Garrett Black May 21, 2014
T.G.I. Friday’s and Red Lobster have much in common: both are large restaurant chains, both embrace the casual-dining aspect of the business and both have agreed to be acquired by private equity firms—Sentinel Capital Partners and Golden Gate Capital, respectively. PE investments in restaurants worldwide are apparently sizzling right now, and the increase in acquisitions makes sense; after all, global consumer confidence is the highest it’s been in years.
But despite a slowdown in 2014 thus far, PitchBook data support the view that, overall, private equity firms have recovered their appetite for restaurants, as the chart below illustrates.
Now, confidence in consumers’ disposable income isn’t enough to guarantee a good investment, so what else is contributing to PE investors’ enthusiasm for restaurants? One of the key factors is the diversity of the sector: fast-casual dining concepts are definitely acquisition targets, as the sample cases of T.G.I. Friday’s and Red Lobster show. Furthermore, such casual-dining chains are geographically widespread, thus avoiding localized depressions in consumer confidence and disposable income. The size and reach of the restaurant, as well as the nature of the restaurant’s service, are consequently two key characteristics.
Careful positioning for growth is also quite important: how easily replicable is the overall dining experience? Again, this is where the fast-casual segment performs well, as additional units can draw on experienced management and brand recognition while tweaking its service to local appetites. For example, a certain T.G.I. Friday’s has more flexibility in pricing and menus than either a high-end French restaurant or a McDonald’s, as the former has high ingredient costs and the latter is a slave to customer expectations of dollar menus.
A recent piece by CohnReznick encapsulates many of the above points, and also suggests that another area of growth is healthy, on-the-go food service concepts. Protein Bar and Piada Italian Street Food, both of which received development capital from PE firms, would certainly seem to exemplify this trend. And it’s not just in the U.S. Overall, the fast, casual and healthy segment seems poised for continued growth, which would bolster restaurant investments as a whole for the foreseeable future, and explain investors’ enthusiasm for the sector. Only 2014’s early slowdown would seem to contradict that trend, but that itself may be somewhat of a data blip, since in 2012 and 2013, the bulk of deals in the space closed later in the year. Perhaps PE investors are just biding their time.
Featured image courtesy of Wikimedia Commons user Laslovarga.
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