Originally Posted to the Wall Street Journal
As restaurant chains go out of business or prune their store counts in the tough economy, competitors are jumping on the opportunity to move into the vacated locations as a way to expand quickly and cheaply.Restaurants can convert their competitors' closed sites to their own brands at a lower cost than building new restaurants from scratch, industry executives note. Incoming businesses also have the upper hand in negotiating rents with landlords stuck with empty restaurant space.
"You definitely have the bargaining power because you have all the vacancies, and landlords are aware of that," says Navin Nagrani, vice president of Hilco Real Estate LLC, which specializes in real-estate restructuring.
Buffalo Wild Wings Inc., a sports-themed bar chain based in Minneapolis, is one of the companies emphasizing conversions as it expands. Over the past two years, it has acquired eight Don Pablo's restaurants and turned them into new versions of its sports-themed bar chain. As of the end of the year, Buffalo Wild Wings had 560 sites.
[ Photos: Buffalo Wild Wings took over a Don Pablo's restaurant, above, in Fort Worth, Texas, converting it into a Buffalo Wild Wings that opened July 28, 2008. ]It has also put in place a rebranding "SWAT Team" of construction, operations and other professionals who can take a vacated site and convert it in just a little more than five months.
Giving Buffalo Wild Wings a boost in pursuing the locations is the chain's balance sheet. "We don't have any debt and we have cash on the book so these are the kinds of opportunities that we can take advantage of" and the competition often can't, says Matt Brokl, a vice president and associate general counsel.
Conversions cost the chain at least 20% less than building a new restaurant from scratch, which can take up to 13 months, Mr. Brokl says. Others estimate the savings can be even greater. Gene Baldwin, a partner with the restructuring firm CRG Partners LLC, estimates that moving into an existing site can cut development costs in half.
While the restaurant industry has been hammered over the past couple of years by a consumer-spending pullback, lower real-estate and development costs and lower rents have emerged as a tailwind for those chains still in expansion mode.
Panera Bread Co. has been negotiating with landlords to move into several former Bennigan's locations since the parent company of the bar-and-grill chain filed for Chapter 7 liquidation last summer, according to Mike Nolan, the fast-casual chain's chief development officer.
"Our experience says the best time to grow, all else considered, is during times of recession," says Mr. Nolan.
Burger King Holdings Inc. is breathing new life into some of the hundreds of Starbucks Corp. locations closed by the coffee chain in response to the economic downturn.
"Who would've thought five or six years ago that we would ultimately be able to take over a conversion of a Starbucks location?" Burger King Executive Vice President Russell Klein said at a recent investor conference.
And a Chili's Grill & Bar operator in Ontario, Canada, has already inquired about moving into at least two former Outback Steakhouse locations after the latter chain pulled out of the Canadian market last week, says John Reale, president of global business development at Chili's parent company, Brinker International Inc.
In the fast-food sector, which has held up better than full-service restaurants because of its lower prices, the credit crunch is one of the factors making more sites available for conversion. According to Hilco Real Estate's Mr. Nagrani, unprofitable fast-food locations are having a hard time selling their sites to other franchisees and shutting their doors instead.
Of course, not all chains are scouting closed sites and not every closed location is suitable for a new restaurant to move in. Chipotle Mexican Grill Inc., which plans to open as many as 130 restaurants this year, says it has found that many possible conversion sites are less than desirable.
"We're finding that people who are closing restaurants tend to close bad locations and keep the good ones," says Chris Arnold, a Chipotle spokesman. "We're not willing to make concessions."
