WHY FOOD COURTS GIVE MANY FRANCHISE OPERATORS INDIGESTION - FRANCHISE OPERATOR VERSUS FOOD COURT MANAGEMENT
There is an old axiom in the food business that says that strong sales cure all. However, there are times when that is not entirely true. In the last several years, declining customer mall traffic and frugal shoppers have put this axiom to the test. Surprisingly, few have been tested more than the franchisee of a major franchise food company. Nationally known franchise units, with instant recognition, appear to be excellent for food courts. What you may not know is that flat or declining sales affect them more than the other non-franchise units, even if they have high sales levels. Many of our franchise clients are frustrated with food courts, while our mall clients are upset with franchise operator's menu changes. What is the cause of this deteriorating relationship?
The landlord, at the onset, is usually delighted to have a national or well-known regional franchise food operator in his or her food court. The name recognition, image, potentially high sales, limited menu, operating consistency, product quality, cleanliness, value, good service, trained employees and generally well-rounded operations normally make the franchise operator a good tenant. It is important to note that the franchise operator is answerable to both food court management and the franchise company. The franchise operator must meet operating standards set and monitored by the franchisor.
The landlord's frustration results from menu changes or additions to the otherwise limited menu; items which usually are in conflict with other food court operators. The franchise company normally adjusts the menu to changing consumer eating patterns, or the need for higher sales. The dictated changes must be implemented by the franchise operator. Thus, the landlord loses control, and other food operators become unhappy.
Serves Two Masters
The franchise operator needs higher sales than the other food operators to meet his additional costs. In addition to the normal rent, food court charges, common area maintenance and merchants association dues or marketing fund requirements, the franchise operator must also pay royalties to the franchisor and make a contribution to the food company's co-op advertising fund. That often does not leave much profit for the franchise operator.
In preparing this article, I called a number of franchise operators (sensible and objective operators) and asked about their food court units. Some of these operators have units with sales of over $1,000,000. First, they reminded me that they usually have higher capital costs because of the franchise company requirements. Second, they all agreed that the average food court does not generate consistent pedestrian traffic for them for the two primary meals (dayparts). Third, their occupancy costs are too high to provide comparable "on street" profits. Fourth, total CAM charges are too high. Finally, in their opinion, size limitations take away the franchise advantage. Listening to their laments does have a ring of the normal tenant complaints. However, sorting out their remarks, indicates that it does cost more for them to be in food courts, and often they do not receive commiserate profits.
Consider the following economics for a food unit capturing $500,000 in sales, with a 10 percent rental and normal food court charges and mall CAM charges. The table below presents the sales, expenses and profit for a fairly typical operation.
Food Court Operator
Cost of Sales -$280,000
Gross Margin $220,000
Expenses including rent and CAM -$175,000
Profit before taxes $45,000
In this example, the operator would have a profit of 9 percent before taxes.
Makes No Sense
Now, let's add in the franchise operator's additional costs. The franchise fee includes a 6 percent royalty and a co-op advertising contribution of 2 percent, or a total of 8 percent of sales. This results in additional expenses of $40,000, reducing the net profit to $5,000 or 1 percent of sales. Given the risk, the tenant should not be in the food court.
One would expect that a national franchise unit would capture greater sales than an independent, and usually they do. However, even if the sales were $900,000, and the net profit before franchise charges amounted to 12 percent or $108,000, the franchise charges would reduce profits by $72,000, leaving a net profit of $36,000, or a 4 percent return on sales. Not much of a return for the risk. Even at sales of $1,200,000 and a net profit of 15 percent ($180,000), the franchise operator must pay an additional $96,000 to the franchise company, leaving a net profit of $84,000, or 7 percent of sales.
Franchise food operators often cannot live at sales under $600,000 to $700,000 annually. Furthermore, this is becoming a "Catch 22" situation for the franchise food operator. He is being squeezed by the franchise company charges and the
food court's occupancy costs.
What does all of this mean? Franchise operators need to carefully review sales potential and costs before entering food courts. Moreover, they need to increase sales or reduce some costs in order to improve profits. Conversely, shopping center management needs to be more prudent in selecting franchise food court tenants to be sure that they will at least be high sales units. A good name does not necessarily make for high sales. Another action might be to tighten up future lease provisions regarding products sold. Furthermore, a check should be made to see if the franchise food operator has experience in operating a food court unit. Permit the franchise food operator more individuality in presentation, especially around the counter which can attract more customers. And, finally, continue to provide an attractive setting with adequate tables, seating and clean up.