Seth Larsen, Chief Development Officer at Cheba Hut
Cheba Hut
Guest: Seth Larsen, Chief Development Officer, Cheba Hut
Host: Chris Hatch
Summary
Chris Hatch talks with Seth Larsen, chief development officer at Cheba Hut "Toasted" Subs, the Fort Collins, Colorado, brand Seth joined 21 years ago as a franchisee, when it had three restaurants. Cheba Hut now has about 90 locations, a $2.4 million AUV and plans for 20 to 25 openings a year through 2030. Seth explains the brand's 2,500-square-foot sweet spot, why it chooses flagship sites over obvious college plays, how it handles rising occupancy costs, what its real estate task force reviews for every site, and why legalized cannabis isn't a factor in where Cheba Hut grows.
Key Takeaways
Cheba Hut's sweet spot is a 2,500-square-foot end cap, but it can flex smaller or larger. In high-rent areas, a 2,100-square-foot store with a patio may beat a 2,900-square-foot box.
Enter a market with a flagship first. A college store can come later in a three- or five-store plan, but rarely first, because of the rents, parking and seasonal swings.
Negotiate the lowest possible rent over the biggest TI package. Rent escalators make TI dollars expensive money. Aim for a 2:1 to 2.5:1 sales-to-investment ratio.
Co-tenancy, left-in/left-out access and monument signage matter. If people see the sign, the store will succeed.
Every site goes through a site pack and a real estate task force review every two weeks. LOI to lease signing takes about 140 days on average, so start early and work two LOIs at once.
Hire "pros, not projects" for key seats. Outside experience shortens the path to success.
Signing the lease is the one decision you can't unwind. Take the time to get the right site and the right deal.
Transcript
[01:45] Chris Hatch: Joining me today on the Dirt Dog Pod is Seth Larsen, Chief Development Officer with Cheba Hut. Seth, welcome to the pod.
[02:01] Seth Larsen: Hey, thanks for having me, Chris. Really appreciate it.
[02:04] Chris Hatch: Yeah. I went out to the world and asked what does everybody need to know from the chief development officer at Cheba Hut? And the number one question that came back is, Are you high right now?
[02:13] Seth Larsen: That's a great question. I am not currently high. It still is a weekday during work hours. We do walk the walk and talk the talk though. And but no, not currently high. Yeah.
[02:25] Chris Hatch: Yeah, that's good. I thought that was a pretty funny question. So you've been with Cheba for quite a while. I think you started in 2005 there, is that right?
[02:34] Seth Larsen: That's accurate. Yeah. Twenty-one years. I was a franchisee for years and have been a partner up here at the HQ side for the last 13. And it's been a great run. When I first came on board with Cheba Hut, we had like three restaurants. Now we have 90 with five more getting built out this year. So we've stubbed our toe countless times over 21 years, but have some really awesome homegrown talent. Our CEO also celebrated twenty one years and he's just a hair younger than me. So it's been an awesome ride and I think we've been doing it for the right reasons and it shows.
[03:14] Chris Hatch: Yeah, I love that. So for the world out there that hasn't experienced a Cheba Hut yet, tell us about what it is. What is it that Cheba's trying to do? What are you trying to pull off? What's a restaurant like? Tell us about the world of Cheba.
[03:28] Seth Larsen: Yeah, it's a great question. We're fast casual restaurant. We've been doing fast casual since before that was a buzzword. We're toasted sandwiches. We also have awesome salads and make all of our homemade sauces and desserts as well, Rice Krispies treats and the like. But have really created an awesome place where employees can be themselves and customers can come and escape. If they come in for lunch and they're coming in from the office, they can escape that moment and come into our restaurants and enjoy. We're built on awesome food, genuine hospitality, kick-a** art that's on the walls and the music that's playing in the restaurants. You know, we still build fun restaurants that we want folks to come and visit, but we're also from time to time the number one DoorDash account in the Western United States on any given week.
So we absolutely crush the digital side of the business as well. And I think it's really our people that are the differentiator and our commitment to making awesome food. We are all stoners at heart, from our founder to myself to our CEO. And when you're a stoner, you love awesome food and creative food. And I think that that's what we've delivered over the last 21 years. We have an awesome group of franchise operators, roughly 30 currently that are all multi-unit or working towards multi-unit, and making those decisions on the front side of the business of who we're going to partner with on the franchisee side.
And then of course the real estate that we're looking for and the real estate that we're signing all lead to that apex of being an awesome fast casual restaurant. $2.4 million AUV. About a quarter of our stores do over $3 million. So it is high volume, and it's a lot of hard work to look this relaxed. The magic that's happening in the store is hard work, but it's no deep fryers, it's no flat tops, there's no black iron in those kitchens. But it's hard to serve 500 tickets a day and take care of people and do it at a high level. So you know, we're excited for our continued growth. It's been mindful through the years, and we're going to continue that, hopefully, for the next 21 as well.
[06:02] Chris Hatch: What's a typical restaurant size right now that you guys are building?
[06:05] Seth Larsen: Yeah, our bread and butter is 2,500 square feet. We do go a little bit smaller, we do go a little bit larger, but 2,500-square-foot end cap is kind of the bread and butter. I understand that that's the bread and butter for a lot of concepts out there. But we've been successful in educating landlords and in new cities that we enter to make sure that they understand who we are. You know. When I first started 20 years ago, it was tough to explain what Cheba Hut was, especially since we only had a really small number of stores. You know, now as we're approaching, we'll hit 100 in Q1 of next year.
You know, and if I'm a landlord, even if I'm an institutional landlord and I Google Cheba Hut, you can get a pretty good idea of what we do and what people are saying about us. And, we've worked really hard to make sure that we're not confusing the public. because that is easy to do when you're a pot themed sandwich shop. But yeah, it's been an awesome run. 2,500 square feet is the bread and butter. Our goal and what we've done kind of the last two years and what we want to do through 2030 is roughly 20 to 25 openings a year. And that's the pace at which we feel good.
Our teams can handle it from ops to tech to marketing to dev. And that smart, sustainable growth, I think, is really key and crucial. Keeping the brand cool, being mindful who we bring on as franchise partners, being mindful about the cities and states that we enter and do business in. And you know, I think when we do that and everything's clicking, you get really awesome new store openings. And we've had this year alone every one of our stores has outpaced what we anticipated in terms of sales and You know, that's when the magic's happening. That's when everything's working, right? You got the right franchise partners, they understand their market, they're hometown heroes, we've got the right real estate, their operations are on point, our training teams are on point, our marketing is on point, and we've really done a really good job of that, especially this year.
We've brought on some new outside hires and talent as well, which has been really exciting and. We don't want to just learn everything from myself, who's been around for 21 years and Mark, our CEO. You know, we're homegrown talent. Again, a lot of positives with that. But you know, bringing on strategically some of these outside hires that have done it before at other brands and can bring that different perspective has been awesome. And you know, we did that on the development team you know, for the longest time. We were choosing real estate really off a gut feel of what we knew previously. And, have brought in professionals.
We have an awesome director of real estate. Her name is [Houston Hoffman] and she's built some awesome tools and has implemented massive amount of data points to make sure that we're augmenting the gut feel, which is still important, with that holistic data and again when you get that cooking it all works out.
[09:29] Chris Hatch: Yeah, this is clearly the Dirt Dog Pod. There's nothing that beats putting the dirt in your hand, right? And getting your feel for that site. A hundred stores is such a great threshold to be at because to your point, you can look back at the data. So what are you seeing consistently with some of these higher performing stores? Are they located next to a target? Are they just on a strong retail corridor? Is there good traffic counts? What are you finding that makes a difference between one of those three million plus stores? And maybe something that's in the bottom quartile.
[10:02] Seth Larsen: Yeah, it's a good question. And I guess the answer is there's a lot of things. So, I mentioned who we partner with on the franchisee side is really important. You know, someone that understands their market that is kind of that hometown hero. You can still be a restaurant pro plus and have a dozen restaurants, but still have that hometown hero feel. And I think that that is really important, understanding the market that you operate in. You know, we of course we look at co-tenancy, we look at left in, left out. Of course we like monument signage. We know if people see our sign that we're going to be successful.
We have historically not taken the A-plus real estate we could take. I'll give Lincoln, Nebraska, as a good example. We could have went right next to the university. And if you don't know anything about Cheba Hut, you'd be like, yeah, you're a university play brand. Go there, you know. But we went further out. It's a new kind of hipper district called the Telegraph. We were one of the only restaurants to open up out there. And I'm sure that plenty are coming now with our success out there. But parking is a little bit easier. It pulls from kind of that neighborhood as well as the university side.
And you know, strategically placing those restaurants is super important. We have a breakdown of customer segments that are kind of brand aligned here. So we call it Cheba Hut addicts, Cheba Curious, Cheba Noobs, and Narcs. We don't want we don't want to go where narcs are. There's not enough marketing dollars in this world that we could spend to convince them that Cheba Hut is going to align with their values. And that's okay, you know? So that that good and we're not afraid to go where there's curious and even noobs, right? You're just going to maybe have to work a little bit harder. So you know, what we've realized over the last twenty-eight years is that our brand plays well in the suburbs we're kind of that forbidden fruit, you know.
We certainly don't medicate our food in any way. We make awesome food made by real people and provide authentic hospitality experience at a price point where you can come back often. And you know, when you do that, it plays well across the United States, which is what we've seen. So, we're going to continue to do that. As long as we live those Cheba Hut core values and stay true to ourselves, we know that we're going to continue to grow average unit volume, we're going to continue to have awesome openings and bring Cheba Hut to more people.
[12:50] Chris Hatch: Yeah. It seems there's so many challenges facing the operational side, but one of those that exists for the multi tenant operators I find more so or as much as anything. And especially being out of Denver with as many of the stores as you guys have in Colorado. The taxes have just gotten brutal on some of these multi-tenant. And what's it like trying to keep yourself at a healthy occupancy cost threshold when you're looking at this new real estate in some of these areas?
[13:22] Seth Larsen: Yeah, it is. It's a great question. It's jarring some of the leases that I see signed now compared to ten years ago. But our volumes have continued to increase and Of course, you always want the best deal possible. You also want to take down those areas... The thing that we always battle, right? Exclusives, you know. So if there is this new awesome development we don't want a competitor coming in there and blocking us out for the next 10 years. So, taking some of those chances, I think, on more expensive real estate is really important part of the process. I think our footprint too lends itself to some flexibility.
So You know, I mentioned that the our bread and butter is 2,500 square feet. We've certainly done more. We've we can do less. We can take end caps, we can take inline, we can take freestander. So I think when you have a brand that has some of that flexibility, you can certainly look at some different opportunities there. And you know, if you're in a high rent situation, you know building a restaurant that might be 2100 square feet with like a nice patio outside might make more sense than you know taking down 2900 square feet with a massive bar on the inside. So so playing some of those games there I think is is really important and weighing those options.
You know I think too I have this conversation I guess with franchisees all the time about you know, TI dollars and we see so many packages and what total project costs are. And you know, my goal has always been a two-to-one to two-and-a-half-to-one sales-to-investment ratio, right? And I think we've done a good job of that. And we can get our folks there in year one if we're smart about it. A younger me would say, get the most massive TI dollar package you can, right? And now the older wiser me is negotiate the lowest possible rent because that's really expensive money with your rent escalators every year.
So I just had the conversation earlier this week. So, being smarter about those things I think is really important. And you know, our bread and butter is is what we've kind of built the brand on, is a three-store deal. So, our franchisees are multi-unit or at least really focused on multi-unit. And when you enter a market doing flagship first, which is our recommendation, right? You want that first store to pop. And say there's a college in that market as well. You know, maybe the college is your third store, but it's certainly not your first store and probably not your second store. But if you're in a college market and you want to be a player, you got to lock down those purchasing habits of those folks very early in that process.
So, part of a three-store model or three-store honeycomb or even a five-store, like making sure that one of those is college focused is important, but not the first one. You know, the rents in college markets tend to be really expensive and it comes with a ton of baggage, right? No parking, kids leave for break, the ebbs and flows of summertime and wintertime, and kids run out of money. You know, as opposed to some of those suburban plays that are a little bit safer. So you know, I think it's a balance and it's a long-term approach to operating because our you know, our franchisees and we have a long history of operating company stores too, is just making sure that you're playing the long game.
This is a long game, right? Franchise agreements are 10 years, lease terms, the initial terms are typically 10 years. So, making sure that we're playing that long game and if if it's a more expensive project, but we're confident in it being a banger and it's going to be a flagship that that's that's a risk we're willing to take. So, yeah, but it is it's an interesting landscape. You know, we've certainly walked away from deals that that were too expensive. We treat real estate and growth decisions as a personal project, for better or worse, right? So, we don't answer to private equity. We don't have a quota of stores that must get open or we're going to start laying folks off.
That's not how we operate. I would much rather have it take a longer time to find the right piece of real estate and the right deal, as opposed to rushing into something and now it's a problem for 10 years. You can unravel a lot of bad decisions in business and franchising, and certainly franchising Cheba Huts, but signing that lease is one that you can't unravel. That's really tough, you know? So getting that right on the front side is just so important.
[18:30] Chris Hatch: Interesting. So you mentioned some strategic hires and bringing some new blood into the system being helpful. Where do you think the moment was where it kind of clicked? Because clearly you're on a good pace here with the twenty five openings per year and the franchise model and getting those multi unit operators in. Is there one or two things over the last few years you think you would point back to?
[18:52] Seth Larsen: Yeah, I would say the term I use is pro, not a project. And I think we've had a lot of project employees that we homegrew or that we could afford at the time. And you know, there's some benefits to that and certainly some downfalls, but you get to a point where You know, there's certainly people that are better than me in many areas of franchising and restaurants and development. And you know, when you start making those hires, your life becomes a lot fuller and the process becomes easier. And man, when you hire pros and not projects, it's really enlightening. So and that's not to say we have some really awesome homegrown.
Talent here and we love that and that's in our DNA for sure. But in some of these strategic seats where maybe myself or Mark, our CEO, or Jimmy, our CFO, doesn't have experience, bringing in someone that has done it before at a high level has just been really enlightening. And it reduces the curve of success, right? Like yes, we could figure it out. Yes we could get there. It'll probably take five years, but if you bring in the right people, You know, it takes two years suddenly or whatever it might be. So, it's just been a an awesome run for us. We're based here in Fort Collins, Colorado.
I went to CSU, our CEO, our CFO, we're all CSU Colorado State grads. We have no plans on leaving here. You know, when we established Fort Collins as our headquarters, we were nervous like Are we going to be able to attract talent to come here? It's a lovely city. You know, there's lots of benefits of living here. It's fantastic. But you know, it's not a Chicago, it's not a Denver, it's not a Salt Lake City, right? So, we were a little nervous, but it's it is a great place to live. People are keen to come here from across the country for the right opportunity. And it's just been it's been an awesome level up for us.
[21:11] Chris Hatch: So obviously Colorado is one of the first states to adopt a statewide legalized marijuana campaign. When you go to grow now and look at these new markets, do you only typically select states that have a legalized marijuana program? And is that part of the site selection criteria for where you're going to look to open?
[21:32] Seth Larsen: Yeah, it's a great question. There's no doubt about it that the green wave has gotten more palatable across the United States. So I think that that's a good thing in general for our brand and probably for the United States in general. But it's not a criteria for us to enter a market. Quite frankly, our busiest locations are in more conservative markets. You know, I go back to the comment I made earlier, kind of about being that forbidden fruit. And playing in that realm. We want to be the place that like your buddy tells you about and you're like, You got to come to this place, you got to see it.
They're a little quirky in there, but the food's awesome, the hospitality's genuine and they're not faking it. The art on the walls is real, the music is great. You know, everyone in our stores bobs their head at least one time on the playlist that's playing. So so yeah, it's not a prerequisite for us to enter a market. You know, we do really well down in Baton Rouge, Louisiana, and deep into Texas and Colorado Springs, which is historically pretty conservative, we absolutely crushed down there. So you know, I think the general green wave of cannabis law and acceptability, I guess, across the nation has gotten better, especially in the last 10 years. And that's just been good for business in general.
[22:59] Chris Hatch: Yeah, it's interesting. So as you're out there looking and you're trying to find that flagship location, you got a great franchise operator that's in the driver's seat and you're starting to select sites and zero in on things. What goes through the gut-reaction part of your decision making? What are you looking for when you're looking at one site versus another?
[23:34] Seth Larsen: Yeah, when we're comparing real estate, I think it goes back to the process. So what we've implemented is our franchisee submits site packs at the LOI stage, and you can do it right from your phone, and it asks pertinent information. You get to submit photos, you go there during different day parts. Franchisee does that heavy lifting, right? These are deals that they're signing. So it's important that they put in the work. All of our real estate decisions go to our real estate task force. It's myself, our CEO, CFO, our senior design, our senior director of design and construction, our director of real estate. And we look at every site and we meet every two weeks.
So, our goal is to make sure that we're not that we're not creating friction and we're we want to get quick answers back, but we also want to make sure that we're asking the right questions and we're poking holes where holes need to be poked and we're putting our franchisees in the best position possible. So I think being deliberate about those decisions and taking your taking the time. And these are our director of real estate puts together the presentations for our real estate task force. They're like 20 pages per site, right? We might look at three to five sites per every two weeks, roughly. So it's a lot of work, but again, it's such an important decision that I think it deserves that time and that investment of time and energy.
There's no doubt our franchisees are likely going to take two sites that they're excited about and continuously move them through the process through the LOI stage, depending on what the response is from those landlords and some of the other tangible real estate things that we look at, right? So but I think negotiating those two LOIs kind of at the same time makes a lot of sense. You know, our process from LOI to lease signing is roughly 140 days. So it takes time, you know. And I tell our franchisees this all the time. I'm like, if you guys want to open next year, we need to start ASAP, like today, right?
So let's get that process moving. And, a much younger me would say there's no way it's going to take that long. Like I can get deals done faster than that. And we have, but on average, that's how long it takes. So. You know, starting early, starting often, making sure we get it in front of real estate task force, making sure that we're asking the right questions about these sites. There is no perfect piece of real estate. I've never seen one and no perfect deal. You know, every deal is different. One might be more expensive, one might have better visibility. One might have a smaller patio, one might have a larger patio.
So racking and stacking those and having options I think is really, really important. And the process that we've implemented allows us to do that, provide concise feedback and move deals forward faster with a framework that doesn't slow it down.
[27:00] Chris Hatch: Yeah. All right. So a couple of rapid fire ones here. Funniest thing that's ever happened to you on a real estate tour.
[27:08] Seth Larsen: Gosh. Funniest thing that ever happened on a real estate tour. I almost said no to Lincoln, Nebraska because when we went there, it was January and it was the coldest day in my entire life. You could not get out of the car. You couldn't get out of the car. And I knew I couldn't be open-minded to the market being that cold and uncomfortable. So I guess that would be one. I also was in Vegas one time and I was driving down the road on a real estate tour and it was the EDM fest that they do out there. I wasn't going to it; I just happened to be out there at the same time and I was driving down the highway and a guy sideswiped me in his RV coming out of that five day bender that he was on.
And he was really friendly. He was from Florida. We exchanged information. It was a rental car. I submitted the claim and nothing ever came of it. It was all good. It just like went away. So yeah, those things happen all the time. There's never a dull day. And I I think getting into the markets and not making decisions sitting in an office chair are so important. Whether it's myself that's going out there or director of real estate or someone else on our dev team just getting eyes on these markets and seeing landlords and sites and meeting our franchisees or potential franchisees face to face. There's just no substitute for that.
So we like to get on the road. We like to see stuff face to face. We love taking folks out to dinner and getting real, honest answers not on a Zoom call or a phone call. Just really, really important. So that that would be my answer. I know this is supposed to be rapid fire, but those are the two ones that I can think of. Yeah.
[29:06] Chris Hatch: No, it's good. If you're going into a store today for lunch, what's your go to order?
[29:15] Seth Larsen: That's a great question. We just rolled out new menu boards and just made a couple tweaks to the menu. I'm a food guy through and through. I love restaurants, too. I love being inside of restaurants, the vibe, the music, the food. If I go out to dinner with my family, I'm feeling the bun of every sandwich, my kids' and my wife's, much to their dismay. But You know, I love everything that we do. If I'm going to Cheba Hut today, I would go Sensi Kush, which is kind of a BLT with our homemade honey sriracha on there. It's fantastic. And I'm probably getting a side of pretzel nuggets.
We sell a lot of pretzel nuggets. It's kind of like our version of like you go to a Mexican restaurant, you get the queso. Like you go to Cheba Hut, you get the pretzel nugget. So I would probably get the pretzel nugs and a Sensi Kush if I was going to hit Cheba Hut today on a Friday afternoon. Yeah.
[30:20] Chris Hatch: I love that. Well, good. Well, what do we do for the folks that are out there listening and they think they've got an absolute home run site or they've got a friend that wants to be an operator or they want to be an operator, just reach out to the team. Ping you, ping your real estate director, who is it?
[30:38] Seth Larsen: Yeah, yeah, I'm always available for any conversations, whether it's through LinkedIn or directly at seth@chebahut.com. If it's a real estate related question, certainly goes to development@chebahut.com. We all get copied on that, and we're always rockin' and rollin'. We did just relaunch our website as well, consumer as well as franchise sales. And there are some links to Landlord Deck and some of those things on there. So feel free to check that out. But yeah, we pride ourselves on being accessible and available and yeah, looking forward certainly you know, for the next five years here building out Cheba Huts and doing it at a pretty high level.
[31:22] Chris Hatch: I love it. For anybody out there listening, go check out a Cheba Hut. Order a Sensi Kush. Obviously, you've got to get a side of those pretzel nugs. That seems like a no-brainer. I mean, I personally I'm celiac, so I'm probably not diving down that rabbit hole, but it still sounds exciting. Yeah. Seth, thanks for joining us on the pod today. We appreciate having you.
[31:35] Seth Larsen: Thanks, Chris. Really appreciate it.