How do emerging chains handle real estate selection?

Sept. 12, 2010 | by Matthew Loney

If you have ever grown a young franchise concept from approximately 20 locations to over 100, you would probably agree that this initial growth is much more difficult than say growing from 100 to 200 locations or from 500 to 750 locations, and one of the main reasons for this is the problem of proper resource allocation.  Whether you are referring to tangible resources (i.e. fixed revenue), intangible resources, or human resources, the proper allocation of these resources for a young system is probably the most difficult strategic decision that a CEO must make. 

In part one of this series, I wrote about the common strains that a young, emerging system experiences within their operations department and suggested a number of ways to alleviate these struggles while still remaining profitable.  Continuing to focus on the resource allocation factor, I thought it would be helpful to discuss real estate site selection, a process that ranks at or near the top of the list of priorities for every franchise system and one that can overwhelm a smaller system if not managed properly. It certainly takes its toll on both the financial and human resources of companies.

Let’s address some common setbacks to and hints for savvily managing the real estate selection process. First: Although there are a number of great site evaluation software programs on the market, I cringe every time I hear an executive of a young brand talk about purchasing one of these programs as a means of handling their company’s real estate site selection.  This software (especially the more sophisticated options) are incredibly expensive to set up and maintain, sometimes costing over $100,000 in the first year. Further, these executives usually talk about the software as if it were the silver bullet and will eliminate all of the hard costs associated with finding real estate the old fashion way – walking and driving the market.

To clarify, having used a number of real estate identification software programs in the past, there are certainly advantages to having these programs as a resource, but they must be treated as a tool and not as the final deciding factor for locations.  Requiring that the franchisor actually puts “boots on the ground” and give real estate selection its due does not  necessitate adding a director of real estate for which the franchisor must incur the extra expenses of a salary, travel expenses and benefits.  One alternative is for that franchisor or CEO to align his or her company with a real estate agent who will generate his or her income from the brokerage fees paid by the landlords.  Depending upon the company’s growth plans, a year’s worth of brokerage commissions (especially in today’s real estate market) is an attractive opportunity for the right person and eliminates the extensive costs of bringing that director of real estate in house.  Additionally, this eliminates the struggles that often arise from using multiple different brokers to assist with a company’s real estate site selection.  By identifying one broker, a young system can insure that its broker understands the system’s strengths and weaknesses, demographics, economics, and ideal real estate criteria.

As a young system grows, placing the right amount of tangible resources into the right human and other resources is a juggling act that can often mean the difference between profitability and failure.  A third party arrangement similar to the one described above can go a long way to freeing up capital for other opportunities, while ensuring that the system continues to grow as quickly and intelligently as possible.


Topics: Business Strategy and Profitability , Franchising & Growth

Matthew Loney / As president of Stevi B's Pizza, Matthew V. Loney is taking a small pizza buffet concept from a promising regional brand to a leading national franchised system.
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