Who is killing the South African restaurant industry?
Chapter 2: Investigating the suspects - Monsieur Landlord
Our poor unsuspecting victim moved quietly about his business, opening the doors, mopping the floors, working IN his business instead of ON his business, completely oblivious to the danger lurking inside his filing cabinet. For there, in a dusty folder alongside the liquor license application he had been meaning to submit, was his lease agreement!
By Michael Said
Well, the writing had been on the wall and the warning signs there for all to see. Over-trading, new centres opening daily, falling foot counts, rising input costs and an increasingly selective clientele, all coupled with a world recession, but why should this worry him? After all, people have to eat, don’t they?
Yes, they do, but they don’t have to eat out, they don’t have to eat out as often and they certainly don’t have to eat out at YOU! Suddenly foot count plummeted by 30percent and the customers still eating out were spending 30 percent less. On top of which, the retention on the now diminishing turnover had also dropped by well in excess of 30 percent.
Now, in order to run a successful business, our victim understands that there are three key fundamentals he must adhere to. An acceptable food cost (35 to 40 percent depending), an acceptable salary to turnover ratio (18 to 21 percent) and a rental to turnover ratio of UNDER 11 percent. He seems pretty confident that his food cost is correct, despite only taking stock once a month and only occasionally glancing through the pile of invoices on the spike over the hot pass. He has been able to reduce staff to keep his wage bill ‘almost’ under control and it seems that the only matter requiring his urgent attention is the ever escalating ratio between his turnover and his rental.
So he wonders, if times are so tough for me, the same must be true of my competitors, my suppliers and of course, my landlord. “It is time to renegotiate my lease or at least negotiate some kind of break until the flood subsides, after all…” he thinks “we had such a great understanding when we first met; he seemed like such a nice chap!”
Well, there is an old riddle in the Restaurant Industry. Question: How do you turn a pleasant, helpful, compassionate, approachable and understanding landlord into a friggin monster? Answer: Just sign the lease agreement!
Now I need to state that this assessment of landlords may not apply across the board, but the overriding perception is that landlords are unapproachable and single-mindedly fixed on immediate profit at the expense of all else. (I would welcome any and all comments from landlords on the subject). Certainly, more and more landlords are becoming increasingly amenable to rental negotiations, if the restaurant in question can prove that they have given the matter serious consideration and are able to put forward a compelling case.
However, to gain a true understanding of this problem we need to look back to the circumstances surrounding the initial signing of the lease agreement.
Landlords have a tendency to play independents off against franchise groups. Often, being ignorant of the pitfalls and driven by “the dream” of owning their own restaurant, independents are prepared to pay more.
Landlords actually budget for an attrition rate (failures in new malls) and when a shop does fail, they are merciless in enforcing compliance in meeting rental commitments. This even goes as far as installing a new tenant in the old tenant’s place and then charging the old tenant for any shortfall in the difference of the lease amount for the balance of the lease period. Next time you are faced with a lease agreement, watch out for that personal surety clause…
One of the single biggest killers is the dreaded “Tenant Mix”. In the process of looking out for ways to differentiate their mall from the competition, landlords may ignore tried and tested concepts in favour of something new and fresh, often with disastrous consequences for all involved. Other times they play it safe, installing more of the same successful tenants that can be found in every mall everywhere and then they wonder why they can’t drive feet through the mall. By installing similar tenants to those already established in the mall, often without consulting existing tenants, mall owners are effectively cannibalising the trade of existing tenants. As a result, instead of two or three struggling stores we find one or two successful stores.
One only has to visit any one of the literally hundreds of malls around the country, to realize the only ones making money are those selling the fancy paper landlords use to block the windows of empty stores. Don’t believe me? Pay a visit to Brightwater Commons, Balfour Park, Bel Air, Norwood Mall, Stoneridge… and the list goes on and on.
Mall owners are not addressing the real issue, which is that anchors are paying next to nothing for their space and are effectively being subsidized by the man on the street. Restaurants are often expected to pay the same rental, or higher, for large premises that other tenants are paying for smaller premises on the pretext that they are not big enough to pay anchor rates.
Most tenanting is done by brokers who earn a commission for each placement. Granted, when a business fails, the period until full commission is paid is extended, but then every new placement, or re-placements, also earns them a commission. To ensure that brokers are more careful about who they install as tenants, a commission clawback system and “switching” policy, as instituted for insurance and assurance brokers, should be implemented.
The “Ops Costs” paid to brokers to manage and maintain the malls and turn a profit, are simply too high. In Sandton City, for example, the Ops Costs run to approximately R120/sqm. With at foot print of approximately 130,00sqm, you do the math. With inflation, these costs have increased year on year, with no downward adjustment and at a rate approximately one to two percent higher than the actual basic rental costs.
Here is an e-mail forwarded to me from one of my clients…
Despite the empty stores in every mall, this is the latest OTL (offer to let) received from Pareto for a store in Tyger Valley SC. Besides the ridiculous rental asked, they have added a NEW “availability” charge for items that one would expect to be provided for in the normal course of business.
Basic Rental R450.00 per sqm escalating at 10 percent
Ops R64.42 per sqm escalating at 12 percent
Marketing R 26.14 per sqm escalating at 10 percent
Ass Rates R 28.60 per sqm escalating at the council’s discretion
Refuse R 2.31 per sqm escalating at the council’s discretion
Availability Charges ! you will still be billed for usage for each of these
Air Con R8.80 per sqm (escalating)
Water R1.00 per sqm (escalating)
Sewerage R2.77 per sqm (escalating)
TOTAL R597.04 per sqm
Based on the 10 percent rule, this means your little take-away store must turnover R600,000 per month, before VAT, or based on an average transaction value of R45 you will need to serve 15,200 customers a month i.e. 506 customers a day. Likely? I don’t think so.
Rates increases are another killer! It would be interesting to conduct a survey amongst malls and mall owners to find out who amongst them has approached their local city councils to fight these ridiculous increases on behalf of their tenants, or do they simply add these costs onto the rental? Then we factor in the increase in electricity costs and we have more blood on the streets. Sadly, with landlords adding even more costs, such as insurance costs, it does not stop there.
Millions upon millions of Rands have been poured into the set-up costs, hundreds of people have lost everything and thousands of jobs have evaporated. Somebody has to stop the madness! I am not implying that nobody should buy or open a restaurant, or that nobody is making money. I am suggesting that before you do, do your homework as you should for any other business. Owning a restaurant is not a dream job! Wipe the sleep from your eyes and conduct a careful and thorough investigation to ensure you don’t wake up screaming from a nightmare or the sheriff banging on your door.
What is required is a clear understanding of the pitfalls, a better working relationship between tenants and landlords, and proactive property owners who better understand the challenges of their tenants/partners.
Property owners are under pressure too. Loans were secured on projected turnovers and rental increases and empty stores are hurting everyone. There is a strong case to be made that no one was forced into signing the lease and “Ignorantia juris non excusat”, ignorance of the law, does not excuse, BUT it does kill!
Before you sign the lease and launch your concept or purchase an existing business, seek professional advice. There are some great restaurant consultants out there, franchise advisory services (start with FASA), informed and helpful brokers and banks that are slowly beginning to understand the challenges of what is a wonderful industry. You may well be sitting on “the next big thing”, but make sure you support your passion and drive for the project with the knowledge you will surely need.
Brand StrategyEmail: info@mikesaid.co.za
Phone: +27 82 449 7367
Web: http://www.brandstrategy.co.za/
Twitter: mike_said_what Annual escalations are driving rentals too high, whilst annual menu price increases are unable to keep pace, a situation similar to the “subprime” crisis that has virtually crippled the world economies. With everybody convinced that restaurant turnovers would continue to rise in excess of the rental clause turnover and that their value would continue to increase, banks dished out money, landlords dished out leases and restaurant owners signed ANYTHING to get the premises. In reality store growth now is in the low single digits and inflation is ‘officially’ running at around five percent, but rentals are rising at in excess of eleven percent. In short, this is a recipe for disaster! Maybe this will be known one day as the Sub Prime Rib Crisis.When he originally signed the document, life was soooooo good. Restaurant profitability (retention) was running at a very acceptable 18 to24 percent, there appeared to be an endless stream of customers and certainly no shortage of buyers, should he decide to exit. How had it all gone so terribly wrong?
Our poor unsuspecting victim moved quietly about his business, opening the doors, mopping the floors, working IN his business instead of ON his business, completely oblivious to the danger lurking inside his filing cabinet. For there, in a dusty folder alongside the liquor license application he had been meaning to submit, was his lease agreement!
By Michael Said
Well, the writing had been on the wall and the warning signs there for all to see. Over-trading, new centres opening daily, falling foot counts, rising input costs and an increasingly selective clientele, all coupled with a world recession, but why should this worry him? After all, people have to eat, don’t they?
Yes, they do, but they don’t have to eat out, they don’t have to eat out as often and they certainly don’t have to eat out at YOU! Suddenly foot count plummeted by 30percent and the customers still eating out were spending 30 percent less. On top of which, the retention on the now diminishing turnover had also dropped by well in excess of 30 percent.
Now, in order to run a successful business, our victim understands that there are three key fundamentals he must adhere to. An acceptable food cost (35 to 40 percent depending), an acceptable salary to turnover ratio (18 to 21 percent) and a rental to turnover ratio of UNDER 11 percent. He seems pretty confident that his food cost is correct, despite only taking stock once a month and only occasionally glancing through the pile of invoices on the spike over the hot pass. He has been able to reduce staff to keep his wage bill ‘almost’ under control and it seems that the only matter requiring his urgent attention is the ever escalating ratio between his turnover and his rental.
So he wonders, if times are so tough for me, the same must be true of my competitors, my suppliers and of course, my landlord. “It is time to renegotiate my lease or at least negotiate some kind of break until the flood subsides, after all…” he thinks “we had such a great understanding when we first met; he seemed like such a nice chap!”
Well, there is an old riddle in the Restaurant Industry. Question: How do you turn a pleasant, helpful, compassionate, approachable and understanding landlord into a friggin monster? Answer: Just sign the lease agreement!
Now I need to state that this assessment of landlords may not apply across the board, but the overriding perception is that landlords are unapproachable and single-mindedly fixed on immediate profit at the expense of all else. (I would welcome any and all comments from landlords on the subject). Certainly, more and more landlords are becoming increasingly amenable to rental negotiations, if the restaurant in question can prove that they have given the matter serious consideration and are able to put forward a compelling case.
However, to gain a true understanding of this problem we need to look back to the circumstances surrounding the initial signing of the lease agreement.
Landlords have a tendency to play independents off against franchise groups. Often, being ignorant of the pitfalls and driven by “the dream” of owning their own restaurant, independents are prepared to pay more.
Landlords actually budget for an attrition rate (failures in new malls) and when a shop does fail, they are merciless in enforcing compliance in meeting rental commitments. This even goes as far as installing a new tenant in the old tenant’s place and then charging the old tenant for any shortfall in the difference of the lease amount for the balance of the lease period. Next time you are faced with a lease agreement, watch out for that personal surety clause…
One of the single biggest killers is the dreaded “Tenant Mix”. In the process of looking out for ways to differentiate their mall from the competition, landlords may ignore tried and tested concepts in favour of something new and fresh, often with disastrous consequences for all involved. Other times they play it safe, installing more of the same successful tenants that can be found in every mall everywhere and then they wonder why they can’t drive feet through the mall. By installing similar tenants to those already established in the mall, often without consulting existing tenants, mall owners are effectively cannibalising the trade of existing tenants. As a result, instead of two or three struggling stores we find one or two successful stores.
One only has to visit any one of the literally hundreds of malls around the country, to realize the only ones making money are those selling the fancy paper landlords use to block the windows of empty stores. Don’t believe me? Pay a visit to Brightwater Commons, Balfour Park, Bel Air, Norwood Mall, Stoneridge… and the list goes on and on.
Mall owners are not addressing the real issue, which is that anchors are paying next to nothing for their space and are effectively being subsidized by the man on the street. Restaurants are often expected to pay the same rental, or higher, for large premises that other tenants are paying for smaller premises on the pretext that they are not big enough to pay anchor rates.
Most tenanting is done by brokers who earn a commission for each placement. Granted, when a business fails, the period until full commission is paid is extended, but then every new placement, or re-placements, also earns them a commission. To ensure that brokers are more careful about who they install as tenants, a commission clawback system and “switching” policy, as instituted for insurance and assurance brokers, should be implemented.
The “Ops Costs” paid to brokers to manage and maintain the malls and turn a profit, are simply too high. In Sandton City, for example, the Ops Costs run to approximately R120/sqm. With at foot print of approximately 130,00sqm, you do the math. With inflation, these costs have increased year on year, with no downward adjustment and at a rate approximately one to two percent higher than the actual basic rental costs.
Here is an e-mail forwarded to me from one of my clients…
Despite the empty stores in every mall, this is the latest OTL (offer to let) received from Pareto for a store in Tyger Valley SC. Besides the ridiculous rental asked, they have added a NEW “availability” charge for items that one would expect to be provided for in the normal course of business.
Basic Rental R450.00 per sqm escalating at 10 percent
Ops R64.42 per sqm escalating at 12 percent
Marketing R 26.14 per sqm escalating at 10 percent
Ass Rates R 28.60 per sqm escalating at the council’s discretion
Refuse R 2.31 per sqm escalating at the council’s discretion
Availability Charges ! you will still be billed for usage for each of these
Air Con R8.80 per sqm (escalating)
Water R1.00 per sqm (escalating)
Sewerage R2.77 per sqm (escalating)
TOTAL R597.04 per sqm
Based on the 10 percent rule, this means your little take-away store must turnover R600,000 per month, before VAT, or based on an average transaction value of R45 you will need to serve 15,200 customers a month i.e. 506 customers a day. Likely? I don’t think so.
Rates increases are another killer! It would be interesting to conduct a survey amongst malls and mall owners to find out who amongst them has approached their local city councils to fight these ridiculous increases on behalf of their tenants, or do they simply add these costs onto the rental? Then we factor in the increase in electricity costs and we have more blood on the streets. Sadly, with landlords adding even more costs, such as insurance costs, it does not stop there.
Millions upon millions of Rands have been poured into the set-up costs, hundreds of people have lost everything and thousands of jobs have evaporated. Somebody has to stop the madness! I am not implying that nobody should buy or open a restaurant, or that nobody is making money. I am suggesting that before you do, do your homework as you should for any other business. Owning a restaurant is not a dream job! Wipe the sleep from your eyes and conduct a careful and thorough investigation to ensure you don’t wake up screaming from a nightmare or the sheriff banging on your door.
What is required is a clear understanding of the pitfalls, a better working relationship between tenants and landlords, and proactive property owners who better understand the challenges of their tenants/partners.
Property owners are under pressure too. Loans were secured on projected turnovers and rental increases and empty stores are hurting everyone. There is a strong case to be made that no one was forced into signing the lease and “Ignorantia juris non excusat”, ignorance of the law, does not excuse, BUT it does kill!
Before you sign the lease and launch your concept or purchase an existing business, seek professional advice. There are some great restaurant consultants out there, franchise advisory services (start with FASA), informed and helpful brokers and banks that are slowly beginning to understand the challenges of what is a wonderful industry. You may well be sitting on “the next big thing”, but make sure you support your passion and drive for the project with the knowledge you will surely need.
Brand StrategyEmail: info@mikesaid.co.za
Phone: +27 82 449 7367
Web: http://www.brandstrategy.co.za/
Twitter: mike_said_what Annual escalations are driving rentals too high, whilst annual menu price increases are unable to keep pace, a situation similar to the “subprime” crisis that has virtually crippled the world economies. With everybody convinced that restaurant turnovers would continue to rise in excess of the rental clause turnover and that their value would continue to increase, banks dished out money, landlords dished out leases and restaurant owners signed ANYTHING to get the premises. In reality store growth now is in the low single digits and inflation is ‘officially’ running at around five percent, but rentals are rising at in excess of eleven percent. In short, this is a recipe for disaster! Maybe this will be known one day as the Sub Prime Rib Crisis.When he originally signed the document, life was soooooo good. Restaurant profitability (retention) was running at a very acceptable 18 to24 percent, there appeared to be an endless stream of customers and certainly no shortage of buyers, should he decide to exit. How had it all gone so terribly wrong?
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Hi Cristina,
ReplyDeleteThanks for your kind words and thanks for following the SAFW blog.
I hope to update many more interesting articles.
Kind Regards
Nelson