Earlier this month, Darden Restaurants Inc. said it has agreed to buy Yard House USA Inc. , an Irvine, Calif.-based chain that will bring a more contemporary concept into the casual-dining giant’s portfolio.
Yard House was sold by private-equity firm TSG Consumer Partners LLC, which had taken a 70-percent stake in the chain in 2007, when it only had 16 locations. This weekend, Yard House is scheduled to open its 40th unit, and the brand is considered a standout “new evolution” player in a world of aging casual-dining brands.
Pierre LeComte, managing director of TSG who worked closely with the Yard House management team during the past five years, spoke with Nation’s Restaurant News about the role the private-equity firm played in the chain’s growth, and what’s next for TSG.
TSG took a 70-percent stake in Yard House in 2007. Terms were not disclosed at the time, but can you say more about the deal now?
It was a significant investment, but we can’t disclose specifics.
What attracted TSG to the brand?
Frankly, we spent years looking at restaurant landscape across casual dining, but also QSR and even fine dining, and we had looked at a number of concepts. Yard House stood out on a number of dimensions, certainly from an economic performance standpoint.
Frankly, its operating performance from an in-store sales, as well as a four-wall economics standpoint were industry leading and unprecedented. Couple that with an entrepreneurial management team that was still in place from the company’s founding — a team that was able to create a tremendous culture across those 16 locations and was willing to invest alongside us to continue to grow the company. We thought it was the most compelling restaurant business we had seen, after years of reviewing other opportunities.
What was Yard House doing right?
They weren’t just a restaurant. They were creating an entertainment experience. They combined music and atmosphere and food into an experience so that folks were really motivated to go out and try their restaurants and hang out for a while.
The menu was extremely broad, and still is today, so it has low veto power. If somebody wants pizza and somebody wants Italian and somebody else wants steak, they can get it all at Yard House. Even vegetarians will find something there now. There are very few restaurant concepts that can fulfill those diverse tastes.
That’s how they were taking market share. Even with just a few restaurants, they were taking share from other concepts and really revitalizing a portion of the casual-dining segment — the bar-and-grill segment — that had been down for a few years and getting a little long in the tooth.
What was TSG’s role in Yard House’s growth?
I think we had a very effective partnership. At the end of the day, what TSG wasn’t was a restaurant operator. That’s what the Yard House management team was. What we brought was a strategic focus and an ability to help them think through how to grow most effectively and take the brand national.
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A lot of where we spent time and energy was outside the four walls of the restaurants. We focused on working with the team to create a robust site selection process. We thought about where we were going to grow the concept in different cities. Within those cities, we thought about where to invest and put money into locations, because our locations, quite frankly, cost a considerable amount of money to open and these are important capital expenditure decisions.
We also worked with the team aggressively on supply chain, thinking through what the opportunities were as we scaled the company and took it national. We worked to realize synergies and efficiencies from a purchasing and distribution standpoint, and really how to take the company to the next level.
Lastly, we assisted them in how to manage and work with a new capital structure that included banks, as well as equity investors such as ourselves. That was a new experience for the team. We have a lot of understanding about how to interact with banks and how to use them to help fund growth. But we left the team to do what they did best, which was to run a wonderful restaurant concept, create an exciting menu and deliver an experience within the restaurant that wasn’t being replicated elsewhere. We left that pretty much untouched.
Why exit now?
These things are never predictable. Yard House had grown tremendously. The company had attracted a great deal of interest from a lot of different suitors. Sometimes it makes sense to pick up the phone and have a conversation. This is a case where Darden will be a great parent and will bring a lot of resources that will be important for the company to get through its next stage of growth. Yard House had scaled to the point where it made sense for us to realize our investment.
Can you talk about how the real estate landscape is changing for the casual-dining segment?
There’s definitely been a slowdown in new development over the past four or five years. We saw a lot of projects being put on hold during the economic downturn. I think that’s both an opportunity for the right concept that can drive traffic, as well as, obviously, constraining the ability of other chains to find the right location.
Yard House during the downturn kept opening new restaurants. We were taking advantage of low commercial tenancy rates to be able to bring our concept to development with a good strong economic deal from the landlords. As we increased the brand’s prominence nationally, we were increasingly getting access to better and better locations.
Our intent to grow the restaurants during the downturn really paid off. Yard House is clearly taking share in casual dining, and that’s only going to continue because the real estate supply is kind of constrained right now.
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A lot of people have been talking about the evolution of casual dining. How do you see things changing in the segment in terms of the players?
A lot of the concepts, like Applebee’s, T.G.I. Friday’s, O’ Charleys and Bennigan’s, have been around a long time. Consumers tend to be fickle. They want to try something new and different. They want to try the next evolution of a concept. Yard House is only 15 years old, but over half of the restaurants within the chain have opened within the past five years under our ownership. It’s still a very new and differentiated chain.
With Yard House, we saw an evolution within a specific niche within casual dining. Brewpubs were really popular in 1990s, where people were brewing beer on site. Yard House was an evolution beyond that because it focused on the consumer benefit, which was the variety of craft beers it offered and making a wide selection of beers available, as opposed to taking up a lot of space to brew on site. It turned out that on-site brewing wasn’t what was driving people to brewpubs ultimately. Even major players like BJ’s have moved away from on-site brewing, so that now the focus is on offering a lot of tap handles so people could get a different beer with every meal.
A lot of chains have been focused on building their bar. That’s something that Yard House does very well, with bar sales accounting for more than 30 percent of sales. Is that a factor in the evolution of casual dining?
It clearly adds to the profitability of the company, but it also means Yard House is able to attract different people. They can attract people for the traditional lunch and dinner, but they also attract a large crowd for happy hour and late night — both of which tend to be a significant portion of sales, and that’s really unusual for a restaurant. There aren’t many concepts out there where folks will consider one restaurant for all those different dayparts.
Yard House is only full-service restaurant concept TSG had invested in. Now TSG has Stumptown Coffee in its portfolio, but can you speak to whether TSG is looking for something new?
We’re absolutely looking for something new, as we always are. We’re very proud of our partnership with the Yard House team and the success with the business and its growth. We would like to find additional opportunities where we can apply that learning and knowledge and formula to another restaurant business in the future…whether that’s in casual dining, or QSR or fast casual or even fine dining.
There’s been a lot of attention on the restaurant world from investors with initial public offerings lately and also with restaurant stocks that have taken a hit. How do you see the consumer climate impacting restaurant companies?
Some stocks are being impacted by what’s going on overseas, and then some, like Chipotle, have been set up with expectations to outperform. If you miss or come in with lower than consensus expectations, it makes it a challenge. I don’t think there’s fundamentally anything changing at the consumer level in the sense that we’re continuing to see an acceleration in terms of consumers being willing to go out and eat and continue the movement toward out-of-home food purchases.
The few negatives, I believe, are really being driven by what’s going on in the outside world and what expectations have been. But the fact that you’re seeing new restaurant concepts [beginning IPOs] over the last few months is really a testament to the fact that the restaurant landscape is actually improving every week, and those businesses having momentum — some more than others — involve concepts that are gaining share.