Food Hall Math for the Prospective Food Hall Operator
Food Hall operators are typically the entrepreneur in between the real estate and the food purveyor. The real estate owner wants a food hall but doesn’t want to operate it. Food purveyors want to rent stalls but don’t want to deal with anything outside their own brands. A food hall operator steps in to fill the gap by running the business of the food hall. This often involves leasing property, improving it, and then releasing it to food purveyors. The typical obligations for this group are daily property operations, which may include cleaning, tenant coordination, common area services, vendor sourcing, and vendor liaising. In its most pure form, food hall operations is simply property management (albeit more relationship intensive).
Some operators also purvey the food under a set of owned brands. This is called “self-operation,” “self-performing,” “vertical integration,” or “owned concepts.” Sometimes these are executed under separate brands. For example, Eataly is one of the original vertically integrated food hall operators, wherein one company operates the food hall and also purveys all the food and beverage inside. Others, like the newcomer “Citizens” license brand names but self-operate through a contract food services partner (a restaurant group). Simpler (and most popular) are food hall operators that elect to operate the bars and private events, but outsource the food production to subleased food purveyors.
You can boil a food hall business model down a few things:
1. Revenue from leasing stalls
2. Revenue from direct operations
3. Expenses from leased environments
4. Expenses from direct operations
5. Overhead
To understand the viability of food hall operations, please see our last article on food hall math for food purveyors. In it we establish that the average unit volume for food hall purveyors in the US is around $650,000 per annum. This might seem low or high depending on your geography, but remember this averages smaller and larger markets. Secondly, we established some parameters of agreement frameworks. You can also read the past article on food halls structures.
Example Food Purveyor Performance
Medium food purveyor Sales: $650,000 per year
Labor: 26%
Food: 24%
Food Hall Charges: $120k + $65k = $185k (28.4%)
Disposables: 3%
Total before Food Hall Charges: 53%
Total after Food Hall Charges: 81.4%
Net Income to the food purveyor: $120,900 (18.6% Net Margin)
Note: This assumes the food hall operator is covering the utilities.
Now let’s connect this food purveyor example to the food hall operator’s financial potential. If we assume a food hall has 10 total purveyors and that each purveyor can net the operator an average of $185k in food hall charges, then we should have $1.85m in total leasing collections (before vacancy) against which to operate the food hall. Remember this likely includes all collections from the food purveyor (rent, CAM, utilities, etc), so it’s important be smart about the food hall expenses. Here’s a decent rule of thumb:
Rent/Mortgage/CAMs: 40% (<$37 per ft gross)
Utilities: 10%
Labor: 18% (excludes any self-operation)
Repairs/Maintenance: 13%
Operating Supplies: 8%
Other: 2%
Net Income: 9% ($166,500 per annum)
But remember, selecting 10 purveyors doing industry-average sales volumes is difficult. Brokerage fees aren’t contemplated. One also has scale-in rents and overhead to think about. The above scenario is a framework, but situations will vary. Ancillary revenue models, maturity, and operator selection are key drivers to success.
As you can see, it’s tough to make considerable margin of food stall leasing alone. This is why many operators decide to insource the high margin aspects of the business such as bars.
A healthy, well-managed bar should cash flow 25% of sales volume over the long-term. In a food hall, bars will take about 15%-35% of the overall sales volume, depending on design, comfort, visibility, and efficiency. If a food hall with 10 vendors doing an average of $650,000 in sales volume ($6.5mm) has a bar that makes a 22% take, then the overall volume is $8.3mm. The bar is doing $1.8mm in sales (22%). A 25% margin is $450,000. Suddenly, food hall operations are looking better! However, operating bars is not a walk in the park. Earnings can be lost as well as made. For many this represents a bold leap into active (rather than passive) income and the associated taxation and operating responsibilities. Nonetheless, our math looks better. The $166,500 has improved 4x to $616,500.
Self performance?
Additionally, operators with tangible efficiency and experience in food operations can tack on 15-20% on each food vendor’s sales volume. Shrinkage and required managerial skill increases per added menu. Operational skill is imperative here.
An experienced operator knows how to work closely with food purveyors to boost their sales and maintain consistency. They can execute bars at award-winning levels and are sure to leverage the high traffic food hall business to capture additional sales. Expenses are closely watched and carefully controlled to be sure event the tight margins from stall leasing maintains profitability.
So, why wouldn’t the food hall operator just take over all aspects of the business (food, bars, events, etc)? There are a number of observable issues with this that an operator must be aware of:
Loss of authenticity (brands that no one recognizes or cares about)
Fixed cost (labor cost on a large multi-brand footprint)
Overhead associated with a larger staff (Management, Human Resources, etc)
The bottom line is that there is a healthy mix of revenue (and manageable expense) that is tied directly to the experience of each unique operator. There are also management companies (shameless plug) that can help you maximize returns with the right talent (or advise you on the best strategies of how to remain passive). Every solution will differ based on the owner. Inexpensive, but experienced advise is available.
Politan Group specializes in operating food halls, bars, and bars within food halls. We also provide remote accounting, HR, and administration for food halls. Finally, we provide fractional management services for existing food halls where a team needs a leadership group that understands the business of food halls. If you are thinking of building a food hall or need help with an aspect of a food hall you already own, reach out to us. Politan is the most-awarded food hall operator in the industry.