Operators dip slowly into deeper shuttered-site pool

Operators dip slowly into deeper shuttered-site pool

As the slowed economy speeds up the number of restaurant liquidations and reorganizations nationwide, an unprecedented glut of shuttered chain outlets is expected to flood the commercial real estate market with hundreds more available properties in the months to come. But operators poised to take advantage of the vacancies are cautious about the looming opportunities.

Even as fast-growing foodservice brands eagerly contact real estate brokers to explore the possibility of picking up some of the mothballed units, they say a host of unknowns about the quality of the buildings and equipment, lease terms, trade-area demographics and zoning laws will make them proceed carefully. Nonetheless, opportunities for stronger foodservice chains to meet or substantially exceed their expansion goals—potentially at less expense—have never looked better, some restaurant real estate experts say.

“This is an unprecedented shakeout,” said Mark Dufton, a principal with DJM Realty, a Boston-based restaurant realestate brokerage that specializes in dispositions, acquisitions, lease renewals and appraisals. “While there is constant turnover in restaurant locations, the number of closings in such a short period of time matches what’s going on in the retail world.

“This is a classic shakeout not so much because of oversaturation, but because this perfect storm of bad economic circumstances has pushed a number of troubled operators over the edge.”

Most prominent among the anticipated closures are those of the previously high-flying Starbucks [3] Coffee chain. With 11,570 outlets in the United States, Starbucks announced in early July it would close 616 stores by next May—all of them company coffeehouses—and lay off as many as 12,000 workers because of weak sales, oversaturated markets and slowing consumer traffic. Some 4,195 joint-venture or franchised outlets are unaffected, the company said.

More recently, nearly 200 franchisor-owned Bennigan’s [4] and Steak and Ale [5] outlets were shut down when Metromedia Restaurant Group’s S&A Restaurant Corp. filed for Chapter 7 bankruptcy. The brands’ approximately 138 franchised units were not involved in the liquidation petition.

Separately, Eagan, Minn.-based Buffets Holdings Inc. is fighting a landlord, Fortress Investment Group, in bankruptcy court for the right to close and liquidate 127 company-operated Ryan’s and Fire Mountain restaurants. In a motion filed in late July, Fortress petitioned the court to allow it to take over the units and operate them, but Buffets claims it needs to close the stores by August. A judge’s ruling is imminent.

Famous Dave’s of America Inc. [6] of Eden Prarie, Minn., recently told its investors that it is “evaluating the long-term prospects” of the 44 company stores it operates in the 171-unit system. “This process may lead to a decision to impair the assets of some underperforming restaurants, resulting in noncash charges typically associated with such decisions,” the company said, noting that it might close an old restaurant in Chicago that is too close to a newly opened unit.

Other foodservice operators like Church’s Chicken [7], Roadhouse Grill and Donatos Pizza have disclosed plans to shut down dozens of company and franchised outlets. And Wall Street is speculating that once Arby’s [8] parent Triarc Cos. [9] completes its acquisition of Wendy’s [10], the No. 3 burger brand will likely close hundreds of company stores within a year to make the deal more palatable.

Among the aggressively expanding restaurant chains that already are examining the inventory of shuttered stores for possible growth opportunities is Chipotle [11] Mexican Grill, the 700-unit, Denver-based fast-casual brand that posted a 31-percent rate of sales growth last year while adding 123 new units.

Rex Jones, chief development officer for Chipotle, confirmed that the company is in discussions with a third-party liquidation specialist to examine several of the soon-to-be shuttered Starbucks outlets. Citing a confidentiality agreement, Jones declined to say anything more about the process.

Noting that Chipotle remains on track to open 130 to 140 stores this year and next, Jones added that Starbucks’ small footprint—about 1,000 to 1,500 square feet, versus Chipotle’s need for 1,800 to 2,500 square feet or more—could prevent Chipotle from using some closed Starbucks units.

“It’s the real estate you look at,” Jones elaborated. “Good real estate has been a big barrier to growth. So we are working with Starbucks. We have contacted Bennigan’s and Steak & Ale, too.”

Chris Arnold, a spokesman for Chipotle, emphasized that opening stores merely for the sake of opening stores could hurt the brand’s image.

“We are very careful that growth doesn’t compromise our requirements for what has made us successful,” Arnold said. “We don’t want to grow so fast that it undermines what we do.

“Naturally, we want great locations for every site, but that means first finding great managers, a good staff. It makes no sense in getting ahead of that and then you reach the day when you have to close a location down the road because you compromised yourself just for the sake of the location.”

Gregory Levin, chief financial officer of 70-unit BJ’s Restaurant & Brewery of Huntington Beach, Calif.—a casual-dining grill and brewhouse operator that posted a 32-percent rate of sales growth last year—also expressed caution about growing too aggressively.

“It behooves us to look at some of these sites in the Bennigan’s and Steak and Ale brands,” he noted. “But those units have been around a long time, and the structural fixtures may not work with our concept. I would imagine some of them would have to be torn down for us to make a go of the real estate.

“This is very early on, but I think we will continue our disciplined expansion strategy. We don’t charge into new markets until we have sound structure to support our current markets,” he said, noting that the Steak and Ale units are mainly in Texas.

Some regional chains that are growing out of their heritage markets also have said they don’t see much growth potential in the closed units.

Patrick Morris, chief operating officer of the Rotelli Pizza and Pasta, a 31-unit fast-casual concept, based in Boca Raton, Fla., said neither the full-service locations nor the Starbucks would suit his operations.

“The Starbucks are too small and the Bennigan’s and Steak & Ales are too large,” he said. “We specialize on in-line units about 1,800 to 2,500 square feet.”

Allan Hickok, a financial analyst with Houlihan Lokey in Minneapolis, applauded the operators’ caution. He said that with the economy as bad as it is and because some of the Ryan’s, Steak & Ale and Bennigan’s units may not be worth the cost to retrofit, smart operators have nothing but time to pick the best sites.

“This idea that this shakeout is going to lead to a harvest of empty restaurants that will benefit the remaining operators, in terms of sales growth or unit growth, is fantasy,” he said. “There’s not going to be a windfall and in most cases, the survivors are not going to feel it.

“Unless you are some small-town guy next to a Starbucks, it’s difficult to say your business will improve, because the fact of the matter is that some of these stores didn’t have any sales in the first place.”