This post is part of the On the Margin blog.
Restaurant companies seem intent on getting smaller, at least if you’ve read the news lately.
On Monday, for instance, I wrote about Buffalo Wild Wings Inc.’s sale of its minority interest in the fast casual chain PizzaRev to an investment firm led by former McDonald’s Corp. CEO Don Thompson.
That same day, the Chalak Mitra Group, owner of the Genghis Grill chain, sold a trio of its “non-core brands,” including Elephant Bar, Baker Bros. American Deli and Ruby Tequila’s Mexican Kitchen.
Those two deals came just days after Jack in the Box Inc. said that it was looking at alternatives for its Qdoba Mexican Eats chain — meaning a likely sale.
In March, meanwhile, Chipotle Mexican Grill Inc. sold its ShopHouse Asian Kitchen concept. Or, more specifically, it sold the leases for ShopHouse’s 15 locations to Bibibop Asian Grill — essentially killing the ShopHouse brand.
The concept shedding stands in direct contrast to what seems like a trend toward industry consolidation. Just this year, for instance, Restaurant Brands International Inc. bought Popeyes Louisiana Kitchen, JAB Holding bought Panera Bread Co., and Darden Restaurants Inc. bought Cheddar’s Scratch Kitchen.
The Popeyes and Panera deals, in particular, were notably expensive. Indeed, private-equity firms represented only 16 percent of buyers in the consumer space last year, the lowest percentage since 2005, according to a study by A.T. Kearney. One big reason: Strategic buyers pushed them aside.
In the restaurant space, the diverging trends of consolidation and concentration demonstrate the wide gap in performance in the restaurant industry.
Strategic buyers only get permission from their investors to acquire additional concepts when they’re doing well. Three years ago, Darden investors would have gathered outside the company’s Orlando headquarters with torches and pitchforks if the company bought a varied menu casual dining concept like Cheddar’s.
In the case of Buffalo Wild Wings, however, the chain is struggling to generate a sales lift. Its stock is down more than 20 percent off of its peak. And an activist shareholder, Marcato Capital Management, is pushing for seats on the company’s board and wants the CEO, Sally Smith, to resign.
Chipotle was another activist investor influenced decision. The company gave seats on the board to Bill Ackman late last year, and is still working to recover from an awful sales slide in 2016 after various foodborne illness outbreaks late in 2015.
The divestitures of both ShopHouse and PizzaRev made sense from a corporate standpoint. Neither did much to add to the revenues and profits at their respective companies. They were long-term bets on the part of the companies’ respective executives.
Such long-term bets seem silly at a time when the typical public company CEO is in his or her job for about six years. And the concepts made it appear as if the executives were distracted at a time when their core concepts needed work.
Qdoba is a different animal. It is bigger than PizzaRev, ShopHouse, Elephant Bar and the others combined. It’s not entirely clear that Jack will sell Qdoba — the company could theoretically refranchise the concept to make it more like its flagship chain. Indeed, any buyer is likely to sell off those company stores.
Yet in that situation, Jack executives concluded that operating the two brands is hurting the company’s overall valuation. It probably is, but that won’t keep someone from buying the chain if it is put up for sale.
And that would enable Jack in the Box to focus on its single concept. Until it’s successful enough that it could think about buying again.
Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.
Contact Jonathan Maze at [email protected]
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