Mall chains take long-term outlook

Mall chains take long-term outlook – food courts

Don Jeffrey

Chains operating in food courts are thriving, but some of the most successful operators are decrying the escalating costs that make it harder to go into a court and reap reasonable profits.

These operators predict that a shakeout will eliminate the mom-and-pops and concepts too closely competitive and leave a core of national and regional mall chains as survivors.

But these mall chains–which range from the pizza-and-pasta concept Sbarro to the sandwich specialist All Amercian Hero and the healthy-foods purveyor California Smoothie–may discover after defeating the weaker competitors that they face a far more formidable foe.

Huge restaurant chains like McDonald’s Burger King and Church’s Fried Chicken are hungrily eying the malls and beginning to move into already-tight food courts and the spaces adjacent to them.

Food-court operators report that sales drop appreciably when the majors move in.

But despite the negatives–and they are numerous–chains that began in or nurtured their growth in food courts are betting their capital on long-term success.

No longer a trend, the food court has emreged as the dominant overall food-service concept in American malls, whether they be off-price suburban shopping centers, high-fashion upper-income enclaves or tourist theme centers in the larger cities.

Developers, recognizing the concenrs of operators, say they are forced to weigh the benefits og going with the well-financed, well-marketed major chain or the unique local operator or small chain that may lack the big chain’s efficiency and track record.

Whatever the outcome, there appears to be no turning back by developers as far as food courts are concerned. For them, the courts are highly profitable.

But many observers believe these high profits are realized from excessive rents and charges that force operators to depend on enormous volumes.

For operators the advantages of being in the food courts are: potentially high customer traffic at their counters, tremendous exposure for new or growing concepts, low investment costs, efficiencies in sharing seating space with other concepts, the large captive audience of mall employees, labor savings and the solution to what some term the “split-group phenomenon.”

Investment costs are low because operators fit their concepts into already-constructed spaces where the use of extensive equipment is precluded.

Taco Viva, a Florida-based, 77-unit Mexican-style fast-food chain, spends about $100,000 to put up a food-court unit, considerably less than the $275,000 to $450,000 investment required for a freestander or in-line mall unit. Average annual unit volume is $340,000.

The tremendous exposure to large numbers of people in a mall–and especially in a well-situated food court–helps a chain like Taco Viva, says marketing vice president Nelson Futch, because Mexican fare is not yet widely accepted. New tryers are needed, and the courts provide the opportunities.

“Mall employees who go to the food court every day inevitably will see the line at the taco counter, and someday they’ll try it,” he says. “Our surveys indicate a higher degree of first-time tryers in food courts. There’s much less mystery there surrounding what Mexican food is about.” He says the food court is “our area of total concentration.”

Futch also says the court solves the problem of the “split-group,” whereby a group will steer away from a place whose fare one member strongly resists. In a food court, where a group can sample several fares and still sit together, “we feel sure we’ll get our share,” Futch says.

And volumes are high in food courts. Joseph Sbarro, vice president of the hot Sbarro chain–40% of whose 100-plus units are in courts–reports that its first food-court location is taking in $1.5 million a year.

But volumes have to be high to make up for high costs imposed by developers. Besides basic rents, which range from $20,000 to $45,000 a year, depending on the mall and the size and nature of the food concept, there are mall mainteance charges, royalty charges that vary from 2% to 10% of sales over a break-point, utility costs, marketing fees and other assessments.

One operator reports that common-area charges are sometimes unfairly distributed because a dishonest operator may not report his total sales; thus, fees paid by everyone are increased. And some developers of upscale malls are now reportedly demanding up fron “key” money to get into the malls.

Another source of pressure on volumes as well as margins is the crowding in the courts.

Tony Dammicci, real estate vice president of Carousel Snack Bars, a 285-unit chain operating under that name as well as Hot Dogs and More and The Great Hot Dog Experience, says developers keep increasing the number of tenants in new courts.

“We normally like to see eight to 12 users in the court,” he says. In one mall, he’s one of 20 vendors. With all the pressures, says Dammicci, “it’s becoming harder to say yes to go into a food court.”

One way some operators are getting around the problem is by opening more than one concession in a court. In some busy Sbarro locations, for instance, the pizza and pasta have been split off into two separate operating entities.

Robert Keilt, chief executive officer of the 14-unit healthy-foods concept California Smoothie, says he tries to negotiate “tandem” arrangements in food courts. Next to a Smoothie he may place a Philadelphia Steak and Sub Co., another of his concepts. This arrangement boosts volumes and saves on labor and construction costs. One manager can run both concepts.

Motivating managers can be a problem in food-court situations. For that and other reasons, Bueron Ledbetter, vice president of 300-unit Chick-Fil-A (called the “big daddy of mall chains”), says frankly, “We don’t like them.” He says that his managers consider themselves to be entrepreneurs and that forcing them to work in food courts where they cannot control the environment, mingle with their customers, or devise their own promotions seriously affects their motivation.

Ledbetter says Chick-Fil-A especially dislikes the inability of a chain to promote itself in a food court. Usually all tenants of a court pay promotional fees, and the developer will merchandise the court.

Food-court units initially enjoy great volumes, Ledbetter says, but without promotions sales plateau quickly. Average annual volume of a Chick-Fil-A is $550,000.

Chick-Fil-A has for four years pursued deals that allow it to have its own seating, identity and lease-line promotions, if it has to accept a food-court situation. The unis are larger and the chain pays more for rent. Sbarro also has arrangements whereby it faces the food court but has some interior seating as well.

But this kind of arrangement may backfire on mall chains because it can work the other way. A sitdown restaurant may be able to use the adjacent food court’s seating for its take-out customers. Some developers are charging these restaurants a portion of the food-court charges.

This is part of the trend whereby major nonmall chains are moving into the malls. Because their other markets are becoming saturated or because sites are too expensive and hard to find, they are looking at food courts or in-line sites as growth vehicles. McDonald’s McSnack test units and Chruch’s Fried Chicken’s ministores are the types of unis that could compete wtih Chick-Fil-A and All American Hero in the near future.

David Glassman, chairman of 43-unit All American Hero, says the majors will defeat the purpose of the food court–to provide a mix of food concepts that the consumers can’t get elsewhere–and “take the heart out of the food court.” And, with the millions the majors can spend on marketing, they present an unfair advantage.

Richard Nicotra, chairman of 50-unit Everything Yogurt, says the majors may put the smaller chains out of business because they can offer a varied menu at lower prices. For instance, a Wendy’s with its baked stuffed potatoes might threaten some already-troubled potato chains. “The developer has to be the policeman,” Nicotra says.

Some smaller chains, however, welcome the majors. Taco Viva’s Futch says their reputations will add class and familiarlity to food courts and their high visibility and marketing clout will draw more traffic.

The question of menu overlap is a serious one in food courts, where competition for the shopper’s dollar is already intense, but most sensitive developers work with vendors to create a mix without overlapping. Menu restrictions are often part of the lease language. This usually satisfies the operators but sometimes limits them.

Commenting on menu limitation, Kathleen Fox, marketing director of Carousel Snack Bars, says, “As a businessman, I love it, but as a marketing person, it makes my job tougher.” She says that in most of her food courts she cannot offer nachos, a big seller in in-line units, because there is a Mexican chain in the court that sells them.

Another complaint of operators is a loss of individuality in the food court. Many mall courts–and malls themselves–have a bland sameness to them.

Nictora says his “main gripe” is a strictness of design that “nixes your individuality.” The job of the developer’s designer is “to make sure no shclocks get in, but they inhibit people like us.” Also, in their effort to make malls efficient and attractive, designers may ignore food-service concerns, he says, resulting in incorrectly sized tables, inadequate storage rooms and poor counter heights.

The inability to control the environment and create an identity burns many operators, although strict criteria may be good for the weaker concepts. One operator says, “It takes a lot of the headaches out of the food-service business for some.”

The rules make it hard, too, on the local mom-and-pops who, if allowed, could add their unique flavor to the sometimes overconceptualized courts.

Many chain operators believe that the mom-and-pops will be the major casulaties of the mall shakeout. Lacking the efficiencies, speed of service, financial resources and marketing presence of the chains, they will succumb to the intense competition and high costs.

But then other operators point to te success of a chain like Sbarro–which started out as a family-run business in Brooklyn long before food courts were the rage–and say that good concepts will always thrive.

COPYRIGHT 1984 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.

COPYRIGHT 2004 Gale Group