Nov 24, 2020

   

   Ian Walsh

How the Economic Changes of 2020 Have Impacted Franchise Site Selection

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While coronavirus-related uncertainties remain, it’s clear that many businesses will be forever changed. For example, according to Gartner research, an estimated 82 percent of company leaders plan to let employees work remotely post-pandemic — at least some of the time — potentially reducing the demand for downtown franchise locations near central business districts. At the same time, real estate may be increasingly available and more affordable in the months to come, giving franchise brands additional opportunities for new locations.

Together, these factors may prompt franchise brands to rethink their real estate strategies.

In this Q&A, industry veteran Russ Smith, regional development director for the Wendy's Co., provides his take on the state of franchise real estate development and navigating future growth.

Q: How has the shift to remote working changed site selection?

Smith: In the retail food business, office space — in downtown or suburban areas — matters because we have a lot of lunch business. Obviously, we want to look at that daytime opportunity, and if people are not congregating in a central location, such as an office park, that can impact how you look at sites. It certainly impacts how to view sites in a central business district because that's still a big question mark. It goes back to the adage that you want to go where the people are, and if people aren't going there anymore, that changes the perspective a bit.

The flip side is that if the country is headed for trends like Amazon or Microsoft, which have said, “Make your home your office,” or there if is a move to more remote, smaller offices, some of these nice residential sites that we would call a "neighborhood store," suddenly become more interesting. You're not looking at daytime from the standpoint of employment; you're looking at daytime as actual people there during the day, which obviously over the last many months has been a much higher number. And maybe that's a trend that will continue.

Q: What do you see when it comes to commercial real estate supply?

Smith: You do not see much new construction for obvious reasons. The supply has been with vacancies. But the strange phenomenon — and we saw this back in 2008 and 2009 — is that even when vacancies occur, the prices don't drop. The reason for that is because great real estate is still great real estate. And that's the problem. Even more so in a time of stress like 2020, a franchisee will be extra cautious to avoid a subpar site. The availability and prices are great for the lower-tiered real estate, but if you're looking at the A sites, landlords are still asking the same prices, if not more.

We have seen some softening in the world of land purchases in smaller markets. It's a nice trend if your franchisees are looking to grow in small towns. But again, like all real estate, there is a certain element of rolling the dice. And obviously, the smaller the town, the bigger the roll, so you've got to be cautious there too.

Q: As a franchise development director, how has the development world changed in recent months for you, and where do you see it going?

Smith: We expect some shifting and changing, but I think it's more about emphasis than it is about a wholesale reshuffling of our philosophy. We have always looked at the three-legged stool — retail, commercial, and residential — and having concentrations of those three things. As I said earlier, maybe commercial is going to be a little bit different, but that may lend itself to bolster more residential-type projects.

Retail is also interesting with the changes we've seen. Some of these big-box guys might be going smaller. So those 250,000- to 300,000-square foot neighborhood community centers, with three or four big boxes and junior anchors, may shrink a bit. Again, it all comes back to wanting to be where the people are, so a big challenge for us going forward is, “Where will the people be?” We don't have all the answers there. But I do think that [the Wendy’s] concept lends itself well to being focused on the high-growth residential areas in the first place, which will continue to be strong. We've always been a proponent of growing in small towns, and that's one of those things that kind of ebbs and flows with popularity. But I would think that might be an opportunity going forward.

Q: What about conversions versus new builds?

Smith: As a percentage, the majority of our restaurants are built from the ground up. However, we do love conversions because they potentially are taking out a competitor, and at the same time, you're opening a new restaurant. Plus, they may cost less than a ground-up new build.

But it goes back to making sure you are making a sound decision. It is important to understand who's failing and why they are failing. You want to be careful about a conversion because you don't want to take over a bad location just because it's a conversion. It’s best to subtract the conversion element and ask the question, “Is this a great site? Does it have all of the elements that we're looking for?”

Q: As we move through the pandemic, are there any areas where you plan to be more aggressive when negotiating leases and renewals?

Smith: There are some concessions that lessors are a little more willing to consider. Namely, we've decided to specify something regarding the pandemic because we have found, legally speaking, a pandemic may or may not be one of those force majeure things. We have made the determination going forward that the pandemic will be a force majeure. I don't know how receptive our lessors will be with that because it just hasn't been that many so far. Landlords are still nervous about vacancies, so my guess is that they will be tougher on issues like assignment provisions and subleasing in the future.

Q: What is your advice for franchisees looking to take advantage of real estate opportunities?

Smith: When you are deciding to spend a huge amount of money on a 20-to-40 year idea, don't get lured away by false promises. Make sure you have whatever is critical for your business, be it visibility or access. Don’t shortchange yourself. And in the current environment, that is the same message. You don't want to take the risk of shortchanging one or two of the elements of a great site. We are encouraging our franchisees to grow, and we also don't want them to make a mistake. Be cautious, and be smart. Do your research.

The COVID-19 pandemic has generated both challenges and opportunities for franchise brands and their franchisees. As you move forward, you can help your franchisees budget more effectively and improve profitability with our new playbook, “The Franchise Budgeting Playbook: Your Roadmap to Unit-Level Profitability.

 

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