Staying Competitive Through Remodeling

Choosing a Remodel

The simple decision to remodel is really the first in a long line of decisions the business operator must make. Once the owner decides to remodel, the next step is to determine the extent of the renovation. This is mostly driven by two major factors: cost and timing. It is typical to refresh an establishment every couple of years and to perform a major remodel every seven to 10 years. Minor remodeling can happen anywhere in between. A scrape and rebuild is something to consider about every 20 years or so. Some important exterior items that might be upgraded are signage, the entry portico, patio areas, awnings and painting. Some important interior upgrades might be the tables and chairs, painting, kitchen equipment, kitchen layout, store fixtures/shelving, and interior design/decor. There are benefits to major and minor remodeling, and much of this decision depends on the cost. Some remodeling is measured at cost per foot, but frequently it is not about just getting a specific return on capital. It is about preserving the cash flow, whether it is to stop a negative sales trend, or to maintain or create additional profit.

Funding a Remodel

Next, the operator needs to consider the actual cost versus the budget. In general and depending on the scope of the remodel, the cost can run anywhere from $10 to $150-plus per square foot. However, most business owners are not looking at the cost per square foot, but rather at the impact and benefit of the remodel. If it is necessary to update something as basic as the parking lot area, then that is where the focus should be. The owner should review the cost of making improvements, as well as the cost of not make improvements. It is not always about getting a specific return on the money spent remodeling. Sometimes it is about just preserving the cash flow. For instance, a business owner decides to spend $100,000, knowing this will not necessarily increase sales, but it will maintain sales at their current level. In that case, investing money to maintain sales and keep customers can be a wise choice.

Most operators hope to get a three-to-five-year payback after remodeling, but industry trends have shown that five to seven years is a more accurate projection for return on investment (ROI). Funding the remodel can come from several different sources: a line of credit, operating cash flow, savings, landlord contributions or capital contribution (from a private equity parent, for example), if available. Ultimately, the decision is based on cost of capital. If using a credit line, the owner would have to be able to outline the expected costs. Private equity fund owners will expect an estimated 20-plus percent ROI, and they will want to see support for the estimate. In a larger company, the CFO might agree to pull the money from working capital for the remodel. Another source of money is an annual reserve of 1% to 2% of sales that is set aside for minor updates and maintenance.

It is also important to look at alternate ways of funding, such as making an arrangement with the landlord to fund part or all of a remodel. This type of agreement can be a beneficial investment to both the landlord and tenant. One would need to consider how to approach the landlord by understanding what will motivate them to get on board with the remodeling plans and how the remodel will benefit them. Many factors can influence their decision. Is the lease up for renewal? Will the tenant want to extend the lease early or add additional term? Will the remodel help attract other tenants to the shopping center, etc.?

Conducting a test on a small group of locations can help determine how successful a large-scale remodel will be. It is typical to test about five to 10 locations before committing to a large investment with multiple units. This will also help sell the remodel to a private equity partner or the landlord community.

Promote the Change

Once the remodel is complete, promoting the change is a great way to attract new customers and retain existing customers. Business owners may want to emphasize cosmetic improvements, or advertise special promotions to go with a “grand reopening.” This works well in instances where the business was closed during the remodel. After all, the goal is to encourage the public to come to the business and then come back again and again.

Remodeling has proven to be a proactive way to maintain and build a successful brand. It is also a cost-effective way to stay current with the popular trends. Keeping up with the competitors not only boosts the economy, but helps keep current customers interested and draw in new customers. There are many factors to consider before investing time and money into a remodel; however, with the basic knowledge of remodeling fundamentals ' along with the proper guidance ' operators can confidently begin the remodeling process and continue to build their success over the long term.

Dave Spargo is a founding principal with Huntley, Mullaney, Spargo & Sullivan, Inc., a real estate and financial restructuring firm. He can be reached at [email protected] or 916-787-2060.

In the United States there are more than 990,000 restaurants, approximately 700,000 chain and independent retail firms, and more than one million brick and mortar outlets. The competition for customers is, to say the very least, fierce. Such intense competition means that restaurant and retail operators must keep racing forward to attract new and returning customers, and the race never ends. Many businesses have lasted for decades because they have been able to keep pace with changing trends, to “go with the flow” by continually updating and improving their brand image. Tenants can remain viable and attractive by remodeling.

Transitioning with the Times

Remodeling can help restaurant and retail operators compete, grow and thrive over the long term, and is often less expensive than building from the ground up. A remodel can range from a minor change, such as installing new carpet, to a major change, such as restoring the entire exterior of the building. Part of knowing what to focus on in a remodel is understanding what attracts customers and makes them happy. For example, reconfiguring the kitchen area to open up to the dining area is one such current crowd-pleasing remodeling trend that has been highly successful for restaurants. This open concept creates more transparency between the diners and the restaurant staff. Customers love watching the food being prepared and seeing into the chaotic, noisy kitchen atmosphere. It is all part of a new kind of dinner show.

Choosing a Remodel

The simple decision to remodel is really the first in a long line of decisions the business operator must make. Once the owner decides to remodel, the next step is to determine the extent of the renovation. This is mostly driven by two major factors: cost and timing. It is typical to refresh an establishment every couple of years and to perform a major remodel every seven to 10 years. Minor remodeling can happen anywhere in between. A scrape and rebuild is something to consider about every 20 years or so. Some important exterior items that might be upgraded are signage, the entry portico, patio areas, awnings and painting. Some important interior upgrades might be the tables and chairs, painting, kitchen equipment, kitchen layout, store fixtures/shelving, and interior design/decor. There are benefits to major and minor remodeling, and much of this decision depends on the cost. Some remodeling is measured at cost per foot, but frequently it is not about just getting a specific return on capital. It is about preserving the cash flow, whether it is to stop a negative sales trend, or to maintain or create additional profit.

Funding a Remodel

Next, the operator needs to consider the actual cost versus the budget. In general and depending on the scope of the remodel, the cost can run anywhere from $10 to $150-plus per square foot. However, most business owners are not looking at the cost per square foot, but rather at the impact and benefit of the remodel. If it is necessary to update something as basic as the parking lot area, then that is where the focus should be. The owner should review the cost of making improvements, as well as the cost of not make improvements. It is not always about getting a specific return on the money spent remodeling. Sometimes it is about just preserving the cash flow. For instance, a business owner decides to spend $100,000, knowing this will not necessarily increase sales, but it will maintain sales at their current level. In that case, investing money to maintain sales and keep customers can be a wise choice.

Most operators hope to get a three-to-five-year payback after remodeling, but industry trends have shown that five to seven years is a more accurate projection for return on investment (ROI). Funding the remodel can come from several different sources: a line of credit, operating cash flow, savings, landlord contributions or capital contribution (from a private equity parent, for example), if available. Ultimately, the decision is based on cost of capital. If using a credit line, the owner would have to be able to outline the expected costs. Private equity fund owners will expect an estimated 20-plus percent ROI, and they will want to see support for the estimate. In a larger company, the CFO might agree to pull the money from working capital for the remodel. Another source of money is an annual reserve of 1% to 2% of sales that is set aside for minor updates and maintenance.

It is also important to look at alternate ways of funding, such as making an arrangement with the landlord to fund part or all of a remodel. This type of agreement can be a beneficial investment to both the landlord and tenant. One would need to consider how to approach the landlord by understanding what will motivate them to get on board with the remodeling plans and how the remodel will benefit them. Many factors can influence their decision. Is the lease up for renewal? Will the tenant want to extend the lease early or add additional term? Will the remodel help attract other tenants to the shopping center, etc.?

Conducting a test on a small group of locations can help determine how successful a large-scale remodel will be. It is typical to test about five to 10 locations before committing to a large investment with multiple units. This will also help sell the remodel to a private equity partner or the landlord community.

Promote the Change

Once the remodel is complete, promoting the change is a great way to attract new customers and retain existing customers. Business owners may want to emphasize cosmetic improvements, or advertise special promotions to go with a “grand reopening.” This works well in instances where the business was closed during the remodel. After all, the goal is to encourage the public to come to the business and then come back again and again.

Remodeling has proven to be a proactive way to maintain and build a successful brand. It is also a cost-effective way to stay current with the popular trends. Keeping up with the competitors not only boosts the economy, but helps keep current customers interested and draw in new customers. There are many factors to consider before investing time and money into a remodel; however, with the basic knowledge of remodeling fundamentals ' along with the proper guidance ' operators can confidently begin the remodeling process and continue to build their success over the long term.

Dave Spargo is a founding principal with Huntley, Mullaney, Spargo & Sullivan, Inc., a real estate and financial restructuring firm. He can be reached at [email protected] or 916-787-2060.