Renovating Your Store: Expense or Investment?
Let’s Do the Math
Many store owners approach store renovations with trepidation. Their biggest concern: what will this cost?
But what is cost? If you buy a car, it’s an expense, because two years later it’s worth half what you paid for it and it doesn’t return any income while it depreciates. If you buy a boom truck, it’s an investment which also depreciates, but hopefully generates enough income to provide a good return. If you renovate your store, is that an expense or an investment?
If you think of it as just an expense, the next logical thought is, “This is a cost of doing business, so how can I reduce this cost?” So, you spend less rather than invest more. The deck chairs get shuffled. Compromises are made. Some renovations get watered down so much that customers don’t even notice the changes. Stores are put into a state of turmoil for months on end. Customers need more help finding things but find staff unavailable, testy, and stressed. Owners swear they’ll never do this again.
A better question than “what does this cost?” is “what will be the return on my investment?” or “will our cash flow go up or down by doing this?”
There are dealers that rise above the fray. They may have seen their parents or grandparents struggle through renovations in the past, or lived through their own. They decide the best use of their time is to stay focused on what they do best: buy and sell product, train and motivate staff, and look after their customers. They choose to win and not to compromise. They do the math and invest wisely.
The Math on Store Renovations
To do a full renovation with completely new fixturing, new counters and millwork, a complete signage package, and professional merchandising with specialized accessories and displays costs $20-40 per square foot. Larger stores normally are at the lower end and small stores at the higher end. An average 8000 square foot store will do about $4 million in sales and cost $280,000 to renovate.
The average building centre does about $500 per square foot in annual sales at a 26% margin. Renovated stores consistently generate sales increases of 10-30%. At the low end using the above example, that’s $400,000 in sales and $104,000 in margin. Overall gross margin percentages also tend to increase 2-3%. Using a conservative 1% of the higher sales number creates an additional $44,000 of gross margin for a total of $148,000. This renovation comfortably pays for itself within two years. This analysis does not factor in additional labour to service higher sales, however most building centres have the capacity to do 10% more sales without adding staff. Beyond this, there likely will be more costs to service the extra volume.
With lease-to-own financing, a large part of the renovation can be paid over 5 years with no impact on existing credit lines. Lease-to-own financing is generally available to cover about 70% of overall project cost (excluding construction and leasehold improvements). In the above example, lease payments on $196,000 would be about $3881 for 60 months with a 10% ($19,600) payment at the end. It’s wise to budget an additional $10 per square foot of inventory, as more efficient fixturing should deliver higher inventory intensity. The extra $80,000 in inventory would create a carrying cost of $533 per month at 8% interest. This brings the total monthly expense increase to $4414 or $52,970 per year. Subtracting this off the $148,000 conservatively leaves $95,000 of positive cash flow per year.
Return on Invested Capital
Leasing provides an effective way to reduce taxes paid on new income because payments are an expense which is fully deductible. This helps already profitable businesses pay back their investment faster. It also increases the return on invested capital. The lease covers $196,000 of the renovation cost in the above example, leaving a net capital investment of $84,000. This generates a pre-tax return of 113% based on the $95,000 of additional cash flow. The after-tax return on investment based on the small business tax rate, ranges from 92-98% depending on what province you are in.
If you would like to do your own math, you can download a financial calculator from our website. This calculator adds other dimensions such as increased wages, other capital costs, and other “what if” factors you may wish to include.
Other Factors to Consider
Beyond the numbers, there are other factors to consider.
- A professionally renovated business is much more marketable if you are planning to sell your business.
- Meaningful improvements to your business can be the factor that knocks a weak competitor out of your market especially during a recession.
- Employees are proud to work in a well-presented store and customers are glad to shop there.
There’s always a cheaper way to do anything. You can hire a tree company to trim your trees, or try to do it yourself. A friend of mine’s doctor recently died falling out of a tree trying to save a few dollars. It all comes down to perspective. If you see renovating your store as an expense, it may become just that. If you see it as an opportunity to invest for great returns, you are much more likely to reap the rewards.
The math suggests that now more than ever, there is no better place to invest your money than in your own business.
Burlington Merchandising & Fixtures provides innovative merchandising solutions to both retailers and vendors with a focus on driving sales and profitability. Contact us today to get started!
You might also like: