It’s a good time to be in the restaurant business, at least based on the amount of money flowing into the industry.
Entrepreneurs are working hard to crack the code of healthy fast food, and are attracting a nearly unprecedented level of investment from private equity groups and venture capitalists.
Among franchisees of legacy brands, intense competition among a growing number of restaurant industry lenders is fueling a surge of merger and acquisitions, enabling operators to rapidly grow their businesses.
“Capital availability is at an all-time high,” Chris Sciortino, managing director with Baird, said at the Restaurant Finance & Development Conference in Las Vegas this week.
As such, optimism among attendees at the conference was high. Higher valuations can give business owners a sense that they’re worth more, which can improve their mood much like higher home values make homeowners feel wealthier.
In addition, sales are up and the economy appears to be doing well. Operators were generally optimistic about their sales. At the same time, food costs have finally started to come down.
It’s rare for both sales to go up and food costs to go down at the same time. In recent years, food costs have only come down when sales were weak, and they’ve skyrocketed in years when sales were up, pressuring profits.
David Maloni, president and chief commodity strategist for the American Restaurant Association, noted that commodity deflation is coming during an improving economic environment “for the first time since 2006.”
Amid this, however, were a few concerns — notably, that the level of financing being provided to the industry is reaching unsustainable levels.
“It’s too frothy,” Cristin O’Hara, managing director and market executive with Bank of America Merrill Lynch, said in an interview. “It’s a bit unhealthy.”
The amount of debt companies are borrowing has reached pre-recessionary levels, noted Todd Jones, senior managing director with GE Capital Franchise Finance. That gives companies less of a cushion in the event of a sales decline or rising labor costs or both.
And labor costs are on the upswing. “Upward pressure on the minimum wage is the No. 1 issue facing operators at the moment,” Jones said.
But some operators believe it’s important to attract good workers and deliberately pay higher wages to do so.
Rob McColgan, co-CEO with Golden, Co.-based Modmarket, said he deliberately pays higher average wages than the rest of the industry to attract and keep top talent. He also notes that workers get free food so they can align with the chain’s better-for-you mission. “We want team members to be eating what we’re serving.”
Managing wage increases
Jeff Uttz, the CFO with New York-based Shake Shack Inc., said his chain also pays higher wages so it keeps employees.
After Washington DC raised its minimum wage to $10.50, Shake Shack raised its pay there to $12 an hour. Uttz said the company didn’t have to replace a single employee for three months after making that change.
“It’s all about people, and finding the right people to work in the restaurants,” Uttz said. “You’ve got to keep people in the restaurants. If they come in and work for three months and take off, you’re not going to have happy guests, shareholders and you’re not going to have happy workers.”
How do you pay for those higher wages? More sales. “Sales take care of everything,” McColgan said. “If the top line is growing, everything takes care of itself.”
Modmarket and Shake Shack are part of a generation of relatively new fast-casual chains that claim to serve better food with better ingredients, often at a higher price, and are attracting attention from younger consumers — and investors.
The investment is coming from private equity groups that are investing in such chains at an earlier stage of their development. It’s also coming from public investors that are welcoming concepts like Shake Shack with open arms in their initial public offerings; Shake Shack went public and saw its stock price more than double.
These concepts effectively leverage social media to get the attention of younger consumers. Uttz noted that Shake Shack has 218,000 followers on Instagram, not much less than the much larger Chipotle.
“We’re in a time when everybody wants to share what they do all day long constantly,” he said.
Cooper’s Hawk Winery & Restaurants, meanwhile, has a wine club with 160,000 members.
Yet it’s not just about the way the restaurants engage with those customers, it’s about what they’re serving.
“That generation wants to know where their food is coming from,” Uttz said.
Millennials “are not pretentious,” Cooper’s Hawk CFO Diana Purcel said. “They smell out inauthenticity.”
Contact Jonathan Maze at [email protected]
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