Small pizzerias, big profits

April 17, 2006

In this age of colossal steaks, cavernous SUVs and four-person families nesting in 6,000 square-foot mini-mansions, some believe bigger is better, but not Donatos Pizzeria. The 182-unit Columbus, Ohio, chain has learned to simple-size its restaurants by making them smaller and more operationally efficient.

When McDonald's Corp. owned Donatos, the company built a few dozen 3,000 square-foot state-of-the-art pizzerias, freestanding sites with about 90 seats and seven-figure price tags. That formula failed for McDonald's, which closed 23 of those units in one fell swoop in 2002 in its pricey Atlanta market. And the handful kept by the company when founder Jim Grote bought Donatos back in 2004 appear to be the last of that luxurious breed.

This year Donatos opened what spokesman Tom Santor calls a "right-sized restaurant, a smarter restaurant." The modern freestanding 2,100 square-footer seats 40, sports a drive-thru window and

What's Important

Restaurant operators of many stripes are learning that well-designed smaller units can pull higher gross sales and higher profits.

Some operators, like Donatos Pizzeria, are building smaller units it says better reflects its changing market.

Sales at quick-service restaurants, consultants say, must be higher per square foot than full-service restaurants.

is planted in the Columbus suburb of Hilliard. The store's real beauty, however, is in its bottom-line performance. Santor said revenue is comparable to larger Donatos operations, but overhead and operating costs are lower. The privately held company does not share financials, but Santor said "the results have been terrific. It's been a win all the way around."

Chipotle Mexican Grill, Donatos former stable mate at McDonald's, is learning the same smaller-is-better lesson. Reuters recently reported Chipotle president Montgomery Moran telling investors that as its "stores got smaller, the gross sales got larger, and the returns got even larger still." Moran said the 500-unit chain's inline 1,000- and 3,000-square-foot models were outperforming their larger counterparts, and those results are driving Chipotle to reduce future site sizes.

Goodfellas Pizza co-owner E. Jay Meyers learned the size-matters lesson the hard way. The full-service dine-in, takeout and carryout company built a few 6,000-square-foot sites that performed either below expectations or merely to levels generated by units one-third the size.

"We've just found it's a lot easier to operate a smaller store because there are fewer details to manage. There's less waste and lower food cost, and the margins are just better," said Meyers, whose company is based in Staten Island, N.Y. "Anytime we had success with a really large unit was when it was run by one operator who had about 15 years of restaurant experience. And even though he knew what he was doing, his margins were about the same as the smaller stores'."

Sales per square-foot

Warren Sackler, an associate professor of hospitality and service management at Rochester Institute of Technology, said it's not uncommon for restaurateur to rent more space than their revenue justifies. His rule of thumb for deciding whether a site is too large is to project gross sales and then limit rent to 4 percent of that number.

"If you're doing $2 million, you can afford $8,000 a month in rent," he said. "And going over that 4 percent still can be OK depending on where you're cutting (i.e. in labor or food cost). But if you're getting up to 8 or 10 percent of your rent based on volume, then there's a good chance you're in trouble."

Another way of evaluating the profit potential of a site is to figure out whether it can generate enough sales per square foot available. Restaurant consultant Jim Laube believes that to be profitable, low-margin

An Eagle Boys Pizza's micro unit in Emerald, Australia.

quick-quick service restaurants need much higher sales per square foot than high-margin full-service restaurants.

Combining his own research with numbers gathered from the National Restaurant Association, Laube calculated that the average QSR must generate $225 to $300 per square-foot to break even, while a full-service restaurant needs $175 to $275 to do the same.

When it came to Donatos deciding to downsize its stores, Santor said the company did so to reflect the changing marketplace, not just to simplify operations.

"It's not so much a smaller store, it's a right-size store," he said. "We gone from a one-size-fits-all concept to an asset that more properly reflects the neighborhood we're in."

Knowing it couldn't use its standard-size to serve Australia's rural towns, Eagle Boys Pizza created what managing director Tom Potter called "micro units" four years ago. For its enormous size, Australia has only 20 million residents, many of whom live in about a half dozen large cities. The rest live in small towns where Eagle Boys has built 45 micro units.

"We know it takes between 7,000 and 9,000 people to support one chain pizza operation," Potter said. There are several reasons why those stores are profitable, he added. "They pay about a half to a third of the rent paid in other markets, and if you're the only game in town, you can charge $2 more for your product." (Potter also said not all that additional charge is gravy. The added fee is necessary to offset freight costs to far-flung areas.

Since they're smaller, build-out costs for micro units are less than those for a standard store. They also don't use dough rounder-dividers like standard Eagle Boys, they don't have enclosed "phone rooms" where order takers work in quiet, and franchisees pay a reduced fee for the smaller operation.

"An operator in a rural market also has shorter hours of operation," he added. "These guys can make a very good living—based on the costs of living where they are—while working fewer hours."

And like Donatos, Eagle Boys wants drive-thru locations wherever possible. According to Potter, sales increase anywhere from 30 percent to 80 percent at micro units converted to drive-thrus.

"So just when we thought a particular town couldn't supply more pizza consumption for our operator, we moved the unit down the road, put in a drive-thru and sales jumped," he said. "The guy was doing 14 grand a week before, and now he's doing 24 grand a week." (Editor's note: Those sales convert to

The last of luxurious breed: a deluxe Donatos Pizzeria dine-in.

about $10,500 to $18,500 in U.S. currency)

The newest Goodfella's is set to open in Dallas in late April. It is an inline site spanning 2,200 square feet with seats for 80. Meyers said one key to making a smaller Goodfella's work is having a kitchen that can produce the volume to meet the demands of dine-in, delivery and carryout. Its next-door neighbors in the strip center are Starbucks Coffee and a Marble Slab Creamery already in operation, and he expects their traffic to boost Goodfella's delivery and takeout.

"What better recognition can you hope for than those two brands?" he said. "People are coming in and out of those places constantly and asking when we're going to open."

Topics: Operations Management

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