F&B Insider: Leasing Space
F&B Insider is a special column that appears on occasion in the Small Business File. Each week the Small Business File addresses some interesting topic related to entrepreneurship or small business management in the Philippines. F&B Insider columns focus on issues of particular interest to those small business operators in the food and beverage and hospitality industries in the Philippines.
Not many restaurateurs or bar owners start out with their own building in a prime location. In almost all cases, finding an appropriate commercial space to lease is the norm.
When thinking about where to lease a commercial space for your restaurant or bar, you really must follow the timeless adage: location, location, location! But what does that exactly mean for a F&B operation?
Ideally the location should be in an area where there is a high concentration of potential customers during the day and the night. This doesn’t mean your business will be open from breakfast to late evening, but it is nice knowing you have the opportunity to do so in such a high traffic location. You have flexibility to expand your hours if that is the case. The drawback is that rents are usually much higher in such prime locations.
The other option is to locate in a less prime location. This is not exactly a bad idea. In locating in not so prime locations, you get the opportunity to take advantage of lower rents and may face little or no competition in the immediate area. You may not have the visibility you would like when starting up, so sometimes this strategy works best for established businesses who can pretty much move wherever they want, knowing their customers will follow them.
Once you find the right location, you will have to talk to the owner or manager of the space to see if they will accept your offer to open a business in their space. Be prepared to be told ‘no’ if you plan on doing cooking of any nature. Many commercial building owners do not allow food-related businesses to open in their buildings, as there are increased possibilities of fires and/or pest-related problems. This is an extremely frustrating part of the search for an appropriate commercial space, but it is a very real problem.
When you find a space that does allow cooking, then the real negotiations regarding the lease can begin. In general, there are at least twenty important items to consider when contemplating signing a lease for your restaurant or bar. Three of the most common and important considerations are: (1) term of the lease and any renewal options; (2) base rent and security deposits; and (3) provisions for renovation and/or alteration of the space.
The first consideration is very important. There is no point opting to lease a space for the duration of say a year if you intend on spending a considerable amount of money renovating the space to meet the ambiance desired for your restaurant or bar. You really need to seek out landlords who will grant you at least a 3-year lease on the space. Furthermore, you should try and see if you can add in a clause allowing you the option to renew the lease for another 3-years once the initial lease is up.
The second consideration is linked to the first. You will need to negotiate the base rent for the space. Most commercial building owners want a regular monthly rental payment. These are the best kinds of landlords. Try and stay away from any landlord who asks for a base rent and a percentage of sales. You will find it very hard to make any money with leases that take base rent and a percentage of sales. It is not worth the trouble.
In addition to the base rent, landlords will want a security deposit that includes an advance rent portion and a damage deposit portion. There are many landlords who require a 6 month advance rental and a 3 month damage deposit. Try and stay away from such locations as much as possible – I’m pretty sure everyone could find a better use of capital than to tie it up in deposits. Good landlords will want to help you be successful so they get paid regularly. If you find a landlord who asks for 1 month of advance rent and 1 month of damage deposit, consider this a very favorable situation for your fledgling enterprise.
The third consideration concerns what renovations and space alterations will be permitted by the landlord. If you have serious re-design ambitions, you will need to make sure the landlord approves of any changes to his or her building or structure. Don’t be vague at this point. You don’t want to find out half-way through construction that the building owner will not permit you to make certain changes or add certain features to his or her building. If you stick to a basic design, you will encounter few objections.
Good luck in finding the space and lease that is most appropriate for your F&B business. Until next time, Bon Appétit!
More and more expats and OFW’s are getting involved in small businesses that fall under the food & beverage industry umbrella. F&B Insider articles will focus on some of the key issues that can help small business owners gain an edge over other establishments in this very competitive industry.
Hello Martin,
Excellent advice, and not really only for the F & B business. I have never been in that business, but have had friends that did and still do run restaurants and bars. I know most of them, who are very well established now, always said they had like a 5 year plan in tact. I never went in depth with them about it, but basically. There 5 year plan included bringing in customers through good public relations, bottom line, giving great service, food, atmosphere and entertainment to the customer.Also having a good and trained staff as well. If they couldn’t do it in 5 years, close the place down and start somewhere else..find a better location.
Thanks Martin,
Danny
Hi Danny,
Thanks for sharing! You know what I find fascinating about the F&B industry is the huge variety of business plans and tactics. I tend to look at things like your friend and plan a few years out if possible.
But I have also met some bar owners who do the opposite! They prefer to use the momentum of a fad and hope to cash in quickly. Their goal is to make a good chunk of money before the fad window closes. Some people are successful at this, but it’s a strategy I have very little experience with. Again, I think it’s very interesting how there are so many different approaches to planning in the F&B industry.
Thanks for dropping by!
Martin:
Is that pic of your shop? VERY NICE! Haven’t been to Davao yet, but I want to try your stuff.
As a side note: I’m here in Japan today, and went to a coffee shop this AM that serves Iced Teas and Coffees in goldfish bowls! With 2 straws for sharing! It was by the train station and the queue for a table at rush hour (They have around 60 seats) was 15 minutes. Quite a bargain at 500 Yen (Normal price here of just a regular small black coffee, so a real bargain). In any event, a neat little gimmick, or so I thought.
Hi John,
It is a lovely atmosphere in the picture, but no, that is not a picture of my place.
My guess is that it is from somewhere in Davao — Bob supplies most of the pictures in my articles.
Coffee in goldfish bowls does sound like something you could find in Japan. The Japanese love their coffee — both hot and iced. I bet that place is popular with students who need to cram for an exam!
Thanks for sharing. Have a safe trip!
Hi Martin,
Nice article. The old adage “location, location, location” certainly holds true in our case. Four and a half years ago, we opened our little bar/restaurant operation in the remote, suburban North part of Davao City.
While the initial buzz of a new place brought people in in droves, eventually, the crowd reverted back to hanging out closer to home or closer to the downtown area, in big-box entertainment venues and other areas where clusters of similar establishments already existed – to see and be seen, so to speak.
It was not an easy task going against other flashier, better funded establishments.
Four and a half years later, with the transformation of this part of the city running at full speed, we’re finding that we’re not as stretched. The new malls (new or under construction), major IT hub across the street, new restaurants and hotels, not to mention, the McDo within crawling distance (that hot caramel sundae sure sounds good after a half-a-case of San Mig Lights, haha!), certainly help in increasing visibility.
But what kept us alive in these last four years was primarily sticking to our plan of offering a nice, comfortable place to unwind and hang out, a cozy atmosphere – not too trendy (we have a new air-con btw) haha! And making the customer feel right at home.
It’s a good business to venture into if you enjoy a constant challenge, which can mean it’s not for everyone.
It’s also highly competitive, especially in a burgeoning market like Davao. You have to enjoy working long nights and enjoy what you do (a lot!).
Thanks and keep these informative, business related articles coming.
Cheers!
all the best,
Dennis
Avenue S Bar & Grill
Hi Dennis,
Thank you for sharing your experiences. It’s especially nice hearing from another entrepreneur in the food and beverage industry. You’ve shared some excellent bits of information regarding location and also in relation to commitment to your business plan. It’s great to hear you’ve been able to achieve success since opening almost 5 years ago.
Let me know if there are any topics in particular you think would be nice for me to address. I’ll try and see if I can tackle something interesting and you think others would also like some insight into.
Cheers!
Hi Martin,
I’m a follower of Bob’s blog and glad I stumbled upon your post. Yes, this industry is frustrating at times, and everyone is bound to make mistakes, but that’s just part of what makes it cool and interesting.
Having a great team of partners (first time entrepreneurs and lifelong friends)in this venture, a fun crew and new friendships that you make along the way, help make it all worthwhile.
I think a topic focusing on on marketing strategies might prove useful. I’m a big fan of employing cost-effective, non-traditional, marketing methods so I think this whole Web 2.0 phenom is great (we’re trying a few things out). It would be interesting to get feedback on what others have done, what worked or didn’t work, etc. . . .just my two centavos.
Thanks again.
all the best,
Dennis
Avenue S Bar & Grill
Hi again Dennis,
I think your suggestion is a fine one. A short article on some different marketing strategies might be something I tackle in the coming months. Perhaps a focus on non-traditional or guerrilla marketing strategies might be useful.
Cheers!
Nice!
Looking forward to it…
Thanks Martin!
Cheers,
Dennis
Hi Sir Martin!
Your site here is very helpful to businessmen. It provides a roadmap to measuring, planning, implementing & frameworks for successfully shaping strategies.—-
Thank you for sharing us the books & being part of our curriculum was the best!
God Bless You Sir!
Hi Erlym,
Thanks for sharing your comments. I’m glad you like the site/articles. Thanks also for your feedback on how you found the MBA class. I enjoyed the class as well!
Cheers!