Caribou Coffee, left, and Krystal are among restaurant chains that have smaller footprints amid rising construction costs.

Inflation, material shortages, and supply chain disruptions have all contributed to sticker shock when it comes to construction costs. Franchisors are seeking to counter soaring costs by changing store strategies.

Rising labor and construction material costs have increased overall project costs by 8-30% in some cases. “There’s a lot of variability between categories when it comes to materials,” said John Walbrun, COO of Caribou Coffee.

While soaring lumber prices fell in early 2022, costs have surged recently in large items such as HVAC systems and windows. “Overall, there’s a domino effect as we experience higher labor rates and rising distribution expenses among a list of other things,” Walbrun added.

Operators are feeling the pinch of rising costs. “It doesn’t take much for the needle to move for a small franchisee. Budgets are tight and forms are, in some cases, outdated,” said Bradley Sanders, CBRE’s senior managing director, who leads the company’s global retail project management group.

Some franchisees may have signed agreements 12 months ago, or more in the case of multi-unit agreements, when costs were lower. Additionally, delays in obtaining materials needed to complete a project can impact the revenue side of the ledger. Other franchisees run the additional risk of entering a period of “dark rent” where a leased space is not fully operational, yet they are forced to start paying rent.

Although some view inflation as passing or temporary, many franchisors do not wait for costs to come down. They are looking for ways to add value to engineering prototypes to help offset the higher costs franchisees are experiencing today.


Lee Brown

Footprint reduction

One solution is to reduce the footprint size. QSR operators, in particular, see rising costs in the context of changing customer behavior, with more orders going through drive-thru counters or through the door for pickup and delivery.

If a franchise can reduce in-store dining that eliminates even 200-400 square feet, it can result in substantial savings. In cases where construction averages $100 per square foot, this translates to savings of $20,000 to $40,000. The risk franchisors need to consider is whether changes to reduce the footprint today may impact future operations if demand for in-store dining returns, Sanders noted.

Burger chain QSR Krystal has two new prototypes in development. Both have smaller footprints and lower construction costs than its traditional 2,500 square foot restaurant. One is a 950 square foot drive-thru and take-out-only model with no indoor seating, and the other is a 1,300 square foot building with limited seating. The company has seen its construction costs increase by 10 to 30%.

“We’re trying to rebalance scale by reducing our construction costs and focusing on unit economics,” said Thomas Stager, Krystal’s president and CEO.

Construction costs are a priority for Krystal, which is accelerating its growth after the company was acquired by Fortress Investment Group in 2020. The company plans to open six to seven new sites in 2022, with plans to add 25 units per year for the following three years.

The smaller units allow Krystal franchisees to save approximately 40% on construction costs. The prototypes will also include new equipment to help operators reduce labor and get food to customers faster. The type of store will depend on the individual market and the demand in a particular area.

Krystal has “breakfast clubs” in a number of its smaller towns that cater more to on-site dining. “In small towns like this, we’ll still have a lobby that can accommodate about six tables, but it just won’t be as big as our traditional model,” Stager said.

Caribou Coffee is expanding with its smaller Caribou Cabin footprint, a model the company launched in 2019 that offers attractive economic returns. The 60 square foot unit focuses on drive-thru and walk-in services.

“By building this prototype model in our own facilities, we were able to bring in operators to make the process as efficient as possible,” Walbrun said. The rear of the house for the cabin model, for example, was designed to optimize space for crew members and storage. “We’ve found that having a consistent prototype also creates more predictable results for our developers and general contractors, making costs more predictable.”

Lower cost design choice

Franchisors are exploring options to reduce design costs and the materials used in their prototypes. Perspire Sauna Studios saw their total project cost increase by 10-20%, primarily due to increased construction materials and shipping costs. The company is working on a redesign package with value engineering in mind.

“We’re looking at different ways to maximize aesthetic appeal, while minimizing the total cost of construction,” said Lee Braun, CEO and co-founder of Perspire. The wellness franchise offers an infrared sauna and colored light therapy experience. It has 22 studios open in 13 states and plans to open more than 20 new units in 2022.

Perspire finds cost savings by modifying its materials, as well as design efficiencies that generate better heating and cooling to improve its energy efficiency. For example, its original prototype used western Canadian red cedar in all of its locations. The cost of this wood has increased significantly over the past year due to supply shortages. Now the company is looking to incorporate more mahogany, which has a similar look but is about 15% lower in price than cedar, Braun noted.

Value engineering solutions also occur on the operations side. Sanders has seen some restaurants in city markets use a location as a hub with more commissary foodservice supporting a network of other stores in the area to save on labor. CBRE also has a preferred supplier program where it has negotiated contracts with suppliers of HVAC, lighting, ceiling tiles and other finishes to leverage its buying power as a large company and the bring to its customers.

“Everyone is trying to cut costs wherever they can. The key is to seek out the needle movers,” Sanders said. “Saving a penny per square foot on paint isn’t going to make or break the pro forma, but if you can focus on the big items, like rooftop units and kitchen equipment, and make some strategic moves, this is how real value engineering is performed.”