Do a Deep Dive Before Seeking Lease Terminations
More restaurant brands will be scrutinizing and closing underperforming stores in the months ahead. Current real estate economics favor a three-step approach to mitigating such lease liabilities:
- Immediately upon announcement of the restaurant closure, engage with the landlord. The goal should be to minimize termination fees by collaborating to identify a viable replacement tenant for that location.
- Investigate a new three-party arrangement. Have your real estate advisor run an in-depth financial analysis of a potential tri-party arrangement between you, your replacement tenant, and the landlord. This should include the economics of the new lease; the landlord’s estimated out-of-pocket costs for terminating the lease and putting in the new tenant; and your own assessment of the specific market conditions for the real estate location in question.
- Leverage what you have learned. The last step is to use that analysis as part of an open and productive negotiation with both the landlord and the replacement tenant. Come to the table armed with solid numbers and a firm grasp of the costs and other considerations in play.
The analysis here can really help restaurateurs avoid overpaying to exit unwanted leases. This approach also makes you far less likely to enter into unfavorable subleases, or just keep paying rent on dark stores until the lease runs out. And yet companies often either skip that deal analysis and collaboration with the landlord, or give it short shrift. When engaging with the landlord on a lease-termination proposal, come with a compelling, documented argument about your location-specific challenges and those of the larger restaurant business, and be prepared to talk to the landlord about how the two of you can collaborate to quickly find a strong replacement tenant and ultimately enter into a lease-termination agreement. Once that tenant has been identified, what will it take to get the new operator into the space? And how will this affect the overall economics of the agreement between the existing tenant, the landlord and the replacement operator? Here are some questions that will need to be discussed as you move forward with the lease-termination and tri-party agreement…
Trump’s ‘No Tax on Tips’ Could Be End of Large-Group Service Fees
On restaurant bills. Many restaurants may need to rethink their mandatory gratuity policies if they want this income to count as qualified tips for their workers under the new tax laws. The “no tax on tips” provision in President Trump’s One Big Beautiful Bill Act allows certain workers to deduct up to $25,000 in “qualified tips” per year from 2025 through 2028. The rub is that mandatory gratuities, the 15% to 20% that restaurants often impose on parties of six people or more, aren’t eligible for the deduction, a disappointment to the restaurant and foodservice industry, which held out hope for a different outcome. The industry is the country’s second-largest private-sector employer, providing 15.7 million jobs, or 10% of the total U.S. workforce, according to a data brief from the National Restaurant Association based on the U.S. Census Bureau’s American Community Survey. The service fee issue is sure to resonate with many restaurateurs. Research from the National Restaurant Association shows that 54% of full-service operators — including 67% of fine-dining operators — say their restaurants sometimes add a service charge or automatic gratuity to customer checks. Among this group, 12% add the service charge or automatic gratuity to all checks, while 88% only add it to parties that exceed a specific number of people (typically six or more) or to banquets, private events or catering events. Notably, the Internal Revenue Service has never considered these service fees as tips. However, the restaurant industry hasn’t necessarily followed the letter of the law, according to Jean Hagan, a partner at Eisner Advisory Group who focuses on the restaurant industry. Hagan said during a recent webinar for a large state restaurant association, many proprietors were surprised to learn they weren’t supposed to be counting service fees as tips. “They’ve just always been doing it a certain way — passing on the service fees to employees as a tip,” Hagan said. Now, however, restaurants will have to put all tips through payroll, even if they weren’t doing it before, or were incorrectly including service fees, so that the employee can benefit from the deduction. There will be more pressure on restaurants to do it properly. “They’ve got to clean their systems up and follow the law as it’s always been,” Hagan said. “If they don’t, the employee won’t get the full benefit of the new tax law”…
Bielat Santore & Company – Restaurant Industry Alert
HOW MUCH IS YOUR RESTAURANT BUSINESS WORTH?
Since 1978, the principals of Bielat Santore & Company, Barry Bielat and Richard Santore, have sold more restaurants and similar type properties in New Jersey than any other real estate company.
Research indicates that a significant portion of business owners lack awareness regarding the true value of their enterprises.
- Specifically, approximately 65% of business owners are unaware of their company’s valuation, which can hinder strategic planning and growth opportunities.
- Furthermore, a substantial 75% of business owners’ personal net worth is directly linked to their business, emphasizing the importance of understanding and managing business valuation effectively.
- Despite this, a concerning 85% of business owners do not have an exit strategy in place, potentially jeopardizing their financial security and future planning.
Developing a comprehensive exit strategy is crucial for ensuring a smooth transition, maximizing business value, and safeguarding personal assets. These statistics highlight the need for increased education and strategic planning among business owners to enhance their understanding of business valuation and exit planning, ultimately contributing to more sustainable and financially secure business operations.
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Is the Market for Restaurant Company IPOS Making a Comeback?
Not necessarily. Black Rock Coffee Bar demonstrated that there is some demand from Wall Street investors for restaurant chains. But the bar for such offerings remains high. “It’s thawing. It’s not thawed.” Black Rock Coffee Bar went public in September and raised nearly $300 million. Its price soared immediately, though it has come back down to earth since then. Does that mean the IPO market is back? Not necessarily. First off, the federal government shutdown has put a halt to any offering, at least for now. In addition, the restaurant industry is facing some existential questions, about the state of the consumer, demand for fast-food restaurants and other assorted economic challenges. In other words: The market is only so open. “It’s thawing,” Damon Chandik, who leads restaurant investment banking at Piper Sandler, said at the Restaurant Finance and Development Conference this week. “It’s not thawed.” The restaurant IPO market has long been something of a puzzle. Restaurant companies often go public in large bursts interspersed by long droughts with few or zero IPOs. A lot of companies lined up to go public in 2021, and a few went, in Krispy Kreme, First Watch, Portillo’s, Sweetgreen and Dutch Bros. But several companies hoping to go public were locked out when the stock market plunged after the Federal Reserve started raising interest rates later that year over inflation and valuations for restaurant companies changed. Two companies went public in 2023, in Cava and Gen Korean BBQ, and then one this year in Black Rock. Several other restaurant companies are believed to be hoping for a public offering, with some having privately filed. “One every other year is not a great way to make a living,” John Tibe, managing director with Jefferies, said at the conference. “So I think we’d like to see more.” Restaurants certainly have their challenges. Sales have been weak this year, and traffic has been in decline for more than two years. Investors have also punished many recent IPOs. Krispy Kreme, Portillo’s, and Sweetgreen are all trading well below their offering prices. All that can discourage new IPOs because sponsors are looking for strong valuations when they take companies public. Companies hoping to go public are expected to be of a certain caliber. Public investors heavily scrutinize any company that goes public and often pick apart any perceived faults. Aaron Weisbrod, head of restaurant investments at J.P. Morgan Investment Banking, suggested that the market for restaurant offerings isn’t closed, just picky…
How Restaurant Chains are Responding to Mounting Consumer Pressures
Third-quarter earnings calls gave us a glimpse into how some brands are feeling about the current environment. There hasn’t been much positive news in recent weeks, especially if you consider yourself a consumer. October layoffs reached a 22-year high. Calls to the national hotline for food assistance have quadrupled so far this month. Consumer sentiment scores dropped to a three-year low in November.
Indeed, “challenging macro backdrop” was the phrase of the third quarter earnings round, repeated by executives from Domino’s, Restaurant Brands International, and Chipotle, with a handful of other companies identifying pronounced pressures among lower-income and younger consumers. It’s certainly not a new trend, but it seems to be showing signs of acceleration. Here is a look at how some public restaurant companies and different segments are making sense of — and responding to — such an environment. Casual dining. Chili’s, which has been a clear winner in recent quarters with sustained double-digit comp sales, is gaining customers among households with income levels below $60,000, which is an anomaly right now. During his company’s recent earnings call, chief executive officer Kevin Hochman said the casual-dining chain’s “Better than Fast Food” campaign, launched more than two years ago, continues to resonate with value-seeking consumers. “We are gaining market share with low-income households while others are reporting softness with that group,” he said. Further, younger consumers are coming into Chili’s more often because of fresh marketing campaigns, Hochman said. Chili’s competitor Applebee’s experienced some check management during its most recent quarter, with guests trading down to lower price items, according to CEO John Peyton. That said, the company generated positive sales and traffic from new menu innovation and targeted marketing campaigns. “All of our guests are hyper-focused on value … That focus on value is what’s going to be on consumers’ minds throughout the rest of this year and into next,” Peyton said, adding that Applebee’s 2 for $25 value offering is driving traffic. “It’s the match that consumers are looking for”…
Turning Reputation Insights into Restaurant Strategy
AI is transforming the way consumers evaluate businesses and make purchasing decisions. Among the highlights:
- One in five consumers regularly use ChatGPT, Google AI, or other tools to research businesses with 60 percent of AI users saying they have asked about restaurants.
- Google (still) dominates with 71 percent of consumers checking Google reviews, followed by Facebook (41 percent) and Yelp (29 percent). Younger adults increasingly rely on TikTok, Instagram, and AI-based discovery channels.
- More than half of consumers check reputation “often” or “always” before engaging with a new business.
- Seventy-eight percent of consumers believe managing AI reputation will be critical in the next few years.
- Thirty-eight percent of consumers question credibility when all reviews are positive, and 61 percent expect businesses to show proof of corrective action after a negative incident.
“From local eats to destination dining, consumers are scrolling through a smorgasbord of options every time their stomachs rumble,” said Melissa Krut, VP of Success at Sogolytics. “The wide menu of menus to shuffle through requires diners to seek differentiators, which are increasingly driven by positive reviews and delicious marketing wins.” Krut pointed out the study shows that 56 percent of consumers always or often check a business’s reputation before trying it, and 20 percent call no online presence a red flag with seven percent saying it’s a deal breaker. “Beyond stars, visuals like beautifully plated meals and attractive dining environments appeal to younger generations, who are often driven by influencers on TikTok and Instagram. Winning over these younger diners, who lead reputation-checking habits, requires restaurants to prioritize review strategies and visual marketing. With so many restaurants competing with each other, the proof’s in the pudding: Those that stand out in an eat-with-your-eyes media stream and win the reputation game will survive and thrive…
American Express’ Restaurant Tech Acquisitions Are Bearing Fruit
The credit card company’s investments in Resy and software service Rooam are helping restaurants. Credit card giant American Express has made inroads into the restaurant industry over the past several years, acquiring the reservation platforms Resy and Tock as well as middleware provider Rooam. The idea was not only to offer Amex cardholders more perks via the Resy and Tock restaurant networks, but also to help restaurants themselves—many of them also American Express clients—grow their businesses. So far, the strategy is working on both fronts, according to Pablo Rivero, CEO of Resy and Tock and head of Amex’s Global Dining division. On the Resy side, the company has seen an immediate response from a new dining credit for cardholders. Launched last year for Gold and Delta SkyMiles Reserve members and in September for Platinum card members, the credit gives diners $100 to $400, depending on the card, to spend when they make a reservation at a Resy restaurant and pay with their Amex card. In the three weeks after it launched in September, the company saw a 36% increase in reservations from Platinum card members. Their spending also jumped by 1.6x during that time, and there was a 5x increase in the daily average number of Platinum members linking their cards to their Resy accounts. The Platinum card is the company’s most premium card, with an annual fee of $895. Rivero said the dining credit checks a couple of boxes for American Express. It gives members an attractive benefit, adding to the value they get in exchange for their fee. But it also gives these high-rolling consumers an incentive to dine out at a time when inflation and economic malaise are taking a bite out of restaurant spending. “We do know that the restaurant industry is going through some challenging times,” Rivero said. “And so can we create a benefit that would serve two purposes: Benefit the current member in an area that they love a lot, and also benefit the restaurant?” The credit is fully funded by American Express, so restaurants reap the full revenue of those visits. And, notably, it is applicable across the entire Resy network of more than 10,000 restaurants. So far, 95% of those restaurants have had a customer redeem a Resy Credit…
What Restaurants Really Do with the Stuff You Leave Behind
A veteran server explains what really happens to items you forget. Every restaurant I ever worked in had a lost and found, whether it was a plastic milk crate stored under the bar or a cardboard box in the manager’s office. It was never very secure or anything close to being an official lost and found department, but it was there. It was just boxes full of random scarves, sunglasses, readers, and children’s toys, long forgotten. Anything of value like a phone, wallet, or credit card was sent to the manager’s office and safeguarded in the desk. A drawer is about as close to Fort Knox as it ever got. If you’ve ever left something at a restaurant, you might wonder what happens to it after it’s been abandoned. When a customer leaves something at their table, whoever finds it has to decide whether or not it’s worth chasing them down to return it. Honestly, it might come down to the gratuity. If I saw someone had left their sunglasses on the table, but also noticed they’d only left a 5% tip, you can be sure I wasn’t going to run down 49th Street to try to catch them. Into the box they went. If a customer leaves a credit card, that immediately gets turned over to the manager. It will sit in the desk waiting until someone inquires about it and after 30 days, someone might find the fortitude to cut it up and throw it away. I had a customer leave a credit card once. I knew they lived in the neighborhood, so trying to be helpful, I called the credit card company and asked if they could call the customer and ask them to come back to the restaurant. “Thank you for alerting us to this situation. We will cancel the card for their protection,” they said. “No, no,” I protested. “If you could just call them, they could come back right now to pick it up. I have it!” My plea was ignored and they canceled the card anyway. That was a super fun conversation to have with the customer the next day when they came back to see if they had left it there. Left your phone? I’ll see you soon…
Did You Know?
Proposed swipe-fee settlement does little to resolve pain felt by restaurant industry merchants. Credit card giants Visa and Mastercard this week proposed a $38 billion deal to end the 20-year litigation over interchange fees. But restaurant industry advocates say it doesn’t go far enough. Visa and Mastercard on Monday agreed to a settlement to end the long-running “swipe fee” lawsuit, but the proposal has the restaurant and retail industries crying foul. The two credit card giants proposed a $38 million settlement with the merchants who filed the lawsuit in 2005. Under this week’s proposal, which is subject to court approval, interchange fees, or swipe fees, would be lowered by an average of 0.1 percentage points over a five-year period…
Employee Tip
How Restaurants are Adapting to Digital Expectations. As budget constraints continue to drive spending decisions, diners want moments that feel special, personal, and worth the splurge. Serving good food alone is no longer sufficient; restaurants need to create an unforgettable dining experience. For restaurants, where margins are already razor-thin, the challenge is delivering this elevated experience without breaking the bank. The most successful restaurants use technology to enhance genuine hospitality, not as a replacement for human interaction…
