Chapter 2 - Location

Importance of a good location | Analysis of proper location in terms of the operator and his personal requirements | Analysis of communities, neighborhood | Traffic and its effect on location | The relationship of expected profits and investment to location | Competition | Cost and characteristics of the site | The value of diligence and patience

Wouldn’t it be wonderful if the selection of a site for a restaurant could be determined with a geiger counter or a dip stick? We could walk along proposed sites and nonchalantly wait for the buzzing of the counter or the sharp down pull of the dip stick to tell us that this is it! Unfortunately, no one has invented the proper device to pinpoint, successfully, the proper location. Our concern with location is realistic because so much of a restaurant's success may depend on its location. Furthermore, as time passes a location that was regarded as an ideal location can slowly turn sour.

With years some locations get better; others get worse. The new Interstate Highway System is certain to affect many food service opera­tions. Neighborhoods rise and fall; whole sections of a city die on the vine. New trends, such as suburban living, can radically change the value of a location. New rules or regulations, shifts in consumer be­havior, spending and income, changes in population, national and local business activity, union demands, or a change in the time, direc­tion, or density of traffic can destroy the value of some locations and create wonderful opportunities for others.

How can a successful location be determined? There is no sure fire formula which will work for all types of operations. All the factors that contribute to proper location must be analyzed individually in terms of the operator's desires, the type of operation, and the market for the product. It is self-evident that for each type of operation there can be a difference in the menu pattern, menu prices, service of food, need for skilled labor, frequency of food deliveries, and the volume of business necessary to break even. Also, a state or region should be selected that is suitable for you and your family. Although this require­ment may not be a major issue, consideration should be given to the relationship of you and your family with the community. Are you affected by extremes of temperature, sunshine, snow, or rain? Are you and your family accustomed to a big city life? Do any of you have a special health disorder, emotional, or mental block that will be aggra­vated by the community environment? Why not consider these and other factors before and not after you invest in an operation in that area?

If you have decided upon the region in which you prefer to establish your home and your business, you have already narrowed down your location choices and can begin to make a more careful inspection of the several communities that you have in mind.

Checks on the Community

The next step is to make a quiet but rather complete analysis of the possible communities. Are they supported by an agriculture or indus­trial economy? You are trying to determine whether or not there will be a sustained demand for your product and the community's ability to pay now and in the future. Spend several days in each community. Visit the bankers and business people in the local chambers of com­merce. Talk with relatives, friends, strangers. Get acquainted with the various realtors, brokers, restaurant supply houses. Check with the local office of unemployment. Be alert to their comments. Are the people friendly or antagonistic? Do they make you feel welcome? Does a large majority of persons consider that the town is barely holding its own? Is there a large supply of labor, food, and equipment avail­able? Can you obtain these at a reasonable cost?

If the town is supported by industries, how many and what types of industries are in town? Are they diversified? Is there evidence of stabil­ity or are most citizens seasonally employed? Are the companies and the community considered to be progressive and well managed? Is the trend up or down? What is the trend in population and income growth? Does the community attract tourists, vacationers, conventions?

After you have evaluated the answers to these questions and have decided on the community, the next step is to analyze your personal qualifications and the neighborhood in which you intend to establish your operation.

In order to do this, consider your ability, training, experience, per­sonality, financial resources, likes and dislikes. In terms of these considerations you will make or perhaps have made a decision regarding the type of food service operation that you are best qualified to oper­ate. This decision will certainly affect your location.

Checks on Your Operation

Your entire management pattern is distinctly different with a drive-in as compared to a cafeteria or an atmosphere table-service restaurant. Will your operation be a specialty house or will you feature many popular items? What is your basic menu pattern? Do you have a high or low priced menu? Have you made an analysis of your basic menu pattern and determined your probable average check per person? On the basis of the average check per person and the volume of sales needed to make the desired profit, have you determined the number of customers needed to attain the necessary sales volume?

At the location that you are considering, what is the direction, den­sity, duration, type, sex, age, and income levels of the traffic? How does this analysis of traffic compare with the requirements of your operation? What type of neighborhood is needed for your operation? Is the neighborhood composed mostly of suburban residents? shop­pers, office help, amusement seekers? Is the neighborhood growing? What are the potential sales now and the outlook for the future?

As an intelligent businessman, be sure that the business potentials are thoroughly investigated and a budget made of proposed investment, estimated gross income, general and operating expenses. You can then make an educated guess as to the financial success of your venture.

Gross and Net Profit

One operator located in a city of over 190,000 population had a very systematic approach to the problem of location that illustrates very well how effective these considerations are. After warning the interviewer that any restaurateurs planning to use his system should substitute their own figures according to their knowledge and experi­ence with their particular type of food service, the operator resumed, "First, I determine how much net profit I want to make from my investment. This net profit figure is before income taxes and, for me, must be a minimum of $15,000 and a maximum of $25,000 from any one operation. I multiply this profit by 4 or 5, depending on the type of operation I have in mind, and the resulting sum determines my maximum investment in the operation.

"For example, I invested $60,000 in this table-service operation and obtain over $15,000 net before taxes annually. In the cafeteria, on the other hand, I invested $100,000 to obtain $22,000 a year.

"Before I select a location I consider four basic factors: (1) the volume of daily sales needed to give me the desired profit, (2) the number of meal periods, (3) the basic menu pattern, and (4) the type of restaurant I plan to operate.

"From my past experience I know that I can expect to make a profit of 10 to 12 percent of gross sales. Therefore, if the desired net profit is $15,000, my gross sales should be $125,000 to $150,000. To play it safe I use the $150,000 as the required sales and divide this figure by the number of operating days in the year, in my case 360 days, and obtain the required daily sales—approximately $416 a day.

"Next, I consider the number of meal periods and my basic menu pattern. From these two factors I determine the amount of sales needed for each meal period, the average check and subsequently the number of people required to produce a given amount of sales each day.

"For example, before I opened this restaurant, I decided we would not serve breakfast. My hours of business would be from 11:30 a.m. to 9:30 p.m. After analyzing my basic menu pattern—considering item popularity and price—I figured that my average check for lunch would be about $1.00 and my average check for dinner about $1.45. Knowing this town and the eating habits of its people, I could expect about 40 percent of the dollar sales volume to occur between 11:30 to 5:00 and 60 percent from 5:00 to 9:30 p.m.

"With these facts I was ready to pinpoint a location. Let's sum­marize this information so we can see how we stand.

"First, since I do not plan to serve breakfast, the location must pro­vide on an average a luncheon volume of $167.00 and a dinner volume of $249.00. This means I must have approximately 167 cus­tomers for lunch and 172 for dinner.

"Second, since my estimated sales are $150,000 annually, I would not want to pay more than 7 percent rent and probably would not obtain a lease for less than 3 percent. Consequently, the rental should not be more than $1,050 monthly and would probably be over $450.

"Finally, I considered my basic menu pattern and the type of food service to offer from the point of view of the people who would patron­ize that type of operation and would want my menu offerings at a given price.

"At that time, I had a choice of two possible locations in the city. One location was in the heart of the shopping district, which seemed ideal at first glance. However, after a little study, I saw that the rent was too high and the time, type, and density of traffic was not right for my operation.

"For example, in terms of time of traffic, most of the people crowded the streets during the morning and afternoon hours but after 5:30 the streets were deserted. In terms of type and density most of the traffic was women shoppers, housewives, office help, etc. They usually look for fast service, light meal, low average check, and con­tinue their shopping or return to their office. Since I was not going to compete with the two ten-cent stores, one drug store, and three counter lunch operations in that block, I decided on the other location.

"This site, on the other hand, rents for $700 monthly—less than 5 percent of my gross sales. Around the corner is the Hotel Essex. Within a radius of three blocks are three theaters, a bowling alley, the Palace Ballroom, and a shopping and office building district. Seventy-five percent of my luncheon guests are salesmen and supervisory per­sonnel from the insurance, bank, and other office buildings in this vicinity. The remaining 25 percent are clerical help and shoppers. For dinner I have two periods, one from 5:30 to 7:00 and one from 8:15 to 9:00. These peak periods are created mostly by people having late business in town, and those who are either going out for early enter­tainment or returning to their homes after the first show ends."

Two other considerations should be analyzed to select a location successfully: competition and the cost and characteristics of the site. Competition means many things to many people. To some competition is a spur to added achievement—a means to added success, not an obstacle to overcome. To others, competition is a fearful ghost—a dirty word. Competition hurts only when the number of operations catering to the same segment of the population exceeds the demand for the operations.

Looking at competition in this light, it is more often an unreal fear than a concrete reality. The setting, facilities, services, prices, menu, and personality change from one food service unit to the other. Each type of operation has a specific set of characteristics that vary consid­erably from one another. A short order counter operation is not com­peting with a service restaurant or a highway drive-in. A cafeteria is not competing with an atmosphere table-service restaurant. Their menu patterns, menu prices, and services appeal to different groups of the total population.

However, in some areas, there may be too many of the same type of food service units as the one you plan to build. Consequently, if your services, facilities, menus, and prices are the same, you will in all probability appeal to the same segment of the population and thus be sharing the existing market for your products. One effective way to determine your potential sales is to check total restaurant sales in a community where restaurant sales are taxed with the tax division of the state in which the community is located.

Another possibility is to evaluate your community data in terms of consumer expenditures for food eaten away from home. In an agri­cultural area these expenditures are usually not more than 75^ a week per person in the population. In an industrial economy this figure may rise from $1.20 to $1.45 per person, depending on the diversification and stability of industry and the total population. Consequently, the greater the population and the industrialization of the economy, the larger the expenditure per person per week.

Note the number of eating places in the community. On an average, it takes approximately 1,500 people to support a restaurant that desires to attain a $100,000 sales volume annually. Study the appearances of eating places, the type of management, and the presence of chains. Each of these factors will affect your decision to locate in the area. Slipshod methods of management, poor quality food, ineffective ad­vertising and promotion, unsanitary establishments, all indicate that a large market for restaurant sales is untapped.

Another consideration in properly selecting a location is the cost and characteristics of the site. The basic considerations in determining the specific location are the cost of land or rent, the dimensions and topography of the lot, visibility and accessibility to the lot, zoning restrictions, real estate values in surrounding areas, the traffic past the lot and the population within a radius of two miles of the site.

Perhaps this is the most frustrating phase of restaurant develop­ment. However, diligence and patience are desirable virtues at this point. A detailed analysis, and a business-like approach cannot help but bring greater rewards than any hastily formed decisions. Building codes and zoning requirements may place restrictions on construction or use of space which make a restaurant impossible without actually stating that restaurants are prohibited.

Technical advice may be needed: architects and engineers for an opinion of building codes, cost estimates, and structural defects; law­yers to study titles, permits, leases, liens on the property, pending lawsuits; accountants to make a property appraisal, proper asset valuation for tax saving; or government officials for information on exist­ing regulations regarding plumbing, health and sanitation or wiring.

Good businessmen never take a chance and hope for the best if there is an opportunity to obtain the facts and study a proposed action in detail. Most of the successful operations spend months and some­times years properly selecting a location. When asked what were the three most important reasons for the success of his operation, Ellsworth Statler replied, "Location, location, location!"

This chapter on location may be considered unnecessarily compli­cated with details. However, any one of those details may be the one that is important for you and your operation. Why be hasty or impul­sive in selecting a location when with consideration of all factors you can make a decision that will free you of worry, frustration, and ulcers and provide you and your employees with a good start in a profitable service operation.

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