Investing in the Future
As the economic recovery continues, restaurant operators are increasingly making capital expenditures. Data compiled by the National Restaurant Association found 59 percent of the nation’s restaurant operators spent money on equipment, expansion, or remodeling during the three months ending in February, and 62 percent expect to do so before autumn.
The percentage of operators projecting new capital spending was at the highest level in more than a year. It also marked the 18th consecutive month a majority of restaurant owners indicated they would make a capital expenditure.
Additionally, Barnes Reports projects full-service restaurant capital spending will grow 5.7 percent to $2.3 billion this year. That includes $1.29 billion for equipment and machinery, and $1 billion for buildings and structures.
The hike is not surprising, explains B. Hudson Riehle, NRA senior vice president of research. “As the nation’s economic situation has stabilized and restaurant spending has moved up over the past couple years, capital expenditures have mirrored that growth,” he says.
The NRA projects restaurants will see a 3.8 percent sales increase this year, the strongest gain since the economy began rebounding. Just as the recession created pent-up demand for consumers to visit restaurants, there’s been considerable pent-up demand for capital spending.
“During the recession, just about everybody hunkered down and was forced to focus on his business and performing better,” says Lex Lane, vice president of Maryland-based United Capital Business Lending. “The chains that survived came out stronger, and when things began to take off again around 2012, they were ready to roll.”
Capital expenditures are typically dedicated either to expansion and remodeling or for purchasing equipment.
“What you see in the data in general is that limited-service restaurants tend to spend more heavily on equipment than table-service operators, and conversely, table-service restaurants tend to spend more in the expansion and remodeling arena,” Riehle states.
In addition to costs for construction, that also can mean updated furniture, air conditioning, technology, and kitchen equipment.
The North American Association of Food Equipment Manufacturers (NAFEM) reported total market sales for all foodservice companies in 2013 hit $9.94 billion, up 11 percent from two years earlier. The top categories were refrigeration and ice machines (24 percent) and primary cooking equipment (20 percent). Some of the spending increase is due to operators investing in equipment that provides better returns due to labor savings, energy efficiency, and increased consistency.
“Operators are becoming more tech savvy; it’s been moving that way for the last 10 years,” says NAFEM spokesman Charlie Souhrada. The idea of using technological advances for energy and water efficiency throughout the restaurant is not only right for the environment, it also saves money, he says.
Capital spending will be a key driver impacting restaurant industry growth this year, according to Bank of America Merrill Lynch’s Restaurant Finance Group. And for full-service chains, much of that spending will be focused on the front of the house.
“There are things that can be done that will create immediate customer appeal to choose one restaurant over another, such as improving how the restaurant looks, both inside and out,” says Ted Lynch, the group’s managing director. This type of spending began in 2011, shortly after operators started feeling better about the economy, he says.
Improving the look of the restaurant—from a major renovation to providing a refresh by updating signage and lighting, adding new furniture, and painting the place—is a step taken by chains playing offense and attempting to woo customers.
In the back of the house, there are improvements that can save money on utilities and food preparation, “but much of that found its way into capital spending packages in the last cycle,” Lynch adds.
Remodels v. Expansion
Often, mature chains focus more on remodeling existing facilities than building new ones, largely because real estate costs in many areas rebounded faster than traffic improved.
“The amount invested in the renovation of each building is probably a function of the age of the building, and whether you have to rebuild,” Lynch notes.
Last year, Darden Restaurants’ Olive Garden unveiled a plan to remodel restaurants with a more open design, including removing walls to create a more airy atmosphere, adding seats, and designing a more modern lobby and bar.
“If you can free up more space for the dining area, such as increasing the size of the bar or adding more tables, that allows you to turn over more of your real estate to revenue generation,” NAFEM’s Souhrada points out.
By year-end 2014, 13 Olive Garden remodels were completed, and more are slated for this year, Darden’s CEO Eugene I. Lee Jr. told analysts in recent conference calls. “Our recently remodeled restaurants are performing well, with mid to high single-digit same-restaurant sales increases,” Lee said in one of the calls. Key to the plan, he noted, is increasing a restaurant’s capacity by 20–28 seats.
The 66-unit Smokey Bones Bar & Fire Grill chain, once part of Darden and now a Sun Capital entity, has touched nearly all of its units with some sort of upgrade, from modest improvements in lighting for less than $30,000 to complete six-figure renovations.
“The restaurants previously had this cabin-ish feel, so we took out the logs and upgraded interior aesthetics to create a sense of community,” says CEO Chris Artinian, adding that the family restaurant typically designs a bar into the center of each unit.
After Sun Capital acquired Smokey Bones in 2008, the Orlando-based chain stabilized its financials and put operations enhancements in place. Now, for the first time in eight years, the concept, which once had about 140 units, is adding new restaurants.
The first new store opened in March in Peabody, Massachusetts. Two more are expected by the end of the year, and another four to six are projected for 2016. Each is expected to require an investment of about $3 million.
“There’s no doubt the improving economy has helped the whole restaurant industry, and it’s a great time to start building,” Artinian says. Smokey Bones not only will fill in existing markets, but it will return to Chicago, a market that was vacated under former owners.
Franchisees Boost Expenditures
Still, Smokey Bones is in a minority for full-service restaurants at this point. According to Top 500 restaurant statistics from market research firm Technomic, fewer than half of table-service chains increased the number of U.S. units during 2014.
The strongest percentage unit growth in full-service comes from younger companies, particularly those catering to sports enthusiasts or the male demographic, such as Twin Peaks and Tilted Kilt, or casual-dining chicken wings eateries, including Buffalo Wild Wings and Hurricane Grill & Wings.
West Palm Beach, Florida-based Hurricane Grill & Wings, with about 70 units, has been growing its tropical-themed restaurant count by more than 20 percent annually in recent years, tacking on 13 locations last year and projecting another 14 this year. Most of the stores are franchised.
“We know the last three years have been very difficult for the casual-dining sector, but we have enjoyed good comparable store sales gains, and that has helped growth,” says Martin O’Dowd, company president.
The typical costs for a new unit are $600,000 to $800,000, and that includes $190,000 for the kitchen and bar, and $140,000 for furniture, fixtures, and equipment. Most restaurants are in shopping centers, although some are in renovated freestanding structures. About a third of franchisees have expanded their restaurants by taking adjoining space at shopping centers. “One added a large gazebo and nearly doubled annual revenue,” with half of the gain resulting from beverage purchases, O’Dowd says. He notes franchisees have found easier credit conditions than a few years ago, and the company has an arrangement with a funding entity that allows qualified franchisees to borrow up to $350,000, backed by a guarantee from Hurricane’s corporate office.
One segment where many operators are boosting spending involves computers and smartphone technology, including point-of-sale devices, labor management software, guest-centric mobile applications, and tablets for various purposes.
Several companies—Smokey Bones, Chili’s, Red Robin Gourmet Burgers, and Olive Garden, among others—have added tabletop tablets that let guests add menu items, pay tabs, and play games. Smokey Bones recently completed its rollout of tabletop tablets from Dallas-based Ziosk, and Artinian says more than 85 percent of guests use the devices, resulting in a higher average check and more efficient service.
“They provide great digital content in terms of our food, and there’s a real convenience in being able to pay at the table,” he explains. Additionally, guests can pay $1.99 for unlimited game use, which results in added restaurant revenue.
Smokey Bones and most other restaurant companies lease the tablets through a monthly subscription fee, although some buy the devices outright, notes Ziosk CEO and president Austen Mulinder. “About 80 percent of diners who pay with a credit or debit card use the tablet, and I believe that will be about 100 percent eventually,” he notes.
In most cases, the devices give guests the ability to order appetizers and desserts and reorder drinks. A few are testing using the tablets with the entire menu.
Artinian stresses the tablets are not meant to replace servers at Smokey Bones. Instead they help free waitstaff to spend more time in the front of the house, rather than running to the kitchen or point-of-sale machines. The personal contact remains important. “I truly believe that hospitality comes from human interaction, and we don’t want to lose that,” he says. “But if you want dessert, and your server is waiting on another table, you don’t have to wait. In a sense, this just augments the personal touch.”