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By Dean Dirks, Dirks & Associates
Volatile fuel margins, increasing labor costs and the threat of federal taxation on cigarettes leaves owners looking for new income streams. While food service is profitable for many companies, many others have failed. Traditional quick service restaurant (QSR) companies spend a great deal of money on site selection but still experience 4 percent to 10 percent closure rates, with some concepts experiencing failure rates as high as 20 percent.
In many cases, due diligence is a major factor for failure in the c-store foodservice industry. Here are just of few of the things professional consulting firms analyze when researching locations for QSR companies. They should be part of your own due diligence:
The Physical Location
-- Is the location highly visible? Data shows that the "if you build it, they will come" theory does not always apply to c-store foodservice.
-- Are there signage restrictions? Poor signage destroys foodservice.
-- Is there adequate parking? Making money at foodservice can't be a tradeoff for hurting inside sales by lack of parking.
-- What's the potential walk-up business? A lot office and factory workers can offset parking concerns.
-- Can you install a drive-thru? If a drive-thru is critical for your concept, be sure the prospective facility can allow it.
-- What kind of customer counts can you expect? Capture customer rate data and average check in order to forecast sales.
-- How will customer counts vary by daypart? If a store has strong customer counts between 11 a.m. and 2 p.m., a dinner concept is a poor choice.
-- What are you food costs? Analyze projected recipes to make sure food costs and retails are set correctly.
-- What are your labor costs going to be? Analyze impact of foodservice operation on your labor costs.
-- Develop a Profit and Loss statement forecast based on all of the above factors.
-- Calculate internal rate of return.
-- Determine whether the internal rate of return meets the owners hurdle rate.
Other Issues to Consider
-- Your company's ability to operate foodservice.
-- Your company's ability to pay market rates for foodservice managers.
-- Staffing stores is a big problem. Are you willing to add to that problem?
-- The owner's patience to lose money while the foodservice operation grows.
What are the Potential Threats?
-- If your concept is a branded, realize that most QSR companies can build locations as close to yours as they want. Is there available real estate nearby for traditional QSRs to build?
-- Future developments may change traffic flows, new malls, etc. Research these possibilities along with potential Department of Transportation road changes, construction, etc.
In spite of this due diligence, food service is still high risk and no amount of pre-entry research can totally predict success or failure.
Dean Dirks started his career working in his father's grocery stores as a teen. In 1996, he joined West Star Corp., operator of 30 convenience stores, as its foodservice director, and a year later was promoted to director of operations, and later to vice president. In 2004, Dirks joined Firsthand Management LLC -- a division of the 24-store Balmar Petroleum -- as the senior category manager. He has been a member of the NACS Foodservice Committee and the National Convenience Store Advisory Group, as well as a member of advisory boards for Sara Lee, Pierre Foods, Boyd's Coffee and Kraft.