Food Courts in Puerto Rico - Money Making Machines or Expensive Billboards
It seems that food courts in Puerto Rico are win win for mall developers and retailers, but, is it really a win for those who operate at the food court?
Puerto Rico has twenty one malls with enclosed food courts being Plaza Las Américas the one with the largest number of food court outlets. It is not a surprise to see most of these food courts crowded at lunch time during weekdays and crazy during weekends and holidays. The first impression to the public, mall developers and retailers is that these units are so profitable that they might be considered “Money Making Machines”
If you are a restaurant owner or franchisee and are considering operating in a food court be aware of all costs behind the scene plus your own operational costs. Being in a food court is not an easy financial decision unless your operating costs and gross margins are optimized to the max with room for additional costs.
First of all you need to consider that the operating hours in a food court are limited to the operating hours established by mall management. Some let you start operation at 7:00 AM while others at 10:00 AM. The closing time varies form 9:00 PM to 11:00 PM depending if the food court is located close to a Cinema or has an independent access. The worst case scenario is that if your restaurant serves breakfast, your operating hours would be between ten to fifteen hours on weekdays and Saturdays and only six hours on Sundays depending on the Mall. This fact is important since operating hours are important factors when forecasting sales.
Second factor to take into consideration is Basic Rent. The Basic Rent is the one not including any additional cost. Usually the mall charge what is called “Percentage Rent” or “Additional Rent”. This is calculated by dividing the annual basic rent by the percentage rent agreed between the parties. This percentage rent varies from one mall to another but it is around 6% to 8%. All sales in excess of the product obtained and multiplied by the percentage rent agreed is the additional rent tenant must pay to the mall.
Other factors to take into consideration are all extra costs, not included in basic rent, that the mall charges to every tenant at the mall. These charges include Real Estate Taxes, Insurance Charge, Common Area Maintenance and Promotional Fund. These first charges are usually costs associated to the mall as a whole. If you are in a food court, additional charges apply and must be taken into consideration, these are Food Court Maintenance and Food Court Promotional Fund.
We know cases in which the above mentioned charges equal the basic rent so you must consider that the worst case scenario, if you are operating in a food court, is that your total occupancy cost will double the basic rent. If your basic annual rent is $50,000 for a 600 square ft., don’t be surprised that with all additional charges your annual occupancy cost will be around $100,000.00. In addition to that if your annual sales are $900,000, then you must pay additional rent “Percentage Rent” which is calculated as follows: $50,000 (basic rent)/7% = $714,285 (Natural Break Point), then, $900,000 (annual sales) less $714,285 (Natural Break Point) equals $185,715.00 x 7% = $13,000.00. Now you pay $50,000 (basic rent) plus $13,000.00 (percentage rent) = $63,000.00 plus around $50,000 (additional mall charges) equals $113,000.00.
Now the question is, how many transactions do you need to breakeven in fifteen operating hours (assuming you open at 7:00 AM with breakfast and close at 10:00 PM) in order to cover occupancy costs plus all your operational costs (electricity, water, phone, etc)?
It is well known that most of the big players operating in food courts in Puerto Rico, operate just to have presence in malls and shopping centers and are willing to give up profit using the food court operation as a “Billboard”
Caribbean Strategic Solutions provides strategic planning to retailers and companies expanding into Puerto Rico, the Caribbean and Latin America. Services include Site Selection, Trade Area and Market Analysis, Design and Real Estate Services. Our Real Estate Services include Tenant Representation, Lease and Purchase Negotiation, Asset Management and Real Estate Disposition. Visit our website for more information http://www.csscaribbean.com