Store size: Bigger isn't always better

 
May 14, 2006
In an age of colossal steaks, cavernous SUVs and four-person families nesting in 6,000 square-foot mini-mansions, some believe bigger is better. Not Donatos Pizzeria. The 182-unit Columbus, Ohio, chain has learned to simple-size its restaurants by making them smaller and more operationally efficient.
 
When McDonald's Corp. owned Donatos, the company built a few dozen 3,000 square-foot state-of-the-art restaurants, freestanding sites with about 90 seats and seven-figure price tags. That formula failed for McDonald's, which in 2002 closed 23 of those units in its pricey Atlanta market. And the handful kept by the company when founder Jim Grote bought Donatos back in 2004 appear to be the last of that luxurious breed.
 
This year Donatos opened what spokesman Tom Santor calls a "right-sized restaurant, a smarter restaurant." The modern, freestanding 2,100 square-footer seats 40, sports a drive-thru window and is planted in the Columbus suburb of Hilliard. The store's real beauty, however, is in its bottom-line performance. Santor said revenue is comparable to larger Donatos operations, but overhead and operating costs are lower. The privately held company does not share financials, but Santor said "the results have been terrific. It's been a win all the way around."
 
Chipotle Mexican Grill, Donatos former stable mate at McDonald's, is learning the same smaller-is-better lesson. Reuters recently reported Chipotle president Montgomery Moran told investors that as its "stores got smaller, the gross sales got larger, and the returns got even larger still." Moran said the 500-unit chain's inline 1,000- and 3,000-square-foot models were outperforming their larger counterparts, and those results are driving Chipotle to reduce future site sizes.
 
"They (smaller stores) stake up well; all other things being equal, they cost less to build and their volumes are in line with larger stores," said Rex Jones, Chipotle's real estate director. (Read also New design to save Culver's up to $150,000 per store )
 
Blimpie operations director Pam Fazio concurs with Jones. Blimpie's agrees store size is 1,200 feet, and average unit volumes are around $1.2 million. She believes that size is just one part of the cost-saving equation. With its model, Blimpie doesn't need large equipment like fryers and heating lamps, which makes it an easy restaurant to fit in a small space.
 

Average store square footage

Under 2,500... 40.6%

2,500 to 4,999... 37%

5,000 to 7,499... 12.1%

7,500 and over... 5.5%

Not specified... 4.8%
 
Source: National Restaurant Association
"We don't need a whole lot of storage space and we cross-utilize a lot of our products, which is a big reason why we don't need a huge store," Fazio said.
 
Sales per square-foot
 
Warren Sackler, an associate professor of hospitality and service management at Rochester Institute of Technology, said it's not uncommon for restaurateurs to rent more space than their revenue justifies. His rule of thumb for deciding whether a site is too large is to project gross sales and then limit rent to 4 percent of that number.
 
"If you're doing $2 million, you can afford $8,000 a month in rent," he said. "And going over that 4 percent still can be OK depending on where you're cutting (i.e. in labor or food cost). But if you're getting up to 8 or 10 percent of your rent based on volume, then there's a good chance you're in trouble."
 
Another way of evaluating the profit potential of a site is to figure out whether it can generate enough sales per square foot available. Restaurant consultant Jim Laube believes that to be profitable, low-margin QSRs need much higher sales per square foot than high-margin full-service restaurants.
 
Combining his own research with numbers gathered from the National Restaurant Association, Laube calculated that the average QSR must generate $225 to $300 per square-foot to break even, while a full-service restaurant needs $175 to $275 to do the same.
 
When it came to Donatos deciding to downsize its stores, Santor said the company did so to reflect the changing marketplace, not just to simplify operations.
 
"It's not so much a smaller store, it's a right-size store," he said. "We've gone from a one-size-fits-all concept to an asset that more properly reflects the neighborhood we're in."
 
Fazio believes that the smaller-store model can work for any concept. For example, when Kahola Corp. took ownership of Taco Time, it found a way to decrease overall store costs to include store size. Fazio said the company simplified Taco Time's store layout and eliminated much of the operation's labor-intensive equipment.
 
"Rent all over the United States has doubled and tripled," she said. "It's really hard to find cheap leases. And we believe by decreasing the store size we are also decreasing labor costs."
 
Fred Minnick contributed to this story.

Topics: Burger/Steak/BBQ , Italian/Pizza , Mexican , Restaurant Design / Layout , Sandwich , Trends / Statistics


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