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When age shows, to renovate or raze?


East Coast Wings + Grill has a new store prototype that shrinks its footprint.

The restaurant industry has been on a tear in recent years with a surge in expansion that has delivered thousands of shiny new stores touting the latest designs, efficient floor plans and innovative tech. Standing behind them is a fleet of aging restaurants that are starting to feel a bit dowdy.

Those older restaurants are facing more pressure to step-up their game—and their image—in order to remain competitive in today’s marketplace.

Many franchise stores built 20 to 30 years ago are outdated in terms of the organization and design. “So, we’re in this cycle where old franchise stores are having to go through a replacement cycle,” says K.C. Conway, chief economist for the CCIM Institute and director of research and corporate engagement at the Alabama Center for Real Estate.

A variety of other forces are driving redevelopment, major rehabs and relocation to newer locations aside from just an aging physical  plant. Restaurants need to account for technology ranging from self-service ordering kiosks to online apps that is reducing labor, shifting floor plans and changing store layouts. Operators also need to accommodate other trends, such as increased demand for healthy food options that is impacting kitchen food prep and refrigeration.

The aging of the restaurant landscape is an issue that has moved to the forefront in the last few years, agrees Stephen Polanski, senior vice president at Buxton, a company that specializes in customer analytics for real estate and marketing. “The winners continue to update, not only their facilities, but also the way that they interact with customers to drive traffic and to drive revenue,” he says.

In addition, young and old restaurants alike also are grappling with locations that have become geographically obsolete. Locations can decline due to shifts within a particular trade area. For example, if Walmart moves to the other side of town, the out-parcel locations often need to follow or else fail, notes Polanski.

The broader shake-up in the retail industry that is resulting in ongoing store closures and malls and shopping centers struggling to survive has pushed the issue of obsolete locations to the forefront.

Hanging on to good locations

The surge in restaurant expansion over the last few years, along with more limited retail construction, has created a shortage of “A” locations in some markets. Those operators who have a good location, and not necessarily a modern store, are doing what it takes to hang onto those locations whether that is renovating the existing store or even razing a store and rebuilding it from scratch. “All of us in the dining space have been hurt a little bit trying to find real estate,” says Sam Ballas, CEO of East Coast Wings + Grill.

East Coast Wings + Grill has been evaluating its legacy stores and locations ever since creating a new store prototype about three years ago. The new “ECW 2.0” features a new design package to update décor, as well as shrinking the footprint and using new materials to reduce development costs. “The majority of our franchisees have decided to stay put and reinvest in structural, physical plant redesign,” says Ballas. East Coast Wings + Grill has 35 locations in six states and six restaurants under construction for delivery in 2018.

The majority of East Coast Wings franchisees lease their stores, which makes deciding to relocate or renovate easier than those who own stores.

Ballas has a friend who owns a McDonald’s franchise in suburban Winston-Salem. The franchise agreement was up for renewal and the store was required to conform to the company’s new design. In that case, the franchisee opted to do a complete teardown and rebuild. Because he had “the” top location in the market, it made complete sense to hold onto it and reinvest in a new building, says Ballas.

However, in most cases, teardowns tend to be more of a last resort. Although competition is high for top locations, there are still many spaces that are vacant due to relocations or restaurant closings. Most restaurants are eager to jump into an existing vacant box to save money on a new build.

Situations where a franchisee does decide to incur the cost of a complete teardown and rebuild are rare and usually involves a site where the underlying land is extremely valuable and difficult to duplicate, notes Polanski.

Crunching the numbers

Restaurants weighing decisions on whether it is better to renovate, rebuild or relocate to new locations are not leaving anything to chance. Increasingly, franchisors and franchisees are looking for data to support those decisions.

These days, few franchisees are willing to invest more capital in a renovation, rebuild or relocation without the potential for a return on investment, and they want data to back up those decisions. You have to make sure the numbers make sense. “You can’t make that decision simply on emotional desire,” says Ballas.

Companies are using resources such as Buxton to conduct thorough site analysis to make sure an existing location still possesses the right density in terms of its customer base, as well as assessing changes to the competitive landscape that could negatively impact sales. “It is important to understand your client, and make sure you have the right people working, playing and living in your trade area to support future growth,” says Polanski.

Working the numbers

East Coast Wings has a unit level economics department that works with a third-party vendor to look at data to examine the existing market as compared to potential new locations.

The company also tested its new store prototypes to measure performance that showed the 2.0 model did deliver a revenue increase in the high single digits to even low double digits. Although the 2.0 model reduced the footprint by about 1,000 square feet, from 4,400 to 3,400 square feet, sales are comparable in the smaller footprint, notes Ballas.

Especially for restaurants making investment decisions that will need to stand up over the next 10 or even 20 years, it is important to do the homework on the return on investment. “Is it the right geographic location? Has there been any change in traffic patterns? Or is there a forecast in change for traffic patterns before making that commitment,” says Ballas.

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