New Build Costs Through the Roof
- According to RR’s just released New Unit Investment Report (Report Outline), the sales-to-investment ratio for $1B+ chains declined dramatically in 2021 as higher construction costs (partially reflecting longer project completion times) more than off-set growth in new build AUVs.
- Fortunately, higher AUVs (SSS for the $1B+ Chains are up +10.9% YTD 9/30/21 relative to 2019), improving FSR store level margins and franchisor incentives (63% of chains currently offer some form of development incentive) are helping to partially off-set some of these new construction headwinds which are hopefully transitory.
- All-the-same, sky rocketing COGs & labor costs are driving sharply lower new build ROI which, in turn, is driving a move towards smaller footprint stores optimized for digital & off-premise.
- Construction cost increases are driven by higher material prices (especially lumber, asphalt & fabricated metals). Notably, construction labor costs have not increased significantly although GCs are challenged to find/schedule work crews.
- In any case, supply chain disruptions (longer lead times of 12 to 24 weeks for walk-in refrigerators & freezers, POS equipment, HVAC) and a longer permit approval process are significantly increasing the time it takes to complete a project.
- At least 12 (21%) of the $1B+ Chains introduced new prototypes or significant building design updates during the last year, including: smaller building formats (fewer indoor seats); increased drive-thru/pick-up access; digital/tech enhancements; and more efficient kitchen equipment/layouts which should help improve store level efficiency while reducing construction costs going forward.
- Notably, Taco Bell’s new prototype works equally well for humans and aliens in a hurry…