On the Margin
First Watch exterior Jimmy Chiarella

First Watch executes a rare brand conversion

Blog: Breakfast chain is gradually turning Egg & I locations into First Watch restaurants

This post is part of the On the Margin blog.

First Watch enjoys some advantages by being open only half of the day. For one thing, it makes the chain’s conversion of The Egg & I restaurants that the company acquired in 2015 all the easier.

“We can remodel the restaurant without closing,” First Watch president Chris Tomasso said in an interview. “We close at 2:30. It takes us one week. We do one phase a day for seven days, starting at 4:30 in the afternoon until 4:30 a.m. the next day. One day we might have a new floor, new walls or new furniture.” 

It’s easy to forget the rarity of what First Watch is doing: Quickly executing a complicated and rare conversion of another brand.

First Watch, based in Bradenton, Fla., was already a highly regarded growth chain in 2015, with 153 locations, when it acquired the 114-unit The Egg & I — nearly doubling the chain’s size and reach almost overnight. At the time, the two brands were the largest in the burgeoning breakfast-and-lunch market. The deal would have been the equivalent of Blaze Fast-Fire'd Pizza buying fast-casual pizza rival MOD Pizza. 

Since the acquisition, First Watch has been converting company-owned The Egg & I locations in markets where First Watch doesn’t have a presence. And certain franchisees of The Egg & I will have the option to convert to First Watch.

“It’s a joint decision,” Tomasso said. “It depends on the time of their lease and a lot of factors.”

Brands frequently convert locations of rival concepts, but those locations are usually closed, and the conversions happen in small doses. For instance, earlier this year, Bibibop Asian Grill agreed to buy the leases for 15 closed ShopHouse Asian Kitchen locations from Chipotle Mexican Grill Inc.

Full brand conversions of the scope First Watch is doing are rare. Maybe the most famous was Hardee’s 1990 acquisition of Roy Rogers and its subsequent conversion over the next few years.

Roy Rogers had 600 locations, and Hardee’s bought the chain for $365 million. Hardee’s converted most of those units but left some franchisee-owned locations as Roy Rogers. The brand exists to this day.

There are good reasons why companies shy away from conversions like this one. Mostly, the brand itself has value that buyers are willing to pay for on its own, but conversion buyers aren’t necessarily willing to pay. Also, location, real estate and specification issues make such deals more complicated. Plus, it can be difficult to find a conversion opportunity that fits.

But such conversion deals could become more common among chains where growth demand is heavy and investment financing is readily available. Demand for real estate, especially leased locations in strip malls and other retail developments, could also make such deals more desirable. 

Last year, for instance, 100-unit Pieology Pizzeria, armed with investment from the founders of Panda Restaurant Group, acquired its 20-unit fast-casual pizza rival Project Pie.

In The Egg & I, First Watch acquired a brand with locations in Western markets, which complemented First Watch’s presence in Eastern markets and provided the company with a quick opportunity to expand.

First Watch also had the backing of its private-equity owner, Freeman Spogli & Co. And First Watch had been making deals in recent years. 

On top of that, The Egg & I was a similar concept, with similar types of locations and similar hours.

Still, “It’s been difficult,” Tomasso said. 

First Watch remodels Egg & I locations over the first week without changing the sign. The second week, the company closes for three days to train employees on the new menu. During that time, the company does a “gut and purge, where we take things out that won’t be there for a First Watch.”

The period also includes a friends-and-family event to test workers on the new menu. After about two weeks, The Egg & I becomes a First Watch.

At least in the short term, customers like it.

“Our Egg & I's are going up on average 10 percent” when they’re converted to First Watch, Tomasso said. “Some are over 20 percent.”

The result of all of this? First Watch is quietly one of the fastest growing chains in the country. Today, First Watch has 206 locations, and same-store sales increased nearly 13 percent last year.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company. 

Update: July 12, 2017 The photo on this article has been updated to reflect First Watch's current logo.

Contact Jonathan Maze at jonathan.maze@penton.com

Follow him on Twitter: @jonathanmaze

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