Private Equity in the Restaurant Sector: Hot or Not?

The formula for success in restaurant investment seems more art than science—and many middle market PE firms have demonstrated they perfected it in international markets during 2015. Successful restaurant franchises are scalable, revenue generating machines that can be replicated across both domestic markets and overseas. The entity may start with three or four profitable brick­and­mortar locations, then build credibility and hone their model by launching ten to fifteen additional stores. Planning for new, potentially international markets may be the next logical step—and the perfect time to roll out the red carpet for PE firms.

Franchises that have expanded internationally have experienced extremes in performance. Domino’s Pizza Enterprises entered the Japanese market, “quickly became the number two player”, and is predicted to become number one, according to an interview with Chief Executive office Don Meij by CNBC. G rowth has been strong and impressive —t he franchise reported a 48% increase in profit over a twelve month period in 2014. Creative marketing campaigns and revenue streams have been launched and, as the numbers show, made quite an impression on a sizable, hungry audience.

Other brands have flopped, failed or floundered by underestimating the demands of an international venture, sinking robust investments into operations and supply chain logistics, and failing to customize their offerings to the culture of the market. Recent changes in the global foodservice market include Yum! Brands announcement that their locations in China would become independent, publicly­traded franchises. This announcement was made after Yum! brands made headlines regarding food safety issues.

According to LEK Consulting report volume XVI, Issue 45, most countries remain (outside of the United States) “sharply underpenetrated” by chained quick service (QSR) restaurants, and casual dining restaurants (CDR). India has the fewest QSRs, with only seven units per one million people above the poverty threshold. To put this in context, the United States has 516 QSR units per one million people above the poverty threshold. In developing a formula for international success, however, many more variables must be considered, such as lease prices, availability of prime locations, operations and supply chain expenses to name a few.

“The growth of private equity’s role in the foodservice sector—and its sub­sectors—has been remarkable. Multiples have been strong, acquisitions have been plentiful, and it will likely prove to be a sector to watch again this year,” states Alfred Zaccagnino, Founder and CEO of The Samarian Group of Companies, a boutique private equity firm headquartered in Manhattan with a growing international presence.

The uptick of PE activity within this sector is reflective of its appeal. Top restaurant companies are selling for 10 times their earnings, an attractive multiple to PE. But new markets—and companies—must be tested, analyzed, and vetted before the leases are finalized and the signs go up.

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