Last week, I visited a developer to scout a location for a new brand. First, I was shocked to see the number of projects that are in the pipeline to open within the next 15 months in the UAE. The bigger shock was when I was given rental prices. At this particular meeting, I only heard AED 500 or AED 600 per square foot. That does not include extras (CAM, Chilled water, marketing…etc.). A 300 meter location would cost around AED 2 million. How many brands can support that?
I left wondering, how dare they continue to demand such prices knowing that everyone is talking about a slowdown in the F&B industry?
I kept asking myself, why? This is just insane.
Please bear in mind that I am a consultant. I do not wish to alienate myself, and be black listed by the developers. For that reason, I will not name names.
Why does the rental cost nightmare continue to haunt us?
I worked for a company that had a good brand. The company opened few locations. One of the locations was in a big mall. It was for about 3 years and never even reached the breakeven point. This restaurant accumulated huge losses. The owners were smart; they pulled the plug and closed it. The location stayed closed for over 2 years and more restaurants in that area also closed due to lack of foot traffic in that particular area. All of a sudden, one day, I see a sign on that location indicating that a very good international brand is soon to open. I was puzzled because that international big brand does have another location open at that mall and is doing well. Why are they taking this bad location and competing with themselves? To make the long story short, since opening, this location is lucky to have 3 tables during the busiest time on the weekends. Look for it to close soon.
My question to the person whom made that decision to take that location is: Why? Do you realize that actions like this continue to encourage the landlords and keep the rental costs high?
The same thing happened at another location. The first restaurant failed. The owners of the second one thought they were better operators; they took that bad location, opened, and closed. Soon after that, a new one opened in the same spot. I predict the new one will close by end of this year. I know first-hand that each time the new owner paid more money than the old one whom just closed.
How do we turn the tide on rental cost?
As long as we have a line of bad brands, and incompetent operators who are arrogant to think that they can make the bad brand in the lousy location work, landlords will never be motivated to drop rental prices. By the way, landlords make it sound like they are doing you a great favor to even consider giving you a location. The more you call them, the more they know that you are desperate. They know a competent operator would never consider the bad location. They know that you are eager to start cashing in on your bragging rights. You can easily exercise your bragging rights, by renting a big hall and starting a private social club for you and your friends. That would cost you 10% of what you would invest (lose) at the bad location, and you can continue to brag to your friends, that you have the best private social club in town. You do not even have to call for reservations.
If we (Consultants) want to stop this madness from continuing, and keep landlords in check, we must provide proper advice to those about to make the wrong decisions. We must protect them from themselves and keep their egos from hurting them. I do not believe in collective bargaining. I would rather each operator make their decisions and live with the consequences.
As consultants, we must be honest with our clients. We must have the courage to tell them what they might not want to hear. Our clients must trust us enough to listen to us. Consultants are the gate keepers and they are the only ones that serve as neutral entities between the landlords and the owners. They should be able to give proper advice to both sides, and stop this rental cost escalation. If not, be on the lookout for many more closings and many more opening that will end up closing soon after.
A final question to the big players in the market: How many locations can your brand handle without any risk of cannibalism? When you answer this correctly, you will be able to give others a chance to get a good location for a reasonable price.
Murad Alnasur
COO FranchiseME / Restonalysis FZE
