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
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