This is the second in a series of blog posts from JLL that will explore the rising importance of food and beverage (F&B) in retail place-making, the implications for retail property owners, as well as delving into the future challenges facing the industry as explored in the 2017 ICSC ‘Successful integration of F&B within retail real estate‘ report.
Our first blog post in this series focused on the driving forces behind the trends for more foodservice space, as well as summarising the benefits that well planned and executed foodservice can have on the wider shopping centre. This blog highlights that, whilst foodservice continues to be ‘flavour of the month’, it can be a complicated business. We also explore some of the pros and cons for restaurants operating in a shopping centre environment.
Why food is not retail
Foodservice and retail business models differ fundamentally. It is physically impossible to eat all day long and, while the development of ‘grazing’ means that we are no longer restricted to eating ’three square meals per day,’ there is a finite amount that any individual can eat in one sitting, whereas shopping can take place in multiple retail outlets over a prolonged time period and is only constrained by spend power, or consumers’ desire to spend. Give your credit card to the person next to you and try it out! Whilst landlords count guests as footfall, we count them as stomachs and, with this finite amount of eating and drinking per stomach, it is important to get as much spend out of guests’ stomachs as possible.
The global growth of foodservice within shopping centres requires the industry to gain a much deeper comprehension of foodservice occupier business models. Landlords need to understand what operators will do for their customers, what they sell, when they sell it and how much they sell it for. Landlords can no longer treat foodservice as an offshoot of retail. But where do the main differences lie, and are all foodservice operator business models the same?
Sophisticated industry requires better segmentation
As the global foodservice industry evolves and matures, there is a need for a more sophisticated approach to segmenting the market into foodservice categories. It is no longer enough to talk about fast food, quick service and sit-down restaurants. JLL has developed a comprehensive foodservice categorisation model that incorporates concepts from ‘coffee and cake’ to ‘impulse’ to ‘gourmet food’ operators. Each has distinct trading periods, dwell times and catchment (or trade area) characteristics, as well as location and technical requirements. There is certainly no ‘one size fits all’ for foodservice operators and even established brands have unit variations to suit particular locations or demographic profiles – think Giraffe Stop at Kings Cross Station, a breakfast at Nando’s at Gatwick Airport and Starbucks Reserve in Paris.
The complicating factor is that many operators no longer fit neatly into one foodservice category. There are a growing number of cross-over operators that sit across categories, often changing category during the day. Landlord demand for ever more rental revenue has effectively created these hybrid operators – it is a positive for the industry in terms of creativity and innovation, but it does put the onus on landlords to fully understand their business models.
Each style of foodservice category will have varying Gross Profit margins, depending on the quality and type of ingredients used and the brands’ purchasing power; different staffing costs depending on skill levels, quantity and grade of employee, level of automation and technology; different levels of Head Office costs and therefore varying levels of occupancy cost affordability in order to generate the required net profit. An understanding of these different business models is key to understanding a tenant’s ability to pay an affordable level of rent.
Barriers outweighed by benefits
For foodservice operators, there are undoubtedly barriers to entry and viable reasons against opening shopping centre units (and some have a strategy of shopping centre avoidance). Higher fit-out costs and rental levels (in comparison to alternative locations) in some markets, plus additional costs such as service charges, can make the cost of occupation prohibitive in some shopping centre locations.
The other key barrier to entry for foodservice operators is the configuration and opening hours of the shopping centre. This is particularly relevant for ‘fast casual’ and ‘casual dining’ operators, which make roughly half of their revenues after 5pm. Therefore, a unit in a daytime trading centre must have the ability to trade externally from the shopping centre in order to allow the operators to maximise their revenues from evening trade. Meanwhile, coffee shops with public access from outside the centre can potentially stay open until the early morning hours.
However, on balance, the benefits of shopping centre representation outweigh these barriers, for most operators. Restaurants trading in shopping centres benefit from extended trading periods (a long(er) Christmas season, for instance), and above all, from the lifeblood of all retail and leisure operators, footfall and a socially conducive environment.
Explore the ICSC ‘Successful Integration of F&B within retail real estate’ report with JLL in a series of blog posts this Autumn. Subscribe at blog.jll.eu/retail
- Ian Hanlon – Director, Foodservice Consulting
- Ken Higman – Associate Director, Foodservice Consulting