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John Gordon - November 2019



Dispatches from 2019 Restaurant Finance and Development Conference

by John A. Gordon, Principal and Founder, Pacific Management Consulting Group

Many of us are now back from the massive Restaurant Finance and Development Conference last week in Las Vegas. This was my 15th straight conference, and it has always been a place of learning new things and meeting new people. Hats off to founder John Hamburger who began the conference with ten people in the late 1980s and has grown it this year to over 3000 attendees. All of the following issues got much discussion there:

M&A………I was fortunate to guide a panel on franchise M&A with four great panel members: Alan Gallup (National Franchise Sales), Chad Spaulding (Capital Spring), Stuart Adair (City National) and Carty Davis (C2 Advisory).  So, adequate lender funds for restaurants are still available, but underwriting terms are a bit more tough. Franchisee to franchisee, refranchising, private equity and family office transactions are all taking place. But franchisor signoff of the transaction is taking longer and is more involved. It is very clear in many brands franchisee percentage profit margins are challenged by rising labor and rents, and in some, by CAPEX requirements for remodels. The panel members stressed the need for prudent debt management…. watching especially the debt to long term EBITDA ratios.<1> Plainly spoken, this means there has to be a debt repayment plan actuality in pace that works. Underwriting factors excluded, interest rates are expected to be flat in 2020. FYI, the banks do not yet know what the key replacement for the LIBOR rate index will be.

There are plenty of young attractive brands that are growing…that will need money and people, over time, and will be competing for sales share.

Staffing challenges…. are now said to be such that a half to full percentage point of same store sales is being shaved by later evening/overnight/Sunday hours store closings. There are plenty of area managers available due to brand cutbacks, but headquarters IT and digital strategy staff is very tight. In addition, our observation is that some brands are having a tough time coming up with the right CEO candidates.

The structure of restaurant holding companies has changed since 2015…in 2003, when McDonald’s (MCD) began to implement its then “Plan to Win”, it spun off a boat load of brands it had accumulated, including eventually Chipotle (CMG) in 2006. The stock analysts accepted the logic heard and began to think of restaurant holding companies with too many brands as “risky”, except for Darden (DRI). The sentiment began to change back in 2015, with large super acquisitions by Restaurant Brands (QSR) with Tim Horton’s, and Popeye’s, and with Inspire Foods (Roark Capital) and others building large portfolios. The success of these portfolios showed up in same store sales according to Technomic/Restaurant Business, with “large” brands posted SSS of plus 3.3% versus .8% for all public brands in Q3 2019.<2>   Large chains are outperforming smaller chains and QSRs are outperforming casual diners. <3>

This of course has many implications for the industry, including public and private investors, HR, supply chain, finance, construction, real estate and other business disciplines. Large companies will be able to pool marketing and CAPEX (hopefully) to be more efficient. That’s the theory anyway.

Delivery is still a hot mess… two weeks ago Grubhub (GRUB) published a special note to investors and Wall Street and discussed restaurant delivery in great detail on their earnings call. They noted recent research that delivery loyalty per mark had eroded and that delivery had in essence became a commodity to consumers, driven by price. Grubhub indicated it would work with certain restaurant brands and not others and would prioritize independent restaurants. At the same time, many restaurant chains are broadening the number of delivery marks they are working with and trying to find ways contract for delivery only and skip use of the third party website.  There is no consensus in the industry yet and it will take some time for common support tools and efficiencies to be available across the board.  

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About the author: John A. Gordon is a long time restaurant industry veteran with years of operations, corporate staff and management consulting experience. His founded restaurant analysis firm, Pacific Management Consulting Group works restaurant business intelligence, financial analysis and operations analysis engagements for clients, and is always reachable at (858) 874-6626 (office) and email, jgordon@pacificmanagementconsultinggroup.com.

<1>   Every bank and credit ratings agency have a different scoring formula, but if long term debt is north of 5.5 times EBITDA for entities that have CAPEX responsibility, that is a point of clear attention.

<2>   Restaurant Business The Bottom Line, November 19 2019

<3>   Id.

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