Newk's: A case study on cutting franchise costs

Mike Snyder calls himself a frustrated operator and as senior director of construction for Newk’s Eatery he understands every detail that goes into building a successful franchise, from the first lease negotiation to opening day and beyond.

Snyder, a former Chili’s operator who spent 10 years learning the build-out and franchise ropes at Corner Bakery Cafe, has developed a detail-oriented system for Newk’s that cut construction costs for franchisees by about $25 per square foot and trimmed around $200,000 from the franchisee’s total costs.

First comes due diligence

Corner Bakery was in slow-growth mode when Snyder started, spending large amounts of time upfront on due diligence to ensure it was spending its own money wisely, and the practice paid off after the chain was acquired by a private-equity firm and it shifted into a faster-growth franchise model, he said.

“We created a process early on that says the deal is set up through the construction costs, so the construction department had to be hand-in-hand with the real estate department,” he said.

The system requires understanding every cost up front, and costs can vary widely depending on the type of space and the upgrades and improvements required.

“There’s the warm vanilla shell, which is a place you can move into quickly. You just have to put some finish on the floors and walls. As we started getting into different spaces, high-rise office buildings and former Blockbuster stores, every space had unique characteristics. Each one had a different set of scenarios.”

Eventually the team created a due diligence package for each type of space, he said. Due diligence for each new site required filling in the costs for everything from impact fees to door placement up front, to get as detailed an estimate as possible. Armed with that, the real estate team is in a better position to negotiate the lease and walk away early if necessary, he said.

Designs and dollar signs

“When I came on with Newk’s, it was an up-and-coming brand that companies were trying to get as a tenant,” Snyder said.

Working with the developers early on proved crucial to cutting costs, and it makes sense from the developer’s perspective as well because most don’t want to have to redo work they’ve already done to meet the design specs of a new tenant, Snyder said.

“We had to go back in and train our franchise partners about the need to start working in the field as early as possible, and we had a lot of front-end interaction with developers to get them to make modifications on their dime and not our dime.”

During his first six months at Newk’s, he spent much of his time with architects, creating a model kit that the company could use to source the vendors who would do finish goods such as trim and cabinets for all the units, so the costs of those items would be established upfront.

“We spent a lot more time detailing our plans out. We very rarely build the same restaurant twice, and we can either pay excessive design fees or create a set of drawings that give us the flexibility to not have to redesign each time,” he said.

So that’s what the team did, and the move gave contractors and subcontractors a clear picture of the project when they were putting bids together, down to the material costs. It allowed the company to price out a new restaurant based on the established cost structure.

“It gave us more control and understanding of the true build-out costs, so we could go back to the builders and question fees in a lot of categories. That alone saved us $60,000 and took a week off our schedule,” he said.

Tweaking to trim costs

Once the basic design was in place, there was still room to trim costs by tweaking elements. Each unit had a specially designed door pull on the front door and it used a mounting bracket that wasn’t standard, which could mean costs associated with customizing the door and sometimes the storefront. The company had the door pull remolded to fit a standard bracket, so it could use existing storefronts while keeping the design element, Snyder said.

The company also found ways to make better use of the space, allowing it to trim the footprint from about 4,800 square feet to around 4,200, which brought costs down.

On lower costs as a selling point for franchisees

“Our cost per square foot is very attractive and one of the things we’re all looking at now. Sales are tough. Competition is tough,” he said.

Having detailed plans and spreadsheets laying out the costs upfront spurred existing franchisees to want to build more units, Snyder said.

“If we can do the first one and show them it’s not a big pain, they’re willing to do another one.”

It’s also been a selling point to bring new operators into the system, he said.

“I know our competition, I know what they’re building their restaurants for now, and we’re under the average for fast-casual segment.”

The strategy can also smooth the lending process for franchisees.

“It has sped up that SBA loan process a lot. When I came on, we were asking why can’t we hit dates? Why can’t we hit start dates? Why can’t we hit completion dates?

“What we’re doing now, work letter, helping expedite the lease and working with them getting the design, layout and branding, it helps them get the approval from the landlord, which helps with the lender.”

Creating a holistic approach

Having all the designs and a cost matrix in place also makes it easier to train local general contractors to do the build out, cutting out the expense of bringing in out-of-town contractors to do the work, he said.

It’s also a winning strategy with franchisees, who get to pick their own contractors while maintaining the consistency of the brand.

"One nice thing about our costing that has really surprised us so much is that we’ve been maintaining our price point from Colorado to Indiana and Texas and Florida, the pricing has been almost the same in all those markets. When we control materials costs, it comes down to labor.”

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