that number to increase as more older Americans stay in the workforce; by 2032, the Bureau of Labor Statistics expects 14.6 million adults 65 and older to still be working.
Jersey Shore Town’s Beach Opens On A Sunday Morning
For the first time in 155 years. It would have been a routine Sunday morning anywhere else on the Jersey Shore, as families pulled wagons of beach gear across the sand, and children splashed in the surf, but in Ocean Grove, it was both historic and controversial. Visitors to the seaside community in Monmouth County were able to walk from the boardwalk to the beach before noon, with chains and padlocked barriers removed, ending a 155-year-old tradition tied Ocean Grove’s Methodist roots that blocked access to the sand on Sunday mornings. It was a Christian tradition loyally defended by some residents. But others objected to public displays of religion in the Ocean Grove section of Neptune Township, which includes a new $2 million pier built in the shape of a Christian cross. The Ocean Grove Camp Meeting Association relented on beach access from the boardwalk after the state Department of Environmental Protection found last year that the Sunday morning restriction, in place between Memorial Day and Labor Day weekends, violated state law. It also told the association that it could be fined up to $25,000 per day if the Sunday restrictions continued. The association continues to challenge the state decision in court, citing religious freedom and its 19th century origins as a Methodist community retreat. Visitors on Sunday morning also were able to access nearly half of the new 500-foot Ocean Grove pier, which reopened last year. It had been closed since it was destroyed by Hurricane Sandy. However, the pier was closed in December, eight months after opening, due to structural concerns. A section extending 243 feet from the boardwalk was reopened Wednesday after getting clearance from the engineering firm investigating the pier’s condition, the association said. The newer section over the water, which includes the cross imagery, remains off-limits.
The New Value Equation At Restaurants
Consumer perception of value has not changed as much as we think it has. People have shallower pockets but still want to eat at their favorite restaurants. Restaurant value used to be a much simpler calculation: Discount-driven customers would seek out dollar meals at quick-service restaurants, call for pizza delivery on Friday nights (sans delivery fees), and then splurge on full-service meals on rarer occasions. But in 2024, with dollar menus all but extinct, and newer variables like convenience pricing, service fees, shrinkflation, and dynamic pricing in the mix, the consumer value equation has never been more complex. Or has it? Customers may have more options than ever before, from ordering almost any food they want from the comfort of their own home to choosing to dine out “the old-fashioned way” (and every “channel” in between) but spending habits have not changed as much as we might think they have. According to data from Technomic, customers are roughly as price-conscious now as they were just before the pandemic. In a survey, half of customers said that they picked restaurants with lower prices in Q1 2020, while 52% of customers said they do so in Q1 2024, and the exact same percentage of customers (68%) said they pay close attention to menu prices in both Q1 2020 and Q1 2024. “Price sensitivity went down during the pandemic because people were more flush with cash; there were fewer places to spend it, but they had more on hand,” said Robert Byrne, director of consumer and industry insights for Technomic. “That’s not the case now, but restaurant prices aren’t the only things that have increased. It’s all expensive now. So, as a consumer, my thinking about restaurants is not any different than going to the grocery store or filling up my car with gas. … Consumers love restaurants. If they have $10 in their pocket, it’s going to go to foodservice, even if they can only afford a smoothie.” For many consumers, even though inflation has cooled off from its peak of 9.1% in June 2022 to 3.5% in March 2024, according to the Bureau of Labor Statistics, wages have not kept up (though a recent study from Bankrate predicts that wages will catch up with price inflation by Q4 of this year).
Did You Know?
Here’s how to handle non-compete clauses. Non-compete clauses, especially for line-level employees and middle management, have been a controversial topic in the restaurant industry. Some operators like them because they feel it helps discourage employees from resigning over a “grass is greener” approach; may help protect trade secrets like recipes and standard operating procedures; and helps discourage poaching among competitors. Proponents say it is used sparingly and typically only among senior management in the restaurant industry. Critics of the practice say it is widespread even among line-level employees, keeps wages artificially low and traps workers in suboptimal situations.
Employee Tip
Restaurant coalition sues to block broadened eligibility for overtime pay from taking effect July 1. A coalition of restaurant advocacy groups and other trade associations have filed a lawsuit that seeks to kill the U.S. Department of Labor’s broadened rules on overtime eligibility before the regulations take effect July 1. Starting that day, restaurants and other employers would be obligated to pay overtime to any salaried employee earning less than $43,888 annually. For each hour exceeding 40 per week, the workers would be entitled to 1.5 times their rate of pay. The exemption threshold jumps again on Jan. 1 to $58,656. The Department of Labor, or DOL, would have the authority to adjust that trigger point every three years thereafter.
