To finance remodel programs, document the sales bump
Long John Silver’s remodel cost $150,000, low enough to entice operators to adopt it.
Gaining buy-in from franchisees and financiers for remodel programs can be done, but a sharp eye toward the total cost of redesigns and, especially, the increases in revenue that will follow are keys to success.
Not long ago, Fazoli’s was one of those brands with a lot of issues, but since being acquired in 2006 the brand has done an incredible amount of work to get back on track. It’s been awarded with 17 quarters (four and a half years) of same-store sales growth.
“As many know, the brand grew really fast, then struggled a little bit, but with the arrival of Carl Howard it’s really been a rebuilding process,” said Scott SirLouis, vice president of strategy at Fazoli’s, where Howard is CEO.
There was a lot to do, and the redesign was actually the last piece of the puzzle for the turnaround brand.
“When Carl got in, one of the first things he did was really improve the food, then we took a lot of steps to improve the service and the last piece of the puzzle was to match the facilities to the food and service that we upgraded,” said SirLouis.
Most of the locations were 20 to 30 years old, and were more than ready for an update. But even with private equity capital behind it, the brand was thoughtful about the approach.
“We did three locations with what was primarily an exterior remodel. We did some remodel work but it was more replace and refresh what was already there,” said SirLouis. “We saw some great results and they were sustained—we ended the year with double-digit sales increases.”
Fazoli’s remodel features a pick-up area for faster to-go orders.
So in April 2017, the brand took the redesign indoors and rolled it out to nine company locations. SirLouis said the company locations (which make up 40 percent of the brand) were the only places they wanted to test new designs before pitching the update to franchisees. After a few months of operations at the fully redesigned locations, he said things are ready for franchisees for one big reason: sales at renovated locations show a sustained sales bump of more than 10 percent.
The brand unveiled the remodel program, cost-estimating tools and everything else required, at an October franchise meeting. It includes four levels of options that fit with the various locations and franchise operations and range from $180,000 to $500,000.
“There’s the ‘good’ level; the results have been solid, they met our minimums. Then you go up to the ‘best’ package, which is what we’re most excited about and the results have just been outstanding,” said SirLouis.
That range of options, he said, was key because there is a wide range of average unit volumes from $900,000 to $2 million and an equally wide range of operations. Even with a 10
percent bump, a small operator in a small market isn’t eager to tie up capital for too long. But the larger operators may skew toward the more expensive package.
“They’re going to come in and go for the high-end package because you’re going to get a bigger bump; if you’re going to realize a 10 percent-plus return on $2.4 million, that’s a bigger bang than a lower volume unit,” said SirLouis.
Overall, he said the brand sees better than a five-year payback period on all remodels and closer to three years at the highest volume locations.
Long John Silver’s also introduced a major redesign, drastically updating the brand with a major new look and more efficient interior. It just began the big push to franchisees at the annual franchise meeting in October.
The nearly 50-year-old brand was showing its years. The brand was acquired from Yum by a new ownership group, and wasre-worked to affect a turnaround. Management started with food, then looked at the customer experience. But just like Fazoli’s, it had to prove the new design and keep costs in line.
For Long John Silver’s a refresh meant looking more like a modern seafood restaurant, but also better operations. “In today’s food industry, one of the things is the external presentation and we were falling behind,” said CEO James O’Reilly. “We focused on exterior remodel, high efficiency, higher quality and higher throughput.”
Starting at $150,000, the remodel was affordable for operators who had seen low volumes as the brand got traction. They were able to hit a 16.5 percent sales lift and higher at some busy locations.
In Lexington, Kentucky, a remodeled
Of course the franchisor doesn’t pay to update franchised locations, so that means operators need to find financing to be a part of the update.
“In many ways it’s a company expenditure that a company has not had to deal with, and that can be tough,” said Derek Ladgenski, a partner at the Katten law firm specializing in M&A and corporate finance. “Companies need to find lenders out there who understand the cost but also understand the upside of the reimaging or rebranding.”
ApplePie Capital has a partnership with Fazoli’s, which greases the financing wheel a little bit as they only work with franchised businesses. SirLouis said finding a finance partner that understands the industry is something all operators need to do.
“They know the franchise business, they know it from a franchisee perspective. So they understand the four-wall economic model of the restaurant,” said SirLouis. “It’s really good to have someone who is used to be playing in this space and understand the people who are in the small franchisee space.”
ApplePie named Ron Feldman COO after years of consulting. The franchise finance expert was brought on to tackle the ongoing finance needs of franchisees who have partnered with the system. Things like equipment financing and remodeling require a little different financing model as many traditional banks are looking to finance larger projects or new locations.
He said for himself and other lenders, the sales bump must be well documented.
“We’re looking for the brand to have vetted the remodel ROI that is measurable so we can vet out the fact that our financing will give us a kick in revenue where at least they can,” said Feldman. “If they can’t prove that, we don’t engage at the brand level. If it’s a brand that is doing a remodel or POS upgrade, those are things that you have to do.”
He said there’s a wide range of remodel programs he sees, anywhere from a few percent all the way to 20 percent increase in sales, especially in tired brands that need a lot of work. But hitting those marks often means a long period of lagging sales, which is no good either. High single digits is a good place to start.
“More than 6 or 7 percent is what we look for; more than that is a bonus,” said Feldman. “It needs to be enough that it pays for the remodel and more, or why would you do it? If it’s going to give you 3 percent, it’s probably not worth the time or the money.”
He said financiers love remodels that enable better sales, but a nice coat of paint can be important, too.
“We’re sort of agnostic, but we love it if it’s technology, if it’s giving them online ordering. We know the incremental bump from that type of ordering is huge and the investment is low,” said Feldman. “Floor tiles in bathrooms is more deferred maintenance than remodels, but both are needed.”
ApplePie and many others look for a holistic approach, especially among smaller franchisees who might not want to grab whatever high-interest loan is fastest or have the ability to pay cash.
“If we took an assumption that the remodel is $75,000 and they have five units, we’d look at the cheapest way to do that remodel and that might be recapping the business instead of a one-by-one approach. Or it might be three one-offs and two under recapitalization,” said Feldman.
That’s something franchisees should look for from any lender, and it can make it easier to find financing. If an operator can lump together a handful of remodels, they have a lot more options than just one small loan.