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M&A activity is reaching near-record highs in the U.S. and globally, and the hospitality industry is no exception. Deals in the food and beverage industry grew at a 9.7% CAGR between 2010 and 2017, while the restaurant portion of that sector enjoyed 6.6% growth over the same period. 

Emerging brands are studying incumbents and segment leaders for weaknesses to exploit — and some are, successfully. Those with size and scale are throwing their muscle and might into buying more muscle and might. 

There are many explanations for this harried pace of buying, selling, merging, and spinning off.

  • Capital is cheaper than ever, thanks to record-low interest rates
  • The availability of capital is at near-record high, thanks to increasing corporate profits
  • There are trillions in capital sloshing around global markets, seeking investments
  • Foodservice remains a steady — and relatively easy-to-forecast — growth sector, expanding with inflation, population, and discretionary income
  • Emerging and frontier economies will see the bulk of future growth, and conglomerates in these markets look to Western brands first to build their empires

Meanwhile, profit margins are compressing globally, most dramatically in the Middle East, as its foodservice economies move from emerging to developed markets. In response, many scaled chains have adopted a “grow fast or die slow” sensibility. And it’s working — power and dominance are consolidating. 

Though restaurants have been gaining a steady share of stomach year-by-year in most geographies (though grocery stores in the U.S. have started to fight back), the battle for the biggest piece of that share is escalating. In mature markets, the slugfest is brutal and unapologetic. While industry growth is stable and steady, some sub-sectors and categories may be characterized by a sometimes-gruesome competitiveness. In some environments, it’s more dangerous to stand still than to take calculated risks.

Acquisitions make strategic sense in this era of cheap capital, fierce competition, and slow growth, but only if these moves are backed by solid due diligence and a forward-looking strategy. In that spirit, here are 10 ways acquisitions have been leveraged to drive growth for foodservice companies.

1. Dramatic and Consistent Top-Line Growth

When organic growth may be hard to come by, acquisitions can keep overall company revenue lines climbing steep slopes. An existing concept comes to its new owner with all its tangible and intangible value — from units and equipment to menus and brand — as well as its customer base with it. Combined, these new additions to the original portfolio accelerate revenue growth.

In August 2007, Darden Restaurants announced the acquisition of RARE Hospitality, owner of LongHorn Steakhouse and the Capital Grille, for $1.19b. The same year, it sold Smokey Bones Barbeque & Grill for $80m. Despite the loss of 73 Smokey Bones locations, Darden reported an 19% increase (~$1.1b) in sales the following year. With 305 LongHorn and 32 Capital Grilles (up from 287 and 28 when the sale went through), the new acquisitions accounted for 29.8% of Darden units. Another $591m increase in sales in 2009 more than paid for the cost of the deal. As of 2018, LongHorn represents 21% of Darden’s sales, behind only Olive Garden. 

2. Expand Market Share

Consolidation is a major theme across foodservice, from the declining casual-dining segment to the booming delivery sector, and we expect this trend to accelerate. 

This strategy is especially useful for mid-sized firms hoping to increase their market share. In April 2018, rumors of a merger between DoorDash and Postmates began swirling. As of February 2018, Postmates controlled 9.1% of the U.S. delivery market while DoorDash claimed 13.9%. Their combined 21% would push them ahead of Uber Eats, which controlled 19.9%, and solidify their lead on Amazon (4.0% market share). 

HelloFresh successfully completed a similar strategic acquisition when it bought Green Chef in March 2018. The purchase helped HelloFresh pass Blue Apron and become the largest meal-kit company in the U.S.

3. Enter Fertile and New Fast-Growing Markets

As the global economy has gotten more, well, global, the number of multinational corporations has quickly increased, doubling since 1990. This is as true in foodservice, where McDonald’s, Starbucks, and KFC have opened locations all over the world. These chains are relying on organic growth — alongside franchise and licensing agreements with local operators — while others use acquisitions to penetrate foreign markets.

For example, Amazon purchased the Middle Eastern e-commerce firm Souq in July 2017, giving the U.S.-based firm access to 45 million users in a region where online purchasing is growing at record speeds. E-commerce doubled between 2015 and 2017, and it is projected to post growth rates above 20% through 2021. 

Amazon’s acquisition strategy also helps it gain a foothold in segments it has struggled to penetrate. Recognizing the growth in home-delivery for groceries — 70% of shoppers are projected to buy at least some of their food online by 2025 — Amazon launched Amazon Fresh in March 2017. By November of that year, it had discontinued service in nine states, with some employees privately blaming the U.S. Postal Service. The acquisition of Whole Foods is giving Amazon another shot: with brick-and-mortar stores to serve as hubs and independent contractors working as drivers through the Amazon Flex program, the company is set up to claim a significant share of this new market. 

4. Diversify Guests

Adding brands to a portfolio can bring new kinds of guests into a system’s orbit.

For example, Coca-Cola has been buying up and developing new beverage lines for almost two decades. From Odwalla (2001) to Honest Tea (2008) and Costa Coffee (2018), the undisputed soda-champion is trying to reach more health-conscious customers.

These purchases, alongside the in-house development of brands like Dasani, give Coca-Cola an opportunity to sell to every consumer.

When Marriott International bought its former rival Starwood Hotels & Resorts in 2016, it acquired all Starwood properties — physical and intellectual. In the fourth quarter of 2016, Marriott reported a $42m increase in profit and a 47% revenue improvement. In addition to the revenue and profit benefits Marriott reaped with the Starwood acquisition, it also got its 21-million-member-strong SPG loyalty program

5. Stay Current with Consumer Demands

Foodservice is still undergoing seismic shifts, as fast-casual concepts, delivery, and meal-kit services fundamentally reshape the restaurant industry. This pace of change is expected to continue — if not accelerate — in the coming years, sparked not only by even more transformative technological developments but also by the arrival of Gen Z, set to become the largest demographic group in the U.S. in 2019. Acquisitions can help companies keep pace with the evolving industry, and Starbucks handling of its Teavana acquisition is a key case study in this strategy. 

Since purchasing the tea company in 2012, Starbucks has integrated its products into its own units, building Teavana into a $1b brand. Where the parent company failed was in developing and nurturing standalone units: the real-estate strategy focused primarily on malls, which continue to suffer from declining traffic. In July 2018, Starbucks announced that it would close all 379 Teavana locations. Some were quick to classify this as another example of Starbucks’ spotty acquisition history, which includes Evolution Fresh juices and the La Boulange bakery. 

But the company’s pivot from retail locations to grocery-store sales shows a canny understanding of market trends (and its solid understanding of corporate M&A strategies). Not only does the move rescue the brand from the graveyard of shopping malls, but it also gives Starbucks a new line of retail revenue, especially key after selling the rights to coffee sales in groceries to Nestle in May 2018.

6. Integrate Value-Enhancing Technologies

As recently as 2009, some restaurant operations still saw their online presence as optional. At the NRA conference that year, Sally Smith of Buffalo Wild Wings said her organization would take a wait-and-see approach to social media. Such an attitude today feels incredibly outdated: the question isn’t whether to integrate technology, but how to do it. 

Acquisitions are a surefire way to add technology to an operation. In May 2018, Landcadia, the holding company that owns Landry’s Seafood, Morton’s The Steakhouse, and almost forty other restaurant and hotel brands, acquired Waitr, a delivery platform centered in underserved markets in the American Southeast. The deal will not only give the Landcadia restaurant group a dedicated delivery platform — freeing the company from having to create its own — but it also allows them to enter the booming delivery market, where enterprise value is growing at an incredible pace. 

Yum! Brands’ February 2018 $200m (3%) stake in Grubhub follows a similar logic: the investment will make Yum!’s brands more accessible to consumers, but it will also give the QSR operation a share of the delivery platform’s stunning valuation. 

7. Push New Products to Market 

For multi-brand portfolios that want to add new concepts, acquisitions skip the development and proof of concept phase and go right to expansion. This strategy seems to motivate the massive MTY Food Group, which now controls over 70 brand names. In November 2017, it added two burger concepts, The Counter and Built Custom Burgers, to further expand its portfolio.

Other players in the food and beverage space are making similar moves. In May 2018, Kroger supermarkets spent $700m on Home Chef, a Chicago-based meal-kit company that already delivers 3 million meals to people’s homes every month. Home Chef will continue its original business while making its products available in Kroger grocery stores, allowing the chain to access the growing meal-kit sector, which is expected to have $10b in revenue in 2020.

8. Claim Brand Value and Intellectual Property 

By 2015, intangible assets, which include intellectual property and goodwill, accounted for a staggering 84% of the S&P 500’s value. This shows a 394% increase in 40 years. Globally, the most profitable businesses are those in the idea and knowledge economies, and value increasingly comes from brands and trademarks.  

Acquiring restaurant operations out of bankruptcy can revive still-valuable IP, adding its value the purchaser’s portfolio. In 2017, Landry’s won an auction for Joe’s Crab Shack and Brick House Tavern, spending just $57m for the two brands. With 95 locations open at the time, each unit cost Landry’s approximately $600k, a steal considering the concepts’ reported $3.1m AUV in 2013. 

IP-focused acquisitions are also heating up the delivery space. In January 2018 Uber Eats bought New York–based start-up Ando; a company spokesperson explained that “Ando’s insights will help [Uber’s] restaurant technology team as we work with our restaurant partners to growth their business.” As delivery companies continue to consolidate, we’ll see more large platforms buying smaller competitors for access not only to their proprietary tech but also to the data they’ve collected on consumer behavior. 

9. Complete Product-Line Puzzles

In the world of foodservice acquisitions, few firms have been as active — or as focused — as JAB. Since 2012, the German holding company has been building a coffee-and-bakery empire. Starting with Peet’s Coffee and Tea in 2012, JAB has bought up Keurig Green Mountain (2015), Krispy Kreme Doughnuts (2016), Panera Bread (2017), and most recently Pret a Manger (2018). Besides gaining market share in the café-bakery segment, JAB is also pushing competitors to make big moves of their own, as Nestle’s massive, $7b distribution deal with Starbucks demonstrates.

Large firms may make small acquisitions to consolidate market share, buy out competitors, or enter new markets. Many of the deals mentioned here qualify as bolt-on acquisitions, in which a smaller operation is integrated in a larger organization’s supply chain and distribution network. That’s the strategy General Mills is following as it adds brands like Annie’s Organic Foods, Larabar, and, most recently, Blue Buffalo Pet Products. The deals let General Mills enter the organic and healthful market and give the acquisitions access to many more retail outlets.

For this reason, lower middle-market leaders often look for a larger company to acquire them. As operations transition from emerging to emerged brands, they often find their capabilities — in human resources, marketing, supply chain, and governance — stretched their breaking point. They’ve gotten too big to keep staffing levels low and lean, but they’re still too small to completely fill out the corporate structure. Being bought out by a larger organization, with greater managerial capabilities, might be the safest way to grow.

The deal between Krispy Kreme and Insomnia Cookies, announced in July 2018, is a perfect example. With 1,400 locations globally, Krispy Kreme is more than ten times the size of Insomnia, which has just 135. Both organizations contribute unique capabilities to the deal: besides its standalone locations, Krispy Kreme sells its frankly perfect donuts in grocery and convenience stores, and Insomnia specializes in late-night delivery. More than that, Krispy Kreme, which has been in the business for more than 80 years, can help Insomnia move seamlessly out of the lower middle market as they transform from a start-up to a mature brand. 

10. Buy Low, Sell Dear

In March 2018, Spice Private Equity acquired Bravo Brio Restaurant Group for $100m. The last registered valuation for the company was 2.8x (EV/EBITDA) as of December 2017 — well below the industry median of 10.6x. These fire-sale prices offer the new owners an incredible opportunity to build value over the holding period. If Spice can bring Bravo Brio’s valuation up to just the industry median, without making any EBITDA improvements, it would result in a more-than-doubled enterprise value.

This isn’t the easiest way to make money, of course: turning around a struggling restaurant concept, especially one in the casual-dining sector, is a task only the bravest in the industry are willing to take on. But the potential rewards match the challenge, with a successful turnaround creating ten- to twenty-fold returns on investment.

Grow Fast or Die Slow

M&A activity, especially in the foodservice space, is on an unprecedented run. Forward-looking executives are using mergers and acquisitions to fortify their operations: achieving top-line growth, consolidating market share, and adding necessary technological capabilities. The deals being made today will have a profound impact on the future of these organizations.

As interest rates rise and margins shrink, growth will become harder and harder to achieve in saturated categories and markets. Even frontier economies are quickly moving from fragmented to chain-dominated, and restaurants will have to do even more to stand out from their competitors and strengthen their systems with growth in size and scale. 

This period of inexpensive capital and global opportunity is coming to an end, and leadership teams face a stark choice: execute a robust and aggressive acquisition plan to grow quickly or try to survive the squeeze against larger and/or more agile competitors that used this moment to lay the groundwork for a secure future.

About Aaron Allen & Associates 

Aaron Allen & Associates works alongside senior executives of the world’s leading foodservice and hospitality companies to help them solve their most complex challenges and achieve their most ambitious aims, specializing in brand strategy, turnarounds, commercial due diligence and value enhancement for leading hospitality companies and private equity firms. 

Our clients span six continents and 100+ countries, collectively posting more than $200b in revenue. Across 2,000+ engagements, we’ve worked in nearly every geography, category, cuisine, segment, operating..

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The biggest threats are often those that few see coming. It’s a case of history repeating itself with companies being wiped out by disruptive forces that were often dismissed when they first appeared.

A similar fate could be met by many restaurant companies if they do not take active steps to modernize their businesses and stay relevant with evolving industry and consumer trends.

Technological innovation and rapid changes in consumer preferences have introduced a near-constant pace of disruption adding to the already complex foodserivce industry.

We’ve assembled some of our most popular insights relative to trends, technology, innovation, and performance optimization to help cut through the noise around some of these issues and give leaders practical advice for not only keeping up with but leapfrogging the competition.

Volatility. Variance. Disruption. The global foodservice industry is going to have to start responding and performing with the agility and technological savvy of a Silicon Valley startup if it is to maintain its relevance and share of stomach. Read More

The famed Ringling Brothers–Barnum & Bailey Circus closed in January 2017 after almost a century and a half of operation. Its failure to honor its brand’s DNA — to continue to spark the magic that resonated with audiences for over a century —  proved fatal. Restaurant chains can learn lessons from this powerful story. Read More

What was already one of the most complex businesses in the world is becoming even more so following the arrival of the Fourth Industrial Revolution and new consumer demands for convenience. The next five years are going to be more disruptive to the industry than the previous 50. Read More

For as many mentions as you may read in the coming year(s) about alternative proteins and the rise of organics and insect diets,  these are all food — not format — related. It’s clear the alternative formats shaping up are stealing share from traditional foodservice establishments around the world.  Read More

If you have lost a painful budget or board battle recently — particularly if it relates to technology and bold bets to advance your company — you will find this article worth the time. Always learning, always teaching. Read More

Most established restaurant chains have weathered difficult times, as sales slipped and customers started disappearing. Those that survived the slump did so by realigning their brands brand so that its core personality, promise, and positioning resonated with guests. Read More

In the era with an accelerated pace of change, we’ve seen dozens of brands fall into bankruptcy as a result of failing to ask the question “are we still relevant?” (or, at least, asking it far too late). Read More

About Aaron Allen & Associates

Aaron Allen & Associates works alongside senior executives of the world’s leading foodservice and hospitality companies to help them solve their most complex challenges and achieve their most ambitious aims. We help organizations navigate initiatives to modernize marketing, integrate technology, and keep pace with evolving consumer trends.

Our clients span six continents and 100+ countries, collectively posting more than $200b in revenue. Across 2,000+ engagements, we’ve worked in nearly every geography, category, cuisine, segment, operating model, ownership type, and phase of the business life cycle.

The post Where is the Food Service Industry Heading? appeared first on Aaron Allen & Associates, Global Restaurant Consultants.

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Margins are being compressed for restaurants and foodservice operators around the world. Nearly every geography, cuisine, and operating model is being hit with increased costs relative to rent, labor, commodities, demands of modernization, competitive pricing and promotional tactics designed to take share, and a more fickle and demanding consumer with rapidly evolving dining behaviors.

From Middle America to the Middle East and everywhere in-between, there is spotty revenue growth with unique brands and hybrid formats that is coming at the cost of lumbering incumbents torn between two competing notions: drive revenue or cut costs.

But the choice doesn’t have to be binary. Both can be done simultaneously, while catching a wider net of performance improvements — banded together through a single improvement initiative —  that can also prove powerful as a catalyst for wider organizational and financial transformation.

As we’ve said before, the menu is the single most important piece of marketing collateral that a restaurant has, and every great restaurant turnaround worked its way from the inside out — originating from the heart of the house, expressed through brand purpose and positioning, and manifesting itself through the menu and other vital stakeholder touchpoints.

Whether you’ve embarked on a brand audit, a brand refresh, or a full-on turnaround, revitalizing a restaurant’s menu is one of the most complex — yet surest and fastest — ways to improve profitability. Here’s how the menu can help with (and a few common menu mistakes to avoid):

    1. Revenue Growth – A 2% increase in sales is equivalent to a 10% reduction in cost. A well-developed menu can drive check average, new trials, frequency, party size, and advocacy by identifying opportunities for upsells and add-ons, new profit centers, limited time offers (LTOs), bounce backs, and new products.
    1. Food and Beverage Costs – There are a number of questions to be asked when identifying ways to improve food costs. To be sure though, they can’t be improved sustainably by simply increasing prices across the board, reducing portion sizes, and swapping out ingredients for lower-priced (and lesser-quality) alternatives. Menus can and should function like a tour guide to help navigate guests to items that are not just more profitable, but also that are signature items (the Cayman Curse is our most straightforward and time-tested example) that can enhance brand positioning and perception while also supporting margin growth.
    1. Labor – With the menu making an impact across all functional areas of the business, it can influence make/buy decisions, inform discussions about insourcing or outsourcing a commissary kitchen, and – properly approached – a menu overhaul can certainly be an effective lever for a wider labor optimization efforts. When you get into the nuts and bolts of margin improvement through the lens of a holistic menu strategy, you will undoubtedly find ways to optimize labor (best done by balancing the guest experience, operational process improvements, and utilization metrics).
    1. Marketing – When done well, menus help garner free publicity, gain priceless earned media, and give something to talk about internally and externally in such a way that can seriously drive revenues and advocacy. These kinds of initiatives give a good reason for external messaging, versus marketing simply for the sake of marketing. An understanding of behavioral economics and both pricing and menu psychology are becoming requisites of the modern foodservice marketer.
    1. Market Share – Think of any of the most successful restaurant turnarounds in recent history and you will find a commonality; those who have been gaining share at their competitors’ expense leveraged the menu as a central part of their strategy. Right? Can you think of any examples worth mentioning that this wasn’t the case? Market share gains are not just about effective marketing or a lucky card draw. The category leaders thrust themselves forward with a well-choreographed and charismatic campaign that was either centered on the menu or considered it central to their efforts. They weren’t handed gains, they won them with their menu strategy emblazoned on the shield and sword they fought with.
    1. Enterprise Value – Everyone wants to be associated with a winner, and meaningful menu improvements can help create the momentum to grow sales, margins, and the win hearts and minds of those that matter most (inside and outside the business). When you get the menu right, you will enjoy benefits not only to the P&L, but also on the balance sheet. Transformations born out of the heart-of-the-house (brand positioning, product development, enrolling stakeholders, etc.) clearly equate to top quartile performance with regard to other fundamentals of finance – like the balance sheet. Those getting it right with their menu strategy are also rewarded with growth of intangibles and intrinsic value of the enterprise they are entrusted with enhancing.

Because of the nature of the incrementalism and organizational inertia that can sometimes be hard to beat, menus are often developed based on the momentum of what was there before. Many organizations tout the virtues of innovation while also lacking the internal will or systems required to create and implement change on a holistic and seismic level. That also means, usually those who are responsible for the rollout of the menu are either trapped in a committee consensus environment, lack the organizational influence, or are wary of risking internal political capital to shake things up in a meaningful way.

Since nearly every functional area is touched by the menu (supply chain, marketing, operations, training, culinary and beverage development teams, finance) and will require buy-in and winning over critical stakeholders (support center team, field and unit-level operations, external supply and distribution partners, franchisees, financiers, crew-level teams, media, and most especially the guest), it serves as a central point of senior-level influence.

While many view the menu like maintenance — something that needs touchup paint and an oil change — influential category leaders have leveraged the menu as a means to stage a turnaround and reinvigorate a system.

The tools and techniques can be as black and white as the ebony and ivory of a piano, but remain as elusive as the perfect symphony or composition when left to less-skilled hands. The music here requires both stylistic artistry and technical mastery. It’s deceptively simple; getting the right chords, rhythm, harmony, balance, and a beat that both soothes the soul and exudes the shared spirit and enthusiasm (a brand, company, product, community, shareholders, stakeholders, and the rest of it). When you get those things just right, though, you can not only improve sales and margins, you can bring something into the world that inspires others and stands the test of time.

About Aaron Allen & Associates

Aaron Allen & Associates works alongside senior executives of the world’s leading foodservice and hospitality companies to help identify, size, and seize opportunities to drive growth, optimize performance, and enhance enterprise value. Our clients span six continents and 100+ countries, collectively posting more than $200b in revenue. Across 2,000+ engagements, we’ve worked in nearly every geography, category, cuisine, segment, operating model, ownership type, and phase of the business lifecycle.

The post How to Reverse Margin Erosion with Menu Engineering appeared first on Aaron Allen & Associates, Global Restaurant Consultants.

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While we expect M&A activity to continue to pick up over the next five years, those leveraging the best insights regarding the evolution of the market landscape to inform a modernized and globally-oriented F&B investment thesis are set to lead (and even create) segments and categories.

There’s plenty of capital to put behind foodservice companies, and some that are not even in the radar right now (like those looking to alternative formats and improved unit economic models as well as transformative technologies) will jump to very large valuations in the next few years.

Here are ten of the most popular pieces we’ve shared, all informed by our experience supporting both operators and investors in the foodservice and hospitality sectors:

Strategic levers for restaurant M&A are not necessarily new, but understanding the evolving landscape enables non-traditional value-creation opportunities. When the right components are combined within a platform, the whole can be much greater than the sum of its parts (and this is reflected in valuations). Read More

As Private Equity activity continues to flourish in the foodservice sector, restaurant valuation multiples have followed suit — rising even when deal volumes drop. Premiums for high-quality targets are on the rise, with valuations reaching their highest multiple (11.1x) since 2007. Read More

Whether to achieve consistent top-line growth, expand market share, enter fast-growing new markets, add new capabilities, remain current with shifting consumer demands, or integrate value-enhancing technologies, acquisitions make strategic sense in this era of cheap capital, fierce competition, and moderated growth. Read More

While those in the financial and banking sectors often perform the due diligence on those deals, a firm with extensive restaurant experience and a deep knowledge base can deliver insights based on operational and commerical audits that might otherwise be passed over by a generalist advisor. Read More

As deal size has almost doubled across North America and Europe over the last decade, we’re seeing more consolidation as portfolios are making a number of different-sized acquisitions quickly, and convenience and tech both continue to be hot trends for foodservice-related investments.  Read More

Like all transformations, a positive outcome following an investment depends on leaders’ understanding of what gives the brand value. It takes more than “good food, good service, good atmosphere” to launch, grow, and maintain a successful restaurant operation, and institutional investors, as well as private equity funds, can often step in to back new concepts or help established chains grow. Read More

Since January of 2017, nearly $15b worth of public restaurant stocks in the U.S. delisted, as nine companies left public exchanges for private hands. While the total value and number of global IPOs are increasing, fewer U.S. foodservice companies are going public. The pains of going public these days can be avoided while still gaining funding, as there are trillions in private equity capital ready to be invested in global markets. Read More

How could you grow your business with a $50m private equity investment? Would you expand into new markets, roll out the prototypes you’ve been dreaming of, or deploy new technology to make it even easier for diners to get your food? Here we offer a brief overview of PE funds operations, focusing on each stage of the deal. Read More

Signing a deal with a private equity firm can, naturally, have profound effects on the organization operationally in addition to the impact on value creation strategies and resources. The process has its risks, and teams can often disagree on how to reach goals. Here’s a guide to help restaurant executives prepare for taking on a private equity investment. Read More

As dry powder continues to grow, a lower middle-market restaurant investment can offer a risk/reward combination on-target with an investment firm’s criteria. These concepts are becoming an investment sweet spot with valuations attesting to profitability and strong growth. Read More

In any scenario, superior intelligence and insights relative to understanding the landscape and how the consumer and competition are being reshaped are required to create a compelling and modernized investment thesis.

When the right components are combined within a platform, the whole can be much greater than the sum of its parts (and this is reflected in valuations). If that’s something you’d be interested in, we can help. We support both with sell-side mandates and middle-market buy-side advisory for restaurant industry investments.

The post Restaurant Investment: Capital Calls appeared first on Aaron Allen & Associates, Global Restaurant Consultants.

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We receive thousands of inquiries each year from every corner of the foodservice industry and from all around the globe. There are some common patterns in what we’re being asked. Some of most frequent questions include:

  • What regions and categories are driving growth?
  • What segments are expanding and collapsing? Who is gaining and losing market share?
  • Should we expand more domestically?
  • Should we develop new formats prior to expansion?
  • What is the total addressable market for our particular category or cuisine?
  • Should we create or acquire a new concept? If so, should that be in the same cuisine or segment we are currently operating or rather based on where future growth is forecasted to come from?

There’s almost nowhere in the world that is experiencing contraction in terms of overall restaurant industry growth. As true as that is, it’s also true that there’s almost nowhere in the world where someone isn’t losing market share at someone else’s expense.

Global growth is coming in pockets and patches. And some of the patterns that we see are that there are headwinds and tailwinds in terms of the macroeconomic conditions and operating environment. Success favors brave leaders making bold but carefully calculated bets, often using a combination of intuition and empirical evidence.

Knowing Where to Play and When

Identifying growth opportunities in terms of categories, cuisines, and geographies, and what that may mean for plans related to growth and expansion, performance improvement, and enterprise value enhancement is critical.

Our team tracks movements of the $3.1 trillion global restaurant industry across categories, cuisines, ownership types, phases of the business lifecycle, and both the macroeconomic conditions of geographies as well as granular internal analysis across functional areas of the business.

The restaurant industry offers consistent growth. For many decades, it would be an anomaly that foodservice didn’t have growth, and there have been only a couple dips over a 40­–50-year history. In the U.S., the industry has grown at a 2.1% CAGR over the last 20 years (accounting for inflation).

Some segments, including retail stores and vending, drinking places, and limited-service restaurants, are growing at least 20% faster than average each year. Meanwhile, other segments including schools and colleges as well as hotels and motels, are struggling to keep up. Quantifying the opportunity in a specific category allows for targeted expansion strategies and lower risk.

Related insights on specific markets and segments include:

CAPEX Investments an Indicator of Future Performance

There’s a clear correlation: those who invest more in CAPEX are outperforming the market and their competitors. Winners are investing while others sit on the sidelines waiting for clear skies and a well-worn path to follow.

There are similar proof points related to investments in R&D and corporate intelligence — areas that are often considered “soft” or “intangible” that are paying significant returns. In fact, top-quartile publicly traded restaurant companies in the U.S. grew 87% faster than the median in terms of enterprise value.

Data Without Insight Is Useless

We’re believers that you should always trust your gut, but that those gut decisions should also be informed by data — rather than whim.

Those who are growing the fastest are developing industry best practices. And their growth isn’t just because of lucky period-over-period gains. It’s born out of big brains and big plans armed with deep data, all set in motion years earlier.

Growth is always there. You just have to know where to look and who to ask. 

 

About Aaron Allen & Associates

Aaron Allen & Associates works alongside senior executives of the world’s leading foodservice and hospitality companies to help identify, size, and seize opportunities to drive growth, optimize performance, and enhance enterprise value. Our clients span six continents and 100+ countries, collectively posting more than $200b in revenue. Across 2,000+ engagements, we’ve worked in nearly every geography, category, cuisine, segment, operating model, ownership type, and phase of the business lifecycle.

The post Restaurant Industry Growth appeared first on Aaron Allen & Associates, Global Restaurant Consultants.

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Creating a compelling and modernized investment thesis requires superior intelligence and insights relative to understanding the landscape and how the consumer and competition are being reshaped, from the decline of casual dining to the rise of new formats. 

While other sectors have seen significant increases in productivity historically, improvements in the foodservice industry have been minimal over the last 30 years. The Second Industrial Revolution benefited the industry (overall) with improvements in agricultural production. The Third Industrial Revolution, where consumer and electronics products led growth, had a very slight impact on foodservice, with the adoption of the point of sale system — most of which are really a glorified cash register.

But the sector is now in a prime position to make modernization efforts with the impacts of the Fourth Industrial Revolution and — in doing so — is becoming a more attractive target for investment.

Regardless of the future economic climate, there will be an opportunity in the foodservice space. If there’s a liquidity crisis, M&A opportunities will come through consolidation and distressed assets investment. If the economy is booming, emerging brands and markets will reveal new growth acquisition targets (38.6% of global M&A activity across all sectors features cross-border transactions already).

2019 Will Be Another Hot Year for Restaurant M&A Activity

Overall M&A activity has been growing at a 9.0% CAGR in the last five years and has topped more than $4 trillion globally, across all sectors. Restaurants account for a small piece of this activity around the world — and it’s in the tens of billions for the U.S. foodservice market. From January–October of 2018, there were  124 restaurant deals in the U.S. (versus 117 over the same period in 2017), and the increased trend is expected to continue.

The growth of M&A activity, in restaurants and across sectors, is driven by a number of factors:

  • Access to capital is relatively cheap (even though interest rates are increasing in the U.S. and likely to do so in other markets), and there are record levels of leveraged loan issuance, fundraising, and increased levels of leveraged buyouts
  • There’s been more money poured into private equity, and a proliferation of PE firms (now more than 8,000 globally, up from 5,000 just ten years ago) leading to increased competition between firms, and some of them seeking new sectors — particularly disruptive forces
  • Opportunities for consolidation in increasingly crowded foodservice markets
  • While there are plenty of advantages of being a publicly traded company (most notably, liquidity), it can also lead to greater pressures and short-term distractions with quarter-to-quarter scrutiny
  • Due to higher saturation levels, cross-border transactions from developed to emerging markets are likely to pick up
  • While mergers and acquisitions were formerly only used as a strategy by larger chains, smaller companies are now also looking for acquisitions (often in their same category) to grow footprint and increase efficiency

In 2018, revenue growth among publicly traded foodservice companies in the U.S. amounted to $8.1b (+7% year-over-year growth, from $122.1b to $130.3b). 

Inorganic growth (from acquisitions) was responsible for 28% of the increase.  In the increasingly saturated U.S. market, inorganic growth will continue to have significant impacts for both private and public companies.  

What are the Motivations for Restaurant M&A Deals?

For mature brands, there’s expansion and consolidation. In the U.S., this is the case of many casual dining restaurants — 33% of 2018 deals involved targets in the full-service category. In other cases, deals are often more focused on growth companies. This strategy has been successful for the fast-casual sector in the past, and is increasingly starting to benefit the companies that have a “future of foodservice” angle to them — whether that’s technology, innovation and optimization in the front and back of the house, improved unit-economic model, or delivery companies (which have received a tremendous amount of capital investment over the last few years).

There are a variety of factors that influence mergers and acquisitions decisions, whether focused on mainly strategic or financial motivations. While these drivers for M&A are not necessarily new, understanding the evolving landscape helps to identify non-traditional value creation opportunities and a better assessment of risk.

Consolidation in sectors enables companies to gain market share which can then help from a management point of view and optimizing overhead. In other cases, investors put more of a focus on reducing costs.

Regardless, companies on the receiving end of capital find it attractive both in terms of the investment they are receiving but also with regard to strategic guidance and other capabilities provided to them through a PE firm or strategic investor.

Large Deals Grab Headlines, But Players of All Sizes are Benefitting

In 2018, restaurant valuations reached EV/EBITDA levels of 11.1x (up from an average of 10.8x in 2017) and EV/Revenue of 1.4x (up from 1.0x of 2017). Some recent transactions that have helped to increase that average have been Panera (acquired in 2017 at 18.3x EV/EBITDA) and Sonic (acquired in 2018 at close 16.1x EV/EBITDA).

Recently, some investment funds earmarked for foodservice have gotten so large that they have to find bigger deals for it to make sense. For these multimillion-dollar funds, the transaction costs and sheer amount of resources that need to be applied for a deal (including legal, financial, commercial, and operational due diligence  mean that there’s more emphasis on quality over quantity. In these cases, firms seek fewer, larger deals with greater potential upside instead of more, smaller deals.

In this ecosystem there are different sized capital providers that are each looking for specific sized deals with plans to grow companies to their internal ceiling before passing it on to somebody else. From friends and family money to angel investors to venture capital (and some corporate venture capital), to mezzanine or growth capital, and finally to larger firms that are looking to buy and combine businesses.

In the U.S., the largest foodservice deals in 2018 included:

  • Nestle (based in Switerzerland) buying the rights to market Starbucks retail products from beans and capsules for $7.2b
  • The $2.3b acquisition of Sonic by Inspire Brands (Roark)
  • Pret A Manger (based in the UK, but operates in the U.S. as well) being acquired for $2b by JAB Holdings
  • The $770m acquisition of Bojangles’ by Durational Capital Management
  • Kroger acquiring Home Chef (meal kit company) for $700m
  • Fogo de Chão (which made an IPO in 2015) being taken private by Rhone Capital for $560m
Cross-Border Transactions Gaining Traction

We anticipate more foreign buyers coming to the U.S., and U.S.-based investors making further investments globally. This strategy is a way to gain immediate access to a footprint, infrastructure, talent and human resources, and a regionalized know-how.

Jollibee, for instance, finalized its acquisition of Denver-based Smashburger in 2018. The company initially tried to expand to other markets and they met unforeseen challenges and struggled because customers outside of the Philippines were unfamiliar with the brand. But Jollibee does know QSR operations well, so they looked for an opportunity in the U.S. with a large enough footprint to gain scale.

Larger foodservice groups have been using cross-border transactions to grow for a while now. Growth in the U.S. for large established companies is at a point of saturation — any new units for one brand are coming at the expense of someone else. So inorganic growth and foreign expansion are the greatest opportunities.

Expect a Sea Change in Restaurant M&A, and Companies with Modernized Investment Theses Will Thrive

While we expect M&A activity to continue to pick up over the next five years, there’s going to be a significant change in strategies. There’s plenty of capital to put behind foodservice companies, and some concepts that are not even on the radar right now will jump to very large valuations in the next few years.

We’ve seen this in other sectors — technology, in particular — where there’s been a huge uptick in the number of unicorns (privately held startups valued at more than $1b). The restaurant space just saw its first unicorn in sweetgreen, and we anticipate a handful more over the next five years. Transformative technologies improving productivity in foodservice are likely to gain attention and investment as well.

When the right components are combined within a platform, the whole can be much greater than the sum of its parts (and this is reflected in valuations). If that’s something you’d be interested in, we can help. We support both with sell-side mandates and middle-market buy-side advisory for restaurant industry investments.

The post Modernization’s Impact on the Foodservice Investment Thesis appeared first on Aaron Allen & Associates, Global Restaurant Consultants.

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As one of the fastest-growing foodservice markets in the world, the Middle East has been a region of opportunity for many restaurant chains — both for companies based locally and others from around the world. Changing market conditions, nazionalization programs and increasing costs, normalizing margins, and oftentimes weak comps are some of the challenges arising and presenting opportunities to re-assess portfolios, optimize performance, and turnaround or re-invigorate brands.

We’ve worked extensively in the MENA restaurant industry since 2009, and have seen the industry change significantly over the last decade. Here are some highlights of our most popular insights on the food and beverage industry in the region from over that time:

Since Q4 2015, market conditions have been blamed for restaurant performance in the Middle East. In our view, the market is stabilizing and operators should prepare for the new normal. We foresee consolidation being a major theme across the restaurant industry — and that the biggest winner will be the group with the best acquisition strategy. Read More

The foodservice industry is a game of inches. Chain leaders are facing growing pressures to increase revenue, optimize costs, and make their operations more efficient. Read More

With continued urbanization — among other trends — fueling QSR demand in the MENA region, the sector is prime for continued growth, even amidst several challenges for restaurant operators. Read More

Food and Beverage in the Middle East — and GCC countries, in particular — has been an increasingly popular sector for Private Equity Investment. Read More

Rather than working around the Nitaqat system, restaurants in the KSA can benefit from developing a merit-based company culture and work to change the perception of the industry. Read More

Arabic hospitality is not boastful, but worthy of immense pride. Foodservice companies can work to change the regional story of unemployment that has been plaguing headlines. Read More

Not many foodservice consultancies from outside the region fully understand the added challenges of operating in the Middle East. We do, and we bring both a global and local perspective to foodservice strategy and planning no other firm can. 

If you’re a restaurant chain or an investor in the foodservice sector, we can help with growth an expansion, turnarounds, performance optimization, and value-creation strategy. We provide tailored insights about what’s now and what’s next — and why it matters — to help companies become faster, leaner, and more agile.

The post MENA Restaurant Industry Insights appeared first on Aaron Allen & Associates, Global Restaurant Consultants.

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While we often say it’s easier to ride a wild stallion (in this case a fast-growing restaurant chain) than drag a dead horse (one that’s not growing at all) — the big question that many restaurant chains need to answer is: how fast should we be growing?  And what steps do we need to take to make sure we’re right-sizing our business along with that growth?

As a consultancy that’s top-line oriented and often supports companies with growth and expansion, we usually want to take a very optimistic view to help enable the most ambitious aspirations our clients may have. But, on occasion, a company comes along with plans that are completely ungrounded with reality. In those cases, we view it as our responsibility to help recalibrate expectations.

Many restaurant companies (especially startups and emerging brands) have more-than-aggressive expansion plans. We’ve seen some aim at opening 300+ restaurants in two- or three-year time-frames while having an existing footprint of just a handful of locations. It begs the question: is that feasible? Reasonable? Practical?

Right-Sizing for Expansion

For all of the positive case studies (the Chipotles of the world), there are plenty of others who had the same goals but fell short on executing them. Pinkberry, Blimpie’s, Dickie’s, Moe’s, Quizno’s. The list of brands that were expecting to take the industry by storm — but fizzled out — goes on.

Successful expansion requires more than strategic planning — it’s also the calculus of right-sizing to be able to support the business through its growth. Like a child who’s constantly outgrowing clothes so parents buy them a few sizes up to “grow into,” a rapidly expanding business is often at a point of either being under-supported with infrastructure or having systems (or people) too advanced for the current operations.

Advantages of Rapid Growth

Growth is one of the best indicators of positive performance. Some of the benefits of rapid expansion include:

  • Gaining market share and making land grabs in new or emerging concepts and categories
  • Excitement and enthusiasm from the media and additional publicity (leading to positive impact on valuations)
  • Efficiencies and economies of scale
  • Opportunities to engineer potentially redundant costs out from operations via hub-and-spoke or commissary models
  • Attracting more team members, partners, suppliers, and investors who want to be involved or associated with the brand
Potential Risks of Growing Too Fast

Wild claims about growth have been made plenty of times, but because of dismissiveness or lack of operations-based projections, few are able to grow at rates above 35%. Some of the risks companies can face include:

  • Challenges of right-sizing infrastructure (including people, process, technology, etc.), and outgrowing the capabilities of existing resources
  • Supply chain pressures and ensuring availability and consistency of product
  • Real estate pipelines and securing good locations
  • Seeding new markets (creating exposure and awareness)
  • Human resources hiring, onboarding, enculturation, and managing corporate culture
  • Potentially overpaying to compensate speeding up slow parts of the system
  • Tough comps leading to stalling or not achieving consistent growth, potentially damaging brand reputation
Aspiring is One Thing, Assuming to Better the Best is Another

Starbucks has become the second-largest foodservice brand in the world in terms of sales and is also one of the fastest-growing. At the end of 2016, the company announced a plan to open 12,000 new locations by 2021 — increasing store count by 48%. That growth amounts to about 2,400 locations per year. Or, even more impressively, an average of 6.5 stores each day.

Using that metric, it could be easy for smaller organizations to see growth targets of a few hundred locations as more than achievable. But Starbucks has put in more than 40 years of building infrastructure to support this level of growth (or even something remotely close to it). They’re starting from a rock-solid foundation, not a handful of units.

A Case Study: The Fast-Casual Pizza Segment

Fast-casual pizza broke onto the scene and grew rapidly. (In 2015, 9 of the top 25 fastest-growing restaurant chains were in this category.) There’s a large potential for it in the U.S. market — where the bulk of pizza sales are delivery and often at a lower quality — so there was plenty of capital available to fund expansion.

Many brands tried to grab the land very quickly, particularly with a franchise model. But then confidence started to wane, and a number of locations closed up as fast as they opened, with many concepts putting on the brakes. Pie Five, for instance, more than doubled between 2014–2015 but has closed 15 units (17% of its system) since 2016. This is one example of expansion happening too fast, and both individual units and the brand as a whole paying the price.

What to Consider When Planning for Rapid Expansion

For organizations that are growing quickly, it’s easy to outpace the infrastructure in place. This can include everything from finding locations, to building a pipeline of people, to supply chain constraints, to the demands of supporting franchisees. (International expansion adds even more layers of complexity.)

Often, growth targets are simply disconnected from the reality of what it takes to support a sustainable foodservice enterprise. Some fast-growing companies can require as much as a quarter per dollar in revenue growth in additional costs or capital requirements at a corporate level to ramp up in advance growth and pipelining. We recommend modeling conservative, base, and ambitious cases to compare scenarios and associated investments.

Organizations can work on financial models for months without factoring in the operational constraints that very well may mean the plans on paper border on impossible. We’ve heard these stories and reviewed pro forma hundreds of times and, sadly the case, very few companies actually make good on those projections.

Right-Sizing Growth Targets Increases Confidence While Reducing Risk

We caution our clients — both foodservice operators and investors — to beware of promising or planning for expansion targets that would be the equivalent of outpacing some of the fastest-growing concepts in half the time.

Making and breaking promises often leads to damaging the perception of a brand for consumers and investors alike. Right-sizing growth targets based on operational models brings additional sensitivity to planning and pays off through enhanced confidence in projections and performance.

For restaurants looking to expand, it’s not necessarily about how fast they can grow, rather how fast they should grow to deliver for all stakeholders involved.

How We Can Help

Aaron Allen & Associates works alongside senior executives of the world’s leading foodservice and hospitality companies and investors to help them solve their most complex challenges and achieve their most ambitious aims. If you’re a chain operator (or an investor in foodservice), we can help plan for and support growth.  When the stakes are high, challenging assumptions helps dissipate the cloud of bias that can fog big decisions. We provide tailored insights about what’s now and what’s next — and why it matters — to help companies become faster, leaner, and more agile.

The post Are We Growing Too Fast? appeared first on Aaron Allen & Associates, Global Restaurant Consultants.

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The lines are beginning to blur in foodservice. The instrumentation to identify and isolate the shifting share doesn’t exist, with the formats evolving faster than the techniques used to track them. It’s not just as simple as restaurants versus grocery stores (or “food away from home” versus “food at home”) anymore.

Increasingly, we’re seeing companies that are looking to provide food via convenient and affordable formats that have attractive unit economics or are more relevant to emerging consumer trends — bringing food to customers where they live, work, eat, play, shop, and so on.

The amount and intensity of new formats popping up and the way consumers’ appetites are changing (nearly 70 million Americans have made significant changes to their diets) should be sufficient enough to spark a strategic conversation around the wider implications for foodservice. Both investment (whether via private equity or corporate venture capital) and long-term planning can and should be modernized to factor in non-traditional threats that may not have been showing up on the corporate radar and assessment of evolving consumer and competitive landscape.

Just like an amoeba in a Petri dish, many now-expanding categories that started out with just one instance are proliferating throughout the industry, taking meal or snacking occasions from traditional foodservice operators. While some of these will be flash-in-the-pan fads (and we’re not necessarily making any bets on, endorsing, or recommending the examples below), here are a few examples of alternative foodservice formats:

1. Delivery-Only Concepts and Dark Kitchens

Delivery is one of the most dynamic forces reshaping the restaurant industry. Delivery-only (sometimes referred to as “dark kitchens” where there is no customer-facing location) represents about 3.5% of consumer foodservice sales globally, but it’s significantly higher in more developed regions like Western Europe (7.2%) and North America (4.5%).

  • In the U.K. Deliveroo launched pop-up takeaway and delivery food kitchens in May 2017, where they set pods (effectively shipping containers outfitted with restaurant equipment) in low-rent real estate areas — like parking garages — to satisfy a demand for delivery in areas where occupancy costs can be very high
  • These operating models are in alignment with the increased demand for delivery while reducing labor costs
  • The format is also more flexible to switch concepts or menu offerings without additional remodel costs
2. Automats and Vending

The automat, which originated in the late 1800s and reached its heyday in the 1950s before falling out of popularity in the mid-70s, is having its own renaissance. The vending machine model has clear benefits for unit economics, both from the CAPEX investment point of view and labor and staffing cost optimization.

  • In 2017, a Japanese ice cream robot debuted that can serve a fresh cone in less than a minute — and at a lower price point than traditional stores
  • Similar vending machines were selling for $65k to $200k back in 2014 (whereas traditional frozen yogurt/ice cream shops start at $300k for buildout and equipment)
  • San Francisco startup Eatsa also launched an updated and vegetarian take on the automat in 2015, where diners order and pay via an iPad and then pick up food from a cubby when their name pops up on an automated door
3. Mechanization and Robotic At-Home Kitchens

It’s not just restaurant kitchens that are being revolutionized. The first residential robotic kitchen already exists and can be operated with your phone to cook without human intervention.

  • The robot’s hands replicate human movements and use the same technology employed by NASA
  • The machine can produce about 2,000 programmed recipes, and even has options for dietary restrictions and calorie counts
  • The initial cost to the public as of 2017 was $75k, which was naturally met with some dismissiveness (though the same thinking was applied to $15k plasma TVs back in 1997)
4. Food Halls

Food halls are expanding at a rate 16x as fast as restaurants in the U.S., and this is a growth pattern expected to gain momentum globally as well. Since 2015, this segment has more than doubled its footprint, and interest in the format — which alleviates some operational risks and costs for operators — is not expected to slow down.

  • There were some 180 food halls in the U.S. as of 2018, and between 2015 and 2020 the number of food halls will have increased by 4.3x (from around 70 to about 300)
  • Typically, Food Halls are between 10,000–50,000 square feet in size and can feature as many as 20 different concepts
  • Beyond the traditional Food Hall, mini versions (less than 10,000 square feet) are starting to crop up in offices and living spaces which can fit more than a half dozen vendors in the same amount of space of two and a half traditional McDonald’s
5. Food Trucks

Kogi Barbecue, a pioneer in the food truck space, gained notoriety because it was one of the first and most successful cases of restaurants using Twitter. It was a very fast turnaround from its inception in 2008 until food trucks were being listed as one of the most influential trends noted in industry trade publications. While its growth has ebbed and flowed over the years, the unit economic model remains attractive.

  •  In the U.S., food truck sales are expected to reach $996m by 2020 (an increase of 16% since 2015), and much of the growth in the category is making up for losses from stalls and kiosks in malls
  • Traditional brick and mortar chains such as Taco Bell, Olive Garden, and Chick-fil-A have used food trucks to sell their products or test new items
  • Startup hard costs (relative to buildout, equipment, etc.) for food trucks can be as low as one-third of a traditional location buildout, and operating expenses (with fewer permits, no property tax, lower maintenance costs, etc.) can reduce costs as much as 25% compared to standard restaurants
6. Contract Foodservice

Some of the largest foodservice companies in the world are those that many consumers wouldn’t recognize the brand names of. Compass, Aramark, and Sodexo are all leading contract foodservice operators which service airports, hospitals, stadiums, and arenas around the world.

  • In the U.S., managed and noncommercial foodservice represent some $53.6b (about 7% of all food away from home)
  • Contract companies represent 18% of sales among the largest 25 foodservice brands globally, including Aramark (U.S.-based), Compass Group (U.K.-based), and Sodexo (French-based)
  • The global contract foodservice market has an estimated size of $260b, and the largest player (Compass) reached $23.2b in sales in 2018 — equivalent to about a third the global sales of the largest global consumer foodservice brand, McDonald’s
7. Groceraunts

For the last ~50 years, restaurants have been steadily stealing share from grocery stores (so much so that the industry has pretty much taken that consistent growth for granted). But grocery stores have started to fight back in recent years, some of them even adopting the “groceraunt” model, adding in more of a focus on prepared and ready-to-eat foods.

  • Price inflation has gone up three times as fast in restaurants as it has in grocery stores, largely attributable to wage increases and the requisite labor levels in a restaurant environment
  • Sales per employee in grocery stores is 3.6x greater than in restaurants
  • Groceraunts generated 2.4 billion new visits and more than $10 billion in 2016, and 58% of consumers say that a grab-and-go or prepackaged food would be appealing in retail/grocery stores
8. Pop-up Restaurants

Another trend from the past that’s coming back into fashion are pop-ups — reminiscent of 1960s super clubs. Many chefs are opening pop-up restaurants to showcase a special menu or offer select, seasonal choices. With less commitment and the ability to utilize potentially unused spaces, pop-ups have proven to be a good way for chefs to “experiment without the risk of bankruptcy.”

  • Restaurant Day in Finland (a celebration of food culture and a highlight of pop-ups) takes place four times a year and has hosted 3,600 one-day restaurants that have served 180,000+ customers since its inception in 2011
  • Pop-ups capitalize on the long-standing principle of scarcity in marketing by putting an upscale or fine-dining spin on the same concept of limited time offers available at QSRs
  • Millennials, who spend more on dining out as a percentage of their income than any other demographic, are a perfect target for pop-ups — especially as they are also in alignment with the experiential focus that both they and Gen Z seek
9. Cashierless Convenience Stores

Even though the unit models for grocery stores or C-stores are very different than those for restaurants, these categories are competitors for share of stomach and wallet of the same consumer.

  • Only a handful of restaurant chains surpass Amazon Go and Whole Foods in sales per square foot — one of the best indicators for productivity in the foodservice industry
  • Amazon Go could reach as much as $4 billion in sales by 2021 (even though it only has nine stores operating as of early 2019), continuing to steal share from QSRs and snacking occasions
  • Other C-stores are also trying to attract a larger share of consumers’ wallets — Casey’s General Store, for instance, is tapping into pizza delivery (it began the service in a few locations in 2011 and now offers online ordering)
10. Meal Kits and Home Meal Replacement

Though meal kits are estimated to represent less than 1% of restaurant sales, the category has been one more papercut on the industry. The model is in alignment with both the desire for healthful eating and more convenience, though it has been met with recent challenges of competing with a wider range of ready-to-eat delivery options available.

  • Several grocery store chains are bringing meal kits to their aisles — Walmart is selling them from its Culinary and Innovation Center and Kroger bought Home Chef for $200m and is now selling meal kits in its stores in addition to the original subscription model
  • Blue Apron, the only U.S.-based publicly traded meal kit company, hasn’t performed very well lately (both with regard to revenue and profitability), though it did significantly outpace the growth of both food at home and food away from home sales from 2015–2016
  • HelloFresh, the largest meal kit provider in the U.S. which headquartered in Berlin, has revenue exceeding $1b and close to 1.5m subscribers globally
Forward-Looking Companies Making Smart Bets Early

It’s long been a strategy for some of the world’s largest consumer packaged goods companies to buy up smaller potentially competitive companies (either potential competitors or strategic partners) before it becomes too expensive to do so. Coke’s acquisition of Vitamin Water and Conagra Foods (owner of Healthy Choice and Marie Callender’s) purchasing Birds Eye frozen vegetables are only two of plenty of similar examples.

Some in the foodservice space are beginning to adopt a similar approach via corporate venture capital. Chipotle, for instance, launched an accelerator in August 2018 to support food-focused ventures centered on innovation in agricultural technology or sustainability.

The long-term benefit is not from something flashy with a great PR engine behind it to attract media attention or a well-produced YouTube video for a product or concept that may or may not have viable commercial potential. Rather, it’s from looking at what changes in emerging consumer dining behaviors are driving these things and developing a modernized M&A strategy and investment thesis to support sustainable growth.

About Aaron Allen & Associates:

Aaron Allen & Associates works with leaders of global foodservice and hospitality companies on strategic issues. Specializations of the firm include multinational expansion, system-wide sales building, brand and portfolio strategy, modernized marketing, industry trends, technology, and advanced analytics.  If you’re a foodservice operator or investor seeking to drive growth, optimize performance, maximize value, or create a modernized portfolio in the face of increasing competitive dynamics and an accelerated pace of change, we can help.

The post 10 Alternative Foodservice Formats Impacting the Restaurant Industry appeared first on Aaron Allen & Associates, Global Restaurant Consultants.

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It’s a fascinating time for restaurants around the world. The $3.1 trillion global industry is relatively predictable in terms of growth (it mirrors that of population and inflation), but what was already one of the most complex businesses in the world is becoming even more so following the arrival of the Fourth Industrial Revolution.

With it has come new consumer demands for innovation and convenience, new technologies for managing operations and connecting with guests, and a fast pace of disruption that has helped upstart companies and segments leapfrog established organizations. While the previous two Industrial Revolutions didn’t have much of an impact on restaurants, the one we’re living through now certainly will.

These are some of the questions, and associated answers, that are indicative of how much the foodservice industry is going to change over the next five years.

1. Why are restaurants starting to attract more venture capital funding?

The predictability of growth in foodservice makes it a pretty good bet for investors. Within the sector, everyone is looking for up and coming brands and trying to spot what could be the “next Chipotle.”

Brands that are a fit with evolving consumer dining behaviors and interests (the fast-casual format, a focus on fresh and healthful, etc.), put an active effort toward corporate social responsibility (which resonates with millennials — the generation that spends more as a percentage of their income on restaurants than any other demographic), and are incorporating tech-enabled enhancements into their business models.

Concepts that fit this bill, especially those backed by strong management teams, have the potential to be homerun investments.

2. What is it about fast-casual that makes a restaurant more scalable or gives it more potential for growth?

The majority of the global foodservice industry, and the U.S., in particular, is made up of quick-service restaurants (QSRs). In the U.S., half of the food we consume is on food away from home (restaurants, bars, cafeterias, etc.). Of that, half is spent at chains. Of those chain sales, more than half (60%) is made up by the top 100 chains. And of those top 100 chains, half of the sales are accounted for by just 10 companies (all of which are QSRs).

 

Within the chained operations, casual dining restaurants (CDRs) have become less relevant in recent years, as they’ve done less to move both their consumer and investment proposition.

Between the QSRs and CDRs lies an interesting hybrid in fast-casual concepts that have a more compelling unit-economic model and combine the replicability and ease to scale of QSRs with a more relevant appeal to the consumer — and, by extension, investors. The largest costs at any restaurant are food, labor, and occupancy. All three of those have been engineered at a higher efficiency in the fast-casual model.

3. How does incorporating technology improve the ability to scale and become more efficient?

Ultimately, there are a lot of things converging. Businesses can never make it too easy for consumers to buy from them. Technology has and will continue to make day-to-day interactions more frictionless, and we’ll never want to go back to a less-convenient model.

It’s not just the consumers who can benefit from technology in restaurants. Operators can gain efficiencies as well in terms of managing restaurants with real-time visibility into how the business is performing.

A restaurant is like a manufacturing plant, but the industry hasn’t changed in terms of tech-enabled efficiency nearly as much as manufacturing has over the past 100 years. Technology is becoming disruptive to the industry in many ways — particularly to those who have been slow to adopt it. This has created room for the up-and-coming chains who have engineered these updates into their business models from their inception.

4. What are some of the main challenges of running a restaurant in today’s day and age?

There are plenty, but one of the biggest is that margins are being pressured from multiple fronts. In recent history, commodity costs have been favorable (and oil prices, which are responsible for about one-fifth of the price of food, have been low), but they are slowly creeping up. Labor costs have increased quite substantially, which has been a long time coming (minimum wage increases, overtime rulings, etc.) and will continue to eat away at margins.

These factors, compounded with the nuances of what was already a dynamic business, are adding to the effort and intensity in a turbulent financial time for those in the industry.

5. What are some of the trends emerging for restaurants that will continue to grow for the next five years?

Delivery will continue to get a lot of attention (as it should — it’s one of the most significant forces to shape the industry in the last decade). Globally, food delivery represents close to 6% of restaurant sales, and it’s a trend that’s not slowing down. In fact, there’s been more money raised in the last two years for food delivery companies than the last 17 years of restaurant IPOs combined.

The food delivery market is set to reach $200+ billion (moving to ~10% of total foodservice). While that swing may not sound like a lot, in a $3+ trillion industry the impact will be very significant. Entire categories will be affected, and there are some inefficient dinosaur companies who will be most vulnerable.

Other disruptive technologies including automation, big data, machine learning, 3D printing, autonomous vehicles, and so on, may seem like they’re ideas out of Science Fiction and have been met by much skepticism by many leaders in the industry, even though they will be making very real impacts on global foodservice. One of our favorite quotes to reference is from the former CEO of Blockbuster who, four years before the company went bankrupt, said that “neither RedBox nor Netflix [were] even on [their] radar screen.”

6. How will the layout of restaurants — and specifically kitchens — change to accommodate these trends?

Dark kitchens and delivery-only concepts are going to become increasingly popular. This is, in part, driven by the shift of population and the global urbanization trend (people are moving into cities at a faster rate now than in the last decade or so). The population shift makes it pretty predictable to see where restaurants will be opening, especially as the majority of a restaurant’s customers originate from within a 10-minute drive time.

Restaurant designs, from size to format to profit centers, will be updated to accommodate these changes. Each of the functional areas of the business will be impacted. What will these changes mean for HR — how restaurants will recruit, train, retain, and so on? What will it mean for marketing? Design and construction? Location strategy? Menu development and supply chain? And what else are restaurant CEOs thinking about?

7. Will voice ordering have a big impact on restaurants?

It absolutely can and should. Domino’s (which is the leading case study for investments in technology and their impact on valuation) has successfully integrated its “Easy Order” technology with the Amazon Echo so it can be as easy as saying “Alexa, order Domino’s” and dinner will arrive at your doorstep.

But there’s a divergence in companies’ abilities to execute these programs. In an effort to say “look how cool and relevant we are” some chain restaurants have piloted voice order with Alexa, but the end result was just a clunky two-minute process that arguably detracted from the experience rather than improving it.

Those who are making innovations most successfully aren’t doing it just for the novelty of it or to get publicity. Rather, they’re thinking through how a program will improve the guest experience and meaningfully move the needle for their business.

8. How is the personalization trend crossing over into restaurants? Is this something that more consumers will demand?

While we may all think we always want more options, studies have confirmed that societies with the most choice are actually the unhappiest. With that said, there’s a happy medium between providing the guest with options and making them feel overwhelmed.

Everybody wants to feel in control, and self-order options are an excellent way to enable that for customers. Mobile ordering menus and kiosks are also a great way for operators to capitalize on richer merchandizing techniques (menu engineering, pricing psychology, etc.) which can be limited on a printed menu.

9. Will the trend of “lifestyle brands” also impact restaurants? What will they need to do to keep up?

There’s been a movement from marketing for demographics to now putting a greater focus on psychographics. People buy brands that reflect how they see themselves. Rather than a person’s age, gender, or socioeconomic background, focusing on a shared set of beliefs resonates more with the consumer and allows for more accuracy and efficacy with regard to marketing strategy.

The age-old example of Coke versus Pepsi is one of the most popular marketing and branding case studies. Coke has the best positioning as “the original.” Pepsi marketed itself as the alternative, the “choice of a new generation.” This points to the benefits of psychographic marketing. Everybody wants to feel younger — so Pepsi’s positioning helped to gain the market outside of its 18–24-year-old target demographic.

The faster pace of innovation will come to play here, as well. Neuromarketing, behavioral economics, and sensory branding will converge so products and brands appeal to us in ways that we might not even consciously recognize. Take the Starbucks Pumpkin Spice Latte as an example. It taps into the brain with smells — the sense that’s most closely linked to memories and triggering emotional responses — that connect us with the holidays (a time of year we’re typically less budget-conscious). This has helped Starbucks sell more than 200 million PSLs in the last decade for more than $1.4 billion.

Today’s standard restaurants are operating, for the most part, as state-of-the-art 1992. How will they compete in a world where the Internet of Things means everything is traceable and you can monitor your strawberry all the way from the field to the salad bowl?

While the Fourth Industrial Revolution may sound like a techy buzzword, it’s far more than that. How slowly the restaurant industry has moved historically is an indicator of how many systems may now or soon be in trouble, without really knowing how much trouble they’re in.

About Aaron Allen & Associates

Aaron Allen & Associates is a global strategy firm focused exclusively in the restaurant and hospitality industry. We help both foodservice technology companies and leadership of emerging and established restaurant chains identify areas of opportunity and discover new approaches to anticipate and take action in the age of a rapid pace of change and disruption. If you’re interested in learning more about how we can help your business drive growth, optimize performance, and maximize value, contact us here.

The post The Next 5 Years Will Be More Disruptive to Foodservice Operators than the Last 50 appeared first on Aaron Allen & Associates, Global Restaurant Consultants.

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