7-10 percent year-over-year. As Figure
2 shows, however, there is clearly a
breakpoint under which a costly large-scale remodel perhaps is not economical.
In some cases, average annual revenues
are low enough that major remodeling
schemes must be spaced farther apart
to make them economically feasible.
However, without frequent-enough
remodeling, revenue may continue to
decline, making it even less likely that
money will become available for renewal
capital expenditures and initiating a
vicious death spiral for a franchise.
Impact of Capital Expenditures
Dollar Sales Increase
Percentage Sales Increase
Flow-through to Profitability
Overall, the franchise industry in
2012 continues to struggle with
low growth rates, the necessity for
continual discounting to drive volume,
rising commodity costs, pending
menu labeling regulations, and
uncertainty over the implications of the
Affordable Care Act for the industry.
is making a third-party financing
facility available to U.S. franchisees
participating in the remodel program.
Faced with the lower revenue levels of
many locations and flat to nonexistent
sales growth they have experienced for
the past four years, many franchisees
are balking at the prospect of making
large capital expenditures with very
uncertain returns. This problem is
exacerbated by a lack of available
financing for small organizations.
In response, many franchisors have
developed their own programs
to help support their franchisees’
remodeling and reimaging needs.
will feature more-comfortable dining
areas and less fluorescent lighting, and
the company predicts the remodeling
will increase stores’ sales by 6-7
percent year-over-year. To make that
happen, the fast food giant has said it
is prepared to shell out up to $200,000
per remodel, with franchisees paying
the remaining $250,000-$500,000
of the estimated cost per unit.
Denny’s Corporation also has secured
financing for its franchisees in an
effort to spur capital expenditures.
In December 2011, the company
announced a $100 million loan
program to provide financing
for new development.
In 2010, McDonald’s Corp. announced
plans to spend heavily on an accelerated
reimaging of its restaurants. With a $1
billion remodeling push, the company
hopes to give facelifts to 14,000 U.S.
franchises by 2015. The new design
Last summer, Burger King Holdings Inc.
announced two significant remodeling
initiatives of its own. The first is a
new, reduced-cost program to help
franchisees switch over to the company’s
new design called 20/20, which stresses
contemporary to futuristic décor to
create a more upscale environment.
The reimaging will cost from $200,000-
$300,000 per unit, according to Nation’s
Restaurant News. But the company
says that following a 20/20 remodel,
stores typically increase sales by 12-15
percent. At the same time, the company
Many franchisors are frustrated as
well. While they need their franchise
units to have a consistent look
and feel that matches their current
marketing programs and plans for
creating a valuable brand, their ability
to coerce compliance is limited.
Impact on Value
Unfortunately for franchisees, not
all franchisors are willing to pick up
a portion of the tab for remodeling.
As a result, many are stuck not being
able to finance required capital
expenditures and are running into
problems with their franchisors.
One remedy available to a franchisor
is to put a franchisee in default, which
ultimately may lead to a sale of the units.
Under current law, franchisors have the
authority to approve owners within their
franchise organizations, and they can
require new franchisees to commit to
specific plans for capital expenditures
and remodeling to win approval.
Many franchisors are frustrated
as well. While they need their
franchise units to have a
consistent look and feel that
matches their current marketing
programs and plans for creating
a valuable brand, their ability to
coerce compliance is limited.
A decision last year by Judge Thomas J.
Tucker in U.S. Bankruptcy Court for the
Eastern District of Michigan bolstered
the position of franchisors on this issue.