Wednesday, September 18, 2024

Foodservice Operator Optimal Rent Percentage for Profitability

 


Steven Johnson the Grocerant Guru® at Tacoma, WA based Foodservice Solutions®, has seen the foodservice landscape evolve over decades, and one constant remains: the delicate balance between rent costs and profitability. There is one fact no one can deny, if your rent is to high you won’t make any money!

For restaurants and convenience stores, understanding and maintaining the optimal rent percentage is crucial for long-term success. Let’s delve into the historical data to examine what this percentage looks like and explore three examples that highlight its impact on profitability.

The Golden Rule: Rent as a Percentage of Sales

Historically, the industry has set a general benchmark where rent should account for 6-10% of gross sales for restaurants and convenience stores to remain profitable. This range provides a buffer for operators to manage other operational costs, such as labor, food costs, and utilities, while still achieving a healthy profit margin. Deviating too far from this range can place undue stress on the business, leading to reduced profitability or, worse, closure.


1. Restaurant Example: Darden Restaurants

Darden Restaurants, the parent company of Olive Garden and Longhorn Steakhouse, has long been an industry leader in managing operational costs, including rent. Historically, Darden has maintained its rent expenses at around 6-7% of its gross sales. During the 2008 financial crisis, when many restaurants struggled, Darden's adherence to this optimal rent percentage allowed it to weather the storm. Their disciplined approach to site selection and rent negotiations ensured that even during downturns, the company could remain profitable, while competitors with higher rent percentages were forced to close underperforming locations.

2. Convenience Store Example: 7-Eleven

7-Eleven, a global retail juggernaut, is another prime example of the importance of maintaining an optimal rent percentage. Historically, 7-Eleven has kept its rent at around 5-6% of gross sales. This strategy has been instrumental in the company’s ability to expand aggressively, particularly in urban areas where rent costs are typically higher. By sticking to this percentage, 7-Eleven has been able to control costs and maintain profitability even as it continues to grow its footprint. Their focus on high-traffic locations with strong sales potential ensures that rent costs remain within the optimal range, safeguarding their bottom line.


3. Restaurant Example: Starbucks

Starbucks provides an interesting case study in the impact of rent on profitability. During its rapid expansion phase in the early 2000s, Starbucks aimed to secure prime locations, often paying premium rents that exceeded the industry norm of 6-10%. At its peak, some Starbucks locations were paying up to 12-14% of gross sales in rent. While this initially fueled growth, it also led to profitability challenges, particularly in less profitable or oversaturated markets. The company had to close hundreds of underperforming stores in 2008-2009, a move largely attributed to unsustainable rent costs. This experience underscored the importance of keeping rent within the optimal range to ensure long-term profitability.

The Takeaway: Rent Discipline Equals Profit Stability

For both restaurants and convenience stores, the historical evidence is clear: maintaining rent expenses within 6-10% of gross sales is critical for sustaining profitability. This percentage range allows operators to absorb fluctuations in other operational costs without jeopardizing their financial health. While there are always exceptions to the rule, such as strategic locations where higher rent may be justified by exceptional sales potential, the general guideline remains a vital tool for ensuring long-term success.

As the foodservice industry continues to evolve, particularly in the face of rising real estate costs and changing consumer behaviors, operators must remain vigilant in managing their rent expenses. Those who do, like Darden Restaurants and 7-Eleven, will continue to thrive, while those who don’t risk the fate of early Starbucks—a cautionary tale of expansion at the expense of profitability.


In today’s competitive market, understanding and adhering to the optimal rent percentage isn’t just a best practice; it’s a necessity for any foodservice operator aiming for sustained success.

Looking for success clues of your own? Foodservice Solutions® specializes in outsourced food marketing and business development ideations. We can help you identify, quantify and qualify additional food retail segment opportunities, technology, or a new menu product segment.  Foodservice Solutions® of Tacoma WA is the global leader in the Grocerant niche visit us on our social media sites by clicking one of the following links: Facebook,  LinkedIn, or Twitter





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