Real Estate Costs Dent Fast Food’s Bottom Line
Leasing costs must be within 6%–10% of a restaurant’s revenue, for the restaurant to operate profitably. Those ratios can shift suddenly if the economy hits the skids or consumer trends change. A growing number of multi-unit restaurant operators are turning to lease renegotiators for help managing existing leases on money-losing stores, according to Restaurant Finance Monitor, a monthly industry newsletter.
The Red Lobster Case: A Cautionary Tale
Few business stories illustrate the significance of leasing costs more vividly than the recent bankruptcy filing of Red Lobster. Losses on real estate leases were a major cause of the 570-unit seafood chain’s troubles. Red Lobster had already closed almost 100 restaurants before filing for bankruptcy protection in May, and court documents showed that another 100 stores were slated for closure unless the company could renegotiate the leases. In line for closing was Red Lobster’s landmark Times Square location, where the landlord was seeking to double the rent to $2.2 million a year, according to the New York Post.
If a restaurant continues to lose money after cost reductions and other turnaround moves, franchisees often try to discuss the problem with their landlords on their own. A franchise hasn’t (hopefully) garnered significant experience re-negotiating leases and therefore doesn’t know the talking points. The result can be costly delays, according to Lewis Gelmon, a lease renegotiator and restaurant franchisee who spoke at a recent Restaurant Finance Monitor webinar series on renegotiating leases. Another approach is to grab landlords’ attention by shuttering losing stores, stopping rent payments, or negotiating a speedy settlement.
The Strategy That Worked: A Real-World Example
One franchisee Gelmon worked with needed to stanch losses at three of the 19 restaurants he operated. Each was deep in the red because of annual rent increases and declining sales. Gelmon advised the operator to stop paying rent and shut the stores down, then open talks with the landlord to pay past-due rent and buy out the lease. Real-estate companies typically are represented by skilled lawyers and negotiators, and restaurant operators can level the playing field by employing a skilled renegotiator of their own, Gelmon says. The result in such cases, he says, can be a quick resolution that erases the restaurant operator’s default and enables both parties to move on.
Empower Your Lease Negotiations with Legal Insights: Let’s Talk
