Advertising or Remodeling Your Restaurant: Which Drives More Sales?

 

If you want to beat the restaurant industry’s projected annual growth rate of just two percent over the next five years, spending more on advertising may not be the answer. I know that’s a shocker coming from an ad executive but we’re in the truth business, not the convincing business. And, the truth is many operators are behind the remodel curve when they really need to be ahead of it.  As industry consultantAaron Allen says, “If you wait until it looks like it’s time to remodel, you’ve waited too long.” Now, that’s the truth. And, this is especially so in an age when restaurant development continues to outstrip consumer demand.

If you aren’t dealing with a serious competitive threat across the street, odds are you soon will be. The economy may be improving, but customers have never had more dining out options than they do today. The restaurateur’s challenge is to stay relevant and that means staying current.

The condition of your facility communicates a message that’s more powerful than even the most effective advertising. Dated structures and decor cost you money. As ad industry legend Jerry Della Famina once said, “Nothing kills a bad product faster than good advertising.” His observation is derivative of the notion that advertising can sell a product or service only once. After that, the experience has to carry the load.  If you’re using advertising funds to drive new customers to an old facility you’re not going to gain ground. You’ll have to settle for riding the tepid annual industry growth rate of around two percent – if you’re lucky. But, a remodel can change all that and make everything work harder. In fact, depending on the size and scope of the update you can expect annual sales gains of 10 to as much as 30 percent. Even the best advertising isn’t likely pump sales up by 10 percent, and unless you’re giving food away 30 percent is a pipe dream.

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But, just as you would carefully consider the ROI on an advertising investment, it’s important to do the math on a remodel. Invest too much or finance it the wrong way and it’s a loser. Invest too little, and you may not get the impact you’re seeking. Restaurant Research LLC, an industry think tank, says operators should consider four questions when calculating the ROI on a remodel:

  1. What time period is being considered?
  2. What’s the profit flow-thru on incremental sales?
  3. How many years will the sales increase persist?
  4. How will the remodel be financed?

In their think piece on the subject, Restaurant Research illustrates the impact of reinvestment on a restaurant with annual revenue of $1.2 million. Their model shows a $200,000 investment generating a 10% sales increase sustained for six years (the typical remodel cycle is seven years) has the potential to deliver ROI that would make a private equity executive smile.

If you’d like to read more about restaurant remodeling, check out these links:

How Much Is A Facelift Worth?, Retail Leader

Wendy’s Remodels Are Generating Sales, Restaurant Finance Monitor

Would You Spend $700,000 to Grow Your Restaurant Sales by 25%?, Forbes

Why Restaurants Are Remodeling Their Stores, Market Realist

Restaurant Renovations: Does your facility need a facelift?, NRA

How Much Is A Facelift Worth?, Retail Leader