Restaurants Play Musical Chairs : New Eateries Attracted to the Same Sites Where Others Have Failed

Mission Valley Center’s archives are murky, but sometime during the 1960s, the Valley Ho restaurant opened its doors at the east end of the shopping mall near downtown San Diego. The restaurant’s menu evidently zigged just as the dining public’s tastes zagged, however, because Valley Ho soon became part of San Diego’s culinary history.

Valley Ho gave way to Caesars, an Italian restaurant. In 1984, Caesars gave way to Cafe Casino, which offered French food in a cafeteria-style setting. Cafe Casino served up its last meal on June 15, and within days, crews were transforming the building into a Rusty Pelican seafood establishment.

Sometimes, a failed restaurant becomes something un-culinary. A former Oscar Taylor’s restaurant in Mission Valley Center, for example, has been converted into a Brooks Bros. clothing store.

But unless the location is just plain wrong--or the neighborhood has deteriorated badly--restaurant industry economics generally dictate that a restaurant location will remain a restaurant.

“The number of prime locations that don’t already have some kind of building on them is extremely small,” according to Steven Brown, a Baltimore-based analyst with the investment firm of Alex Brown & Sons. “For that reason alone, conversions are becoming more and more typical in the restaurant industry.”

Such conversions may actually be healthy for the industry because “they are not adding to the total number of restaurants,” observed Jim Little, a senior vice president with Cini-Little International,a Potomac, Md.-based consulting company. “You’re not trying to extract more money from the same market with brand new locations.”

What’s more, restaurant properties typically lend themselves to a new name, concept or menu because the previous owners usually want to sell off the whole package--including ovens, cookware, tables and silverware.

“It’s conceivable that all you’d need to do (to start a new restaurant) is to buy the food,” said Scott Greenwood, a vice president with Tricon Hospitality Consultants, a Fairfax, Va.-based consulting firm.

But the first rule of real estate--location--usually determines if a new restaurant will flourish in a location where others have failed.

“If the site is good and the economics ‘pencil out’ good, we’ll convert just about anything into a restaurant,” said William Seckinger, vice president of marketing for San Diego-based Paragon Restaurant Group, which owns 105 dinner houses, including the Rusty Pelican, Boathouse, Hungry Hunter and Carlos Murphy’s chains.

Most of the failed restaurants that Paragon executives review each week “don’t pencil out or they’re not in an inherently good location to begin with,” Seckinger said.

Restaurant executives look for competitors’ restaurants that have good locations--but which have “been run poorly or had the wrong concept,” according to Ronald Street, vice president of real estate development for San Diego-based Foodmaker, parent company of the Jack in the Box chain.

Family dinner houses and more formal restaurants play the name-change game, but it is the the fast-food restaurant business where the pace of change is the most furious.

Candidates for conversion are created as fast-food operators and franchisees drop marginal locations in order to concentrate on proven strongholds, analysts said. Competitors sift through those abandoned sites to find the most attractive candidates.

Depends on Competition

Such operators “have always used conversions but the frequency these days is much higher, especially with the tremendous (overall) expansion we’ve seen,” according to Little. Conversions are easily managed because most fast-food properties “are roughly the same size and they’ve got roughly the same needs” for seating, counter, kitchen and storage space.

Sometimes, the location is right but the competitive situation is wrong. “If Wendy’s happened to be on one corner, with McDonald’s and Burger King on the other two corners, a Jack in the Box might do better because of its broader menu mix,” Little said.

Franchisees also are responsible for the conversion wave. As profit margins tighten, franchisees are more likely to start looking around. Increasingly, franchisees will “turn around and change (locations) into whatever is going to make money,” Greenwood said. “There’s not a lot of loyalty.”

Conversions also help restaurant operators skirt zoning and parking restrictions that restrict the construction of new buildings.

And, although affordable land is available in less-developed areas, conversions are often the only alternative in heavily populated areas.

There seems to be an ample supply of potential conversion sites because of an ongoing consolidation in the restaurant industry, according to analysts. “This is an increasingly tough business and as the marginal players drop out, it leaves opportunities for people with staying power,” Seckinger said.

Nearly a quarter of Paragon’s 105 dinner houses involved conversions, and Paragon will use conversions to increase its reach into new territories, Seckinger said.

Half of the 50 Jack in the Box restaurants that Foodmaker will open during 1988 previously operated as Wendy’s, Carl’s Jr. or Church’s Fried Chicken outlets. Jack in the Box grabbed more than half a dozen Carl’s Jr. locations after Anaheim-based Carl Karcher Enterprises “decided to cut their losses and not build anymore (units) in Texas,” according to Foodmaker’s Street.

Less Expensive

Karcher also has played the conversion game. It recently remodeled seven Wendy’s in the San Fernando Valley. This past April, Karcher opened a Carl’s Jr. on the site of a restaurant in the Wells Fargo Bank Building in Los Angeles.

“We’re not opposed to buying a site and remodeling it, because in most cases that will be a less expensive way to go,” according to Karcher spokeswoman Patty Beckmann.

Some sites that have failed repeatedly are eventually torn down or converted to retail or commercial space.

RESTAURANT STARTS Business starts in the restaurant industry by U.S. Census Region, 1986 vs. 1987

Region 1986 1987 % change New England 913 701 -23.4% Middle Atlantic 1,922 1,983 +3.2% East North Central 2,069 1,796 -12.2% West North Central 926 846 -8.6% South Atlantic 2,306 2,007 -9.9% East South Central 685 664 -3.1% West South Central 1,610 1,252 -22.2% Mountain 892 965 +8.2% Pacific 2,052 2,116 +3.1% Total 13,375 12,400 -7.3%

Source: Dun & Bradstreet Corp. RESTAURANT FAILURES Business failures in the restaurant industry by U.S. Census Region, 1986 vs. 1987

Region 1986 1987 % change New England 51 42 -17.6% Middle Atlantic 282 298 +5.7% East North Central 733 733 -- West North Central 272 204 -25% South Atlantic 258 280 +8.5% East South Central 158 124 -21.5% West South Central 496 419 -15.5% Mountain 321 239 Pacific 681 487 -28.5% Total 3,252 2,826 -13.1%

Source: Dun & Bradstreet Corp.