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 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
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.
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.
Volatility, variance, disruption, and downright white-knuckle rides await us all in 2019, at least on some level. Whether your company will be up, down, or skidding sideways depends on a variety of variables that we will touch on briefly here.
Let us first enjoy (or cringe our way through) a hearty word salad: digital, delivery, disruption, automation, autonomous vehicles, aggregators, artificial intelligence, big data, blockchain, robotics, Internet of Things, self-ordering, machine learning, rapidly evolving consumer trends and dining behaviors, tightening liquidity and increased cost of capital, aggressive activist investors, labor pools drained to labor puddles, and Convenience Engineering helping transform the guest experience and unit economic models of foodservice. There is a lot happening all at once.
Change Comes from Many Directions and in Many Forms
That speeding-up effect is what some are calling the Forth Industrial Revolution. If it feels like sensory overload, you’re probably pretty plugged into what’s happening. If it seems like some science fiction stuff others are dreaming up to distract operations dinosaurs from their “back to basics” plans, then we might all have a better sense for who is positioned to lead companies and categories forward (and who may be “retired” from the prestigious positions they are currently pressured to either deliver from or be dislodged from).
It is equal parts thrilling and terrifying. 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.
Pause. We know that last paragraph turned off half of our audience. But, please, be patient long enough to be convinced of just how impatient you should probably be.
When we hear the argument that the restaurant industry can’t or shouldn’t be compared to the technology industry, we … well, we breathe into a brown paper bag for a bit and then respond with equal parts exacerbation and encouragement.
While the biggest change the restaurant industry incurred from the Third Industrial Revolution was the Point of Sale System, the one we’re living in now is going to impact every functional area of foodservice and will change what we eat, where we eat, how we order our food, how we pay for it, and more.
Here are some of the trends we expect to see (or continue) for foodservice in 2019 — and beyond.
Global Growth to Remain Steady but Key Geographies Slowing Down
Global GDP growth in the next five years is projected to reach similar levels to the last five (averaging 3.6% annual growth). There are, however, large differences between regions. Emerging and developing Asia (including China and India), Sub-Saharan Africa, the Middle East, and North Africa are set to grow the fastest, while growth in the Euro area is projected to be the slowest.
Since the firestorm of the global financial crisis in 2009, the U.S. has recorded one of the longest streaks of economic expansion in its history. It makes sense: who wouldn’t want to recover from that terrible period (or “turbulent time” as it was so often referred to) and have prosperity continue to compound?
While a slowdown from ~3% to ~2% growth in the U.S. may not seem like much on the surface, it actually translates to a “loss” of more than $70 billion for the economy in 2019 alone.
The global economic climate is like a party where we’re all grateful for the invite and enjoyed it while it lasted. But the parallel to this is that one would not want to arrive too early or leave too late.
Implications for Restaurants:
Fewer new store openings in many geographies, and a slower pace for those openings
Some regions jump-starting to newest categories, rather than growing more traditional segments (including casual dining)
Flat to negative same-store sales for many categories in developed markets
Higher Cost of Capital Impacting CAPEX Allocations
Liquidity is tightening as the U.S. Federal Reserve is paying down the balance sheet and pulling $50 billion out of the market each month (since October 2018) while also raising interest rates. These moves, which in turn put a downward pressure on the prices of stocks and bonds, are resulting in a level of uncertainty that may lead to a market slowdown — some fear (pundits pontificate daily) a full-on recession is coming, with many guessing the quarter like a game show contestant.
Even though higher interest rates could be negative for M&A (leveraged buyouts, for example, would become more expensive), there are many factors that will continue to foster private equity activity in the foodservice space. Tax incentives (cuts in the U.S. and other regions, including China) and the fact that the more types of investors (sovereign wealth funds, family offices, etc.) have become active participants in the sector are both helping to broaden the market.
The increases in the cost of capital, in addition to more stock buybacks and other factors, have led to expected decreases in CAPEX as a share of revenue for publicly traded restaurants in the U.S. and Europe over the next two years. While this is partially due to some companies moving to more asset-light models, it also indicates that some organizations aren’t making the kind of forward-looking investments that would help to expand margins, improve efficiencies, and grow footprints.
Implications for Restaurants:
Equity financing may become more attractive than debt (though interest rates are still relatively low), and capital allocations will be under tougher scrutiny for investments including new locations, remodels, capitalized technology improvements, etc.
Economists and executives will be kept busy reworking variables — and those who don’t do the math ahead of time will feel it more (eventually) in the balance sheet with regard to enterprise value, cash flows, liquidity, and so on
Debt ratios in the restaurant industry reached a median of 65% (for publicly traded companies in the U.S.) and interest payments are at about 16% of operating cash flow — this will naturally increase as rates are on the rise
Increased Labor Costs Threaten Margins, But Could Help Save Casual Dining
Minimum wage increases, overtime rulings, immigration reform, nationalization programs, urbanization, record-low unemployment levels (a 38-year low in the U.S.), and more are converging to increase labor costs across nearly every line-item driver. Decades of delay in improving the living wage for restaurant workers in the U.S. and globally (or productivity via modernization and industrial engineering techniques other sectors have been applying to improve efficiency) will soon catch up with foodservice categories and unit economic models that are the most margin-sensitive.
Darden CEO Gene Lee has said that “the biggest challenge in the industry is going to be a war for talent. Brands that can hire, train, and retain frontline employees to bring their brands to life are going to win.” As they’ve done before, Darden saw the writing on the wall. The company has outperformed the casual dining sector on the whole in the last decade.
And while there’s been a lot of lip service relative to casual dining and service levels, in particular, there hasn’t been a dramatic improvement with regard to training to address the issues this category is facing. In fact, there’s been quite a bit of pulling back relative to these initiatives, as they’re seen as more of a cost than an investment which can provide returns through enhanced labor efficiency, improved employee retention, reduced breakage, stronger service levels, reduced customer attrition, and so on.
The rising cost of labor can actually (arguably) be a good thing for the industry overall and economies in the longer term. The result will be not only greater emphasis on engineering more efficient unit economic models, labor models, and productivity improvements — these efforts will also be benefited by a wide variety of exciting new tools that have not yet been adapted to or adopted by the foodservice industry. This presents a tremendous opportunity for investors, technologists, and future-looking operators focusing on bold bets to transform adversity into advantage.
Implications for Restaurants:
Companies who make investments in productivity improvements will leapfrog their competition
Improved compensation can help offset turnover (which costs the U.S. restaurant industry an estimated $95b annually)
Technological advancements benefitting limited service more, initially, to offset labor costs, followed by full-service operators making investments in modernizing training and enhancing relevance
People and Purpose Become More Valuable (Again)
Sometimes a parrot can repeat a phrase it has heard many times with an astonishing resemblance to how it heard it said before. It sounds so human that one can’t help but wonder if it understands the phrase and is repeating it with the same meaning and conviction. “Purpose-driven” has become an example of this in the industry, as it’s now a buzzword for many organizations who have seen plenty others reap the benefits from successfully executing the strategy.
While a monkey-see, monkey-do approach will work up to a point, authenticity is crucial — disingenuous attempts can backfire. There are plenty of attempts to mimic companies who are truly purpose-driven (hard to believe how many times we’ve heard “we’ll be food with more integrity!” after Chipotle’s success) which are often uttered as a precursor for an executive position soon to be turned over.
There are lots of ways for a company to show it is purpose-driven, and it’s not just around charitable contributions. Doing good for those you serve — employees, shareholders, communities, and the industry as a whole — can lead to positive impacts across the spectrum: attracting a likeminded workforce, customers willing to pay a premium (leading to higher margins, which will naturally reflect in the valuation of the business), and other benefits such as better real estate opportunities, stronger partnerships, and the multiplier effect of earned media.
Implications for Restaurants:
More companies across sectors thinking about what their purpose is (not just focusing on profits), and how they can effectuate it
Enhanced enterprise value continues to expand for purpose-driven organizations
The Amazon Deathstar Appears Above the American Foodservice Industry
The first invasion wave of an e-commerce tech giant aiming its master-blaster ray at the restaurant industry will likely happen in the American market with Amazon converging several weapons it has built or acquired into something that’s more deadly than any one component (Amazon Go, Amazon Restaurants, Amazon Basics, Amazon Fresh, Prime Now, one-click ordering, voice ordering, Whole Foods) is independently.
The combined potential of this is so significant it deserves its own series. It should also be noted that, in the same way that generations of technologies have been leapfrogged in emerging markets (e.g., moving from desktop internet right to mobile internet), the impact of services similar to Amazon (like Alibaba in China, noon(.com) in the Middle East, and so on), and how much more quickly they can be adopted and disruptive to the economy as a whole.
Many restaurants don’t consider grocery stores as competitors. Least of all are they thinking of e-commerce. But what would happen if (when?) Amazon decides to start a prepared food subscription program? It could be the best of both worlds for the consumer, and the deathstar for restaurants.
Implications for Restaurants:
Restaurants are the mom-and-pop bookstores of the mid-2000s and need to innovate to dodge the same dreadful fate being hurled at them (like a wrench rotating its way to their forehead, they see it coming but apparently prefer to watch it coming until they feel it, rather than just duck)
Amazon Go, which launched in December 2016, is projected to generate $4.5 billion in sales by 2021 (and is already taking a not insignificant share of wallet)
For as much as we forecasted where delivery would be today (years ago), the next three years will further accelerate the widening performance gap between those who are looking to and investing in the future and those clinging stubbornly to the past
Delivery Aggregators Get Aggregated
More money has been raised in the last three years for restaurant and food delivery aggregators than in the previous 18 years of restaurant IPOs, combined. But what we will expect to see in 2019 (and the years ahead) is consolidation among these companies. This has already started, with GrubHub’s acquisition (and subsequent shut down) of Eat24 — a classic hike and spike strategy.
Online travel agencies were as disruptive for the accommodations and air travel industries as food delivery aggregators are becoming to restaurants. In the last ten years, Booking and Expedia grew their enterprise values by 40% and 25% annually, respectively. In 2008, they represented about 11% of the enterprise value of four of the largest publicly traded hotel and airlines companies (Marriott International, United Airlines, Southwest, and Delta Air Lines — Hyatt and Hilton were not public at the time); that share has increased to 70%.
For operators, margins are going to continue to be an issue when it comes to delivery: the biggest battle between restaurateurs and aggregators is the amount being paid to the delivery companies — so much so that some of the larger operators will move to creating in-house delivery services, if they haven’t already started. (Many have called to ask us how — and delivery companies have asked for our help, too — but easy gains often feed the hubris that precedes humility.)
Implications for Restaurants:
Aggregators aggregating: the history of travel and hotel aggregators will serve as a benchmark for some of what will happen with restaurant delivery today
There will be an evolution of the business model (both on the side of the delivery platforms and the companies using them) which will happen on an accelerated timeframe
Even more Amazon/Whole Foods implications here, and the possibilities from other combinations are nearly endless (think about a potential combination between self-driving cars and navigation services, and the ability to deliver fresh ingredients or fully prepared meals with nothing more than the push of a button, or via voice ordering, or the convenience of a sweet-yet-sophisticated robot that anticipates your desires and acts without even articulating them explicitly)
Alternative Proteins Claim Capital
It will be a few years yet before alternative proteins gain so much ground that it scares the establishment, but smart money is already making bets (including incumbents putting corporate venture capital to work by investing early in — and shaping the future of — companies that could one day grow into rivals). The plant protein market is expected to grow 6.6% annually, reaching nearly $19 billion by 2026. Some companies investing in this sector include Tyson (with a stake in Beyond Meat), General Mills (Beyond Meat, Urban Remedy, Farmhouse Culture), PepsiCo (Health Warrior, Bare Foods), Nestle (Wildscape), and restaurant chains including White Castle, FatBurger, and Umami Burger partnering with Impossible Foods. Beyond Meat filed for the first IPO in its category, expected to take place in 2019 for $100 million.
We’ll still eat a lot more chicken than crickets in 2019, so don’t take this forecast as a silly and commercially unviable suggestion that the average operator try jumping on a bandwagon that’s still being built and lab tested; nor a prediction that Q3’s hottest menu promotion will be what scientists in lab coats are working on today.
But with that said, there is a movement toward greater sustainability. There has to be. Agricultural production simply can’t keep up with population growth. Between water shortages, arable land decreases, species depletion and extinction, climate change and volatility (whether you believe in the politically-charged reasons or not, the impact to crops and food supply, when there is a drought or massive storms is clear), there will be more attention toward ecologically conscious proteins.
Implications for Restaurants:
Lab-grown meats, insect-based proteins, 3D-printed foods, vertical farms, urban and pirate gardens, and more will begin to be included in conversations for the future of the industry (in the next few years, they will become competitors for share of stomach)
What may seem or sound like military-only applications now will move toward commercial markets (it’s easy to forget that the French government incentivized inventors to develop a cheap and effective way of preserving large amounts of food to help feed Napoleon’s Army and this led to the invention of jarring and canning)
Urbanization Births Format Innovations
Globally, ~55% of the population lived in cities in 2018, and that is expected to reach 68% by 2050 (accounting for an additional 2.5 billion city residents by that time). In the U.S., the population in large cities has grown three times faster than the rest of the country over the last seven years. People moving back to the cities is leading to costs increasing faster than low-wage foodservice workers can afford right at a time when operators need them most.
Urbanization will support frontier markets becoming relevant globally, and companies will find it to be increasingly complex when assessing whether and how to expand into these markets. Developing markets will also become more relevant over the next decade, as they’ll account for ~60% of the population and nearly two-thirds of global GDP.
Just as restaurants (casual-dining chains, in particular) followed the population migration over the last few decades to the suburbs, where lower rents afforded larger footprints, the projected changes in the population distribution will lead to new formats. Delivery-only concepts that don’t require prime real estate will become increasingly popular, and new profit centers will be born to accommodate the changes.
Implications for Restaurants:
Large restaurant brands will look toward fast-growing markets and develop customized entry strategies and will need to keep in mind brand translation and regional competition
As new formats meet new times, dark kitchen concepts will increase in prevalence; their enhanced scalability will help to reach levels of growth that were previously deemed impossible for..
Since January 2017, nearly $15b worth of restaurant stocks in the U.S. delisted, as nine companies left public stock exchanges for private hands. The public-to-private deals come at the moment when very few restaurant companies are making initial public offerings. Over the same period, restaurant IPOs accounted for only $59m in value.
This trend isn’t isolated to the foodservice industry. The number of firms listed on U.S. stock exchanges at the end of the 2017 is less than half the number that appeared twenty years earlier.
These changes are largely due to transformations in the cost of capital: where once companies often turned to the public to fund their growth, now private money is increasingly available (and attractive) to leaders. As a result, the foodservice sector of public U.S. exchanges — home to the world’s ten largest restaurant companies — is experiencing a net loss due to public-to-private deals. Meanwhile, global IPO value and numbers have started recovering, revealing that there are still very good reasons to go public.
While Total Value and Number of Global IPOs Is Increasing, Fewer U.S. Companies Going Public
Following the 2008 financial crisis, IPOs across industries and geographies declined but have started to recover.
Over the last three years, markets have seen an average of 1,299 companies go public, 8% higher than the historical average and more than twice the 2009 number. Size is increasing as well, with the total value reaching $189b in 2017. In particular, Chinese foodservice operations are eying public markets.1
The U.S. has not seen this recovery. Between 2004 and 2007 an average of 211 companies went public each year. In 2008, that number dropped to just 31. Following a brief resurgence in 2013 and 2014, the number of initial public offerings has fallen again to an annual average of 145 companies.
Activity in the restaurant industry follows a similar trajectory: from a peak in 2014 and 2015, IPOs among foodservice companies have largely stalled. There were none in 2016, and only two in 2017. It’s not only the number of deals that’s shrinking; it’s also the amount of capital being raised.
Aside from notable examples in 2006 (Burger King and Tim Hortons, now consolidated as the public company Restaurant Brands International) and 2011 (Arcos Dorados, Latin America’s McDonald’s franchisor), the value of shares sold in IPOs has remained below $500m in all but one year since 2014.
The Pains of Going Public: What Makes Private Capital So Attractive
With trillions in private equity capital sloshing around global markets and record-low interest rates, the pains of going public may outweigh the benefits these days. For one, IPOs are costly. They can eat up a significant percentage of the capital raised: about 15% goes to registration and underwriting costs, and companies can leave an additional 15% on the table by underpricing their shares in order to create a first-day rise in value.2
Challenges don’t stop after the company debuts: leaders must deal with intense scrutiny from a number of sources:
Short-Term Investors: The leaders of public companies are often shackled to quarterly reports, their success imperiled by missing targets or a perception crisis that sends stocks plummeting. Many CEOs have expressed frustration with this short-term focus (most famously Ron Shaich), and a recent survey found that 77% of executives across industries believe their companies would be easier to manage if they were private.
Short Sellers: Earlier this year, Elon Musk threatened to take Tesla private in part because of the “large numbers of people who have the incentive to attack the company,” referring to the notorious short sellers rooting for the electric car manufacturer to fail.3
Activists: In 2017, activist investors bought more than $60b in U.S. stocks across industries, doubling the previous year. This amount of capital gives them immense power over the direction of organizations they invest in, for better and for worse. Bloomin’ Brands, Potbelly, Jack in the Box, and Fiesta Restaurant have all been engaged in disputes with activist investors.
While it’s no wonder many leaders are turning to private funding, any number of forces could influence them to undertake an IPO. Going public offers a number of benefits:
Liquidity of Capital: One of the biggest reasons for companies to go public is to gain access to more liquid capital. Private companies, in contrast, often need to launch separate funding rounds, which can take months if not years to complete.
Publicity: IPOs can increase brand awareness, as news of the stock offering reaches new audiences. This is especially beneficial for restaurant companies looking to finance expansion into new markets.
Activists: They aren’t going anywhere, and that may benefit leaders of public companies. Stock prices rise around 6% in companies with these activist investors — and those gains last at least five years, according to a 2013 study.4 We need look no further than Darden for a restaurant-specific example of how engaged activists can turnaround a struggling company. The “Next Chipotle” May Be a Fast-Casual, Health-Focused Brand
Leaders will always have to make calculations about how to fund the growth of their businesses. Variables change the calculus of those decisions, both for executives and investors. Certain organizations, particularly emerging, will continue to find the benefits with regard to liquidity and publicity reason enough to go public.
The evolution of the restaurant unit-economic model has created space for alternative formats that get a tremendous amount of consumer, media, and investor interest and appeal. These concepts are those most likely to go public, as they can rely on the goodwill (and earned media) they’ve accumulated to attract investors. A concept at the intersection of two dominant consumer trends — convenince and healthful diets — could be a contender for the next major restaurant IPO.
Already, bowl and salad concepts are increasing their footprints at a fast pace. One of these organizations may turn to public markets to fund their national (or international) growth.
Disruptive Technologies that Transform Foodservice Will Continue to Attract Investors
The performance of restaurant delivery companies has set the stage for large valuations for organizations whose intellectual property has the potential to reshape the industry.
Since its IPO in 2013, Grubhub’s revenue has grown at a 47.4% CAGR, and its valuation increased 70% between 2014 and 2018. Similarly, Just East, a U.K.-based delivery service, has doubled its enterprise value in the four years since its 2014 IPO.
Meanwhile, valuations for both top American and European public foodservice companies have remained steady.
These delivery companies may be the first foodservice-focused tech operations to claim high valuations on public markets, but they are certainly not the last. We can expect many more innovations over the next few years, espeically in the areas of modernization and automation. The disruptive force of technology will continue to drive big IPOs, and such innovations are urgently needed in the almost $3 trillion foodservice industry.
Best Strategy Defined by Long-Term Goals
Determining how to finance growth — seeking public or private funding, maintaining corporate-owned systems or selling franchising rights, and so on — means weighing not only financial and legal considerations but also operational assumptions, variables, and preparation. The challenges of expansion, particularly cross-border efforts in which brands must translate their unique value proposition to new markets in order to win enthusiastic audiences of guests and employees, add complexity to these questions.
In these instances, external advisors armed with an understanding of historical context and the ability to more accurately predict where the industry and consumer are heading can help to find the most suitable form of funding in alignment with the company’s goals. This added competitive advantage could mean the difference between a disappointing IPO and an extended period of enterprise value enhancement.
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 U.S. pizza market is among the most saturated in the world. That’s not slowing down chains with hustle though. In fact, the fast movers are cannibalizing others with a ferocity that should be cause for alarm for those not investing in the arms race that is shaping up.
In 2016 we published a viral hit on the state of the pizza industry: How Tech is Killing Off Independent Pizzerias. In this post, we’ll take a broader view at how things are shaping up for the global pizza market and some thoughts on where it is likely to head.
Here are 16 stats that put the category, and the performance of key players, into perspective.
Emerging Markets Offer Opportunity away from Saturated U.S. Market
The U.S. already has a fairly saturated pizza market, with one pizzeria for every 5.1k people.
In this market, two chains have been locked in a decades-long battle for dominance. Even though 16 pizza brands make it into the top 200 chains in the U.S., sales are highly concentrated: Domino’s and Pizza Hut claimed 50% of the sales for these systems in 2017. When Little Caesars and Papa John’s are included, the top four systems account for a stunning 79% slice of pizza sales among the top 200.
Outside the U.S., there’s lower saturation. In the U.K., there are 13.5k residents for every pizzeria, while in China and India there are 370,000 and 353,000 people (respectively) for each and every pizza shop. With such low saturation, some of these markets are expected to post high growth rates for the pizza segment: in Asia Pacific and Latin America, pizza sales are expected to grow 1.4x as fast as the restaurant industry in general.
Both Pizza Hut and Domino’s have their sights set on these emerging markets. Domino’s is pursuing expansion in Russia and China, seeing potential in each country for 4,000–5,000 units. Pizza Hut is pushing growth in Sub-Saharan Africa, where it plans to have 250 units across 25 countries by 2020. In May 2018, it also announced a partnership deal with Telepizza that will give the Spanish company master franchise rights in three European countries, Latin America (excluding Brazil), and the Caribbean. This alliance will put Pizza Hut in first place in the latter two geographies.
Franchising Model Allows Chains to Grow Quickly and Claim Strong Returns
In the United States, eight cents of every foodservice dollar goes toward purchasing a pizza. Chains claim the majority (57.5%) of those sales, and that lead is expected to increase: with 5.8% sales growth in 2017, chained systems are more than doubling independent operations. Moreover, chain locations reach an average 68.0% more sales per unit than independents.
Most of these chains have heavily franchised systems, which are built for scalability, and pizza is increasingly dominated by chains growing sales and share through franchising. In fact, the vast majority (an average of 89%) of pizzerias are franchised. Domino‘s and Pizza Hut both have more than 90% of their stores franchised.
The model — when it is done right — also lends itself well to higher return on total assets than what other foodservice businesses earn (as seen by these overnight successes decades in the making). Among all publicly traded restaurants in the U.S., Domino’s and Papa John’s have the highest returns on assets: 8.3x and 5.0x the industry median, respectively.
Not coincidentally, Domino‘s and Pizza Hut also invest heavily in tech, a theme that runs throughout the most successful foodservice companies.
The systemization leading chains have put in place is also giving them an edge in driving average unit volumes (AUVs), which are 49% higher than the rest of the pack
As our post on independent pizzerias’ struggles covered, this is forcing out smaller operators and leaving the leftover market share for the leaders, but it’s also having a big impact on other chains, who are having to deal with an increasingly intense level of competition.
Digital, Delivery — and Domino’s — Fueling Growth
The big story in pizza over the past few years has been Domino’s and rightly so: its turnaround was so successful, it contributed to the pizza segment’s industry-leading same-store sales (SSS) growth in both 2015 and 2016.
While same-store sales in the U.S. were flat in 2016 for most of the foodservice industry, the pizza category grew substantially — led by the tremendous performance of Domino’s.
The chain has continued to post strong comps. In its 2018 annual report, it listed a 7.7% increase in domestic SSS growth and 3.4% internationally. Meanwhile, Pizza Hut posted flat sales, and Papa John’s is seeing a decline, projected at negative 6.5%–8.5% for U.S locations and between -2% and +1% for international units.
Domino’s wins have translated into significant AUV growth, which helped catapult it back into the position of world’s largest pizza chain.
Back in 2011, Domino’s AUV was similar to that of Pizza Hut — actually, it was 1% lower. However, the product turn-around and the implementation of tech to improve convenience gained the chain such growth that Domino’s AUV is now 30% higher than that of Pizza Hut.
Improvements have been derived not only in its U.S. system but also from massive international market wins. As of 2016, Domino’s market penetration was higher than that of Pizza Hut in India (by far) and in Saudi Arabia.
At the time, Pizza Hut still held the advantage in the U.S., but Domino’s overtook it in 2017. However, Pizza Hut still wins in the UAE with close to 20x the sales volume.
Gains Are Coming at the Expense of Competitors
The largest 50 U.S. pizza chains have increased their market share in the last few years, mostly thanks to the new brands that entered the rank.
While those brands remaining among the top 50 between 2010 and 2016 increased their market share (from 51% of the pizza market to 55%), the new brands (many of which are fast casual) took market share from the dropouts and smaller competitors. These new entrants claim a 7% share — 5 percentage points more than the exiting brands did in 2010.
This ongoing battle helps illustrate just how competitive the pizza industry — and nearly every category of foodservice — is these days. Gains for one almost always come at the expense of another. One case in point: between 2014 and 2016, Domino’s opened five stores for every four Pizza Hut stores that closed.
While certainly Domino’s deserves its dues, this is also partially a signal of the emerging global potential of (and increasing consumer and investor appetite for) delivery-only concepts, which in 2016 doubled overall foodservice growth as well as growth for every other segment, except fast food.
Pizza dominates the delivery-only category, with Domino’s and Little Caesar’s as the largest players in this segment. And what we can witness in this category in terms of digital investment, innovation, and gains (in AUV, SSS, profitability, market share, and enterprise value) serves as much as a case study for the pizza industry as it does a sign of things to come for the rest of the global foodservice industry.
As of 2016, sales from Domino’s digital channels were growing 13.8 times as fast as non-digital sales. Once consumers experience this greater convenience, it’s hard to go back. That force is reshaping market share, moving billions of dollars into new categories and channels. Domino‘s has fully committed to in-house digital development, investing over $100m into CAPEX in 2018 alone, which goes to both tech initiatives and central commissaries that ensure consistent quality across the heavily franchised system. In comparison, Papa John‘s and Pizza Hut are investing less than half that amount.
Domino’s leaned in — way in — and the results have been plain for all to see.
Investments in MarTech Helping Drive Growth
The investments required to follow in these footsteps may seem daunting — to aspire to forge an even more ambitious path forward may seem downright dubious — however, the prize for getting it right has already proven..
As fast as the world and our lives move these days, it’s difficult to pay much attention to something that isn’t instantly clear in terms of its value proposition. And it’s a tall order for someone to request we play along with what may at first seem like rhetorical questions or minutes that might be wasted on something that doesn’t have a clear and immediate payoff.
If you will indulge this for a few minutes, I hope and trust you will find it was worth the time of all involved (even to the point of you wanting others to be included and involved as well).
So, a few questions to start warming the oven… and please give a couple seconds of thought on each:
Who most impacted your life this year? How? Why? How did it make you feel? How do you think it made them feel?
When you reflect on the questions above, please take time to imagine the faces, places, feelings, and the circumstances that put you both in the shared space needed to give this experience a clearing to become possible.
Who and what did you see? How does it make you feel now, reflecting back on it?
Now — and I know these are a lot of questions already, so I appreciate you holding with me through this process — ask yourself this:
Whose life did you most impact? What contribution did you make to someone else this year that set a new bar for you and your expectations of yourself and your ability and aptitude to render a truly WOW experience that was kind, gracious, daring, and selfless?
Do you have these circumstances pulled up in your mind? Great! You’re in the right headspace for what’s coming next.
1. Lead by Serving
This first video is a television commercial for a bank in Thailand — and it was certainly created with the intent to pull at one’s heart strings. However, it is also certainly moving and worth the time to remind restaurant executives ascribed to servient leadership that the road is often long and thankless for all committed to contributing in a meaningful way. It’s not about small and short-term payoffs. It’s about setting an example that eventually wins not only hearts and minds but also makes a difference that lasts in a company or community and ripples out far wider than may be imagined when putting in the hard work day to day.
Heartwarming Thai Commercial - Thai Good Stories By Linaloved - YouTube
2. We Are All Connected
There’s always plenty of both good and bad going on around the world — some markets are up or down, certain categories are performing stronger than others, and there are always plenty of challenges. By being proactive and realizing the things within our world and industry that are challenging, great leaders ask of great minds, “What’s wrong?” And, more importantly, “What can we do about it?” The creators of the video below did just that.
What they discovered, through conversations with scientists, philosophers, and spiritual leaders, is that we’re more interconnected than it may seem. The decisions leaders make impact the people in their organizations, the guests and communities they serve, their competitors — and the whole human race. What can’t we accomplish with such power?
"I AM": Official Trailer - YouTube
3. The Power of Recognition
One of the great restaurant leaders to herald for accomplishments and contributions to the industry is David Novak (former CEO of Yum!, serving from 1999 to 2016). In 2016, he released a book called O Great One! that highlights the great power in recognition — and what it means for those in your downstream. The butterfly effect of recognizing individuals within an organization also carries through to the guests those employees are interacting with. Imagine the power of this sentiment carrying through your organization.
Experience the Awesome Power of Recognition - YouTube
For us in the United States, the Thanksgiving holiday is when we pause each year to reflect on who has made the most meaningful and important contributions to our lives. What may seem small at the time can be of great significance to others. In the spirit of the season, here are some of the things, people, and experiences we’re most thankful for in 2018.
Our Community on LinkedIn
We’re very grateful, honored, and excited to have been included in LinkedIn’s Top Voices for 2018. The editors have named us the most important voice in the global foodservice industry on the world’s largest professional networking platform. We’re grateful to both the editors and to you for engaging in the content.
Our Experiences in MENA
November 2018 also marks 10 years to the month of our firm being active in MENA. Among the many things we’ve learned in that time is just how generous and kind the people are. We recently traveled to Dubai to host executive leadership of some of the most recognized industry contributors in the region. It was an opportunity to acknowledge appreciation to clients and admiration to industry leaders. It was also an opportunity to express gratitude for the many expressions of kindness that many in the room helped create or shape.
Every year, we count ourselves lucky that we work in an industry that holds the values of care, compassion, empathy and trust in such high regard. We’re grateful that our passion and profession are one and the same and that we spend our time amplifying the work of inspiring leaders who are moving their organizations and the industry in exciting and powerful new directions.
These honors and experiences fill us with gratitude and humility. We know that we’ll carry them with us for the rest of our lives and that they will motivate us to create such powerful feelings of appreciation in everyone we encounter. We hope that you, too, take this moment to pause, reflect, and recognize the people and events that have had a positive impact on your life this year. Happy Thanksgiving from all of us at Aaron Allen & Associates.
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. 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.
It’s time to free the guest from the tyranny of too many choices.
Humans have a remarkable ability to over-complicate. And this has certainly been true in recent years for restaurant chains that lacked the discipline to prune and manicure their menus.
Much like the sense of surprise and panic of looking at the bathroom scale late in the holiday season and feeling startled enough to get back into the gym and cut a few pounds, marketers — and those responsible for menu rollouts — are realizing they need to drop some weight.
Many clients have asked us for help with menu engineering, and we’ve noticed a few common stumbling blocks. Promotional items and limited-time offers get confused with product development, leading to lower-priced — and lower-impact — menus. Redesign efforts are often assigned to junior teams, who lack the experience and authority to take a holistic approach to menu development and make the necessary decisions. To combat these, we suggest:
Aligning the menu with consumer trends to create innovative signature items
Devoting research and development efforts to the culinary program, which will be repaid as the new menu creates improvements across functional areas
Elevating redesign efforts to the C-Suite, so that menu engineering becomes part of the chain’s long-term strategic planning
Pricing Tactics Masquerading as Innovations
With all the noise and fervor around innovation, it is interesting to note that much of what is happening on menus has more to do with promotions and pricing strategy than it does with R&D, differentiated product development, and meaningful improvements in the areas of speed of service, order accuracy, guest convenience, and operational efficiency.
As chains struggle with shrinking sales, they often face pressure from shareholders to cut SG&A costs, which include culinary development. This sometimes means relying on large distributors for help with menu development, resulting in lots of brands suddenly offering very similar options — precisely what happened to some British pubs just after the 2008 crisis.
We need only look at the sad state of casual-dining chains to see the consequences of this mistake. Rather than find new approaches to menus that would delight guests and align with a brand’s unique promise, personality, and positioning, these chains drifted into the sea of same.
Their menus all started looking like copies of each other’s, and most began running variations on a 2-for-$20 deal. Not only did they fail to offer guests anything that differentiated them from the competition, but the price-slashing made them seem cheap.
Trying to compete with lower-priced QSRs and up-and-coming fast casuals was a strategic error. Innovating exciting signature items would have had the opposite effect, helping them stand out from other concepts both within and outside the category. The menu is a key part of the experience of dining out, and innovation can help refresh a stale brand.
We Eat with Our Eyes First, So Keep the Design Simple, Too
The menu is a chain’s most important piece of marketing collateral, and it should be its best salesperson. But just as menus can end up cluttered with limited-time offers that no one had the heart to kill, they can also end up looking like the design department threw every font, color combination, and Photoshop filter at the page just to see what would stick. Even if there are relatively few items on each page, visual confusion spreads to the guests, who aren’t sure how to navigate the menu.
Selecting the right font, colors, and layout can reinforce the brand story so that it flows through every customer touch point. Appropriate use of menu merchandising techniques — on both paper and digital menus — can lead guests’ eyes to signature and high-margin offerings, boosting sales of items that most differentiate the concept and add to the bottom line.
When these changes are done correctly, chains see quick and sustainable gains. When done incorrectly — or not done at all — they see dampened enthusiasm, lowered throughput, and slow drive-thru lanes.
Simplifying Menus Leads to Increased Same-Store Sales
Between 2013 and 2017, limited-service restaurants in the U.S. couldn’t decide whether to decrease or increase the number of items on their menus.
Some large chains, such as Papa John’s, Sonic, and Taco Bell, increased menu items by at least 28%, resulting in menus up to 1.7x the average size. Meanwhile, Dairy Queen, Dunkin’, and Little Caesars saw the biggest menu reductions.
The chains that reduced the number of items on their menus claimed an average same-store sales growth of 3.3%, while their competitors saw an average 1.9% same-store sales growth per year. This 1.4 percentage point difference added up between 2013 and 2017, giving the concepts with simpler menus much stronger growth: 14% against 8%, a 75% difference.
Menu Complexity Effects Operational Efficiency (and Drive-Thru Performance Can Suffer)
McDonald’s menu has grown massively over the years: it went from 30 items in 1980 to 108 choices in 2014. When Steve Easterbrook took over in 2015, the chain cut its menu by 33%, but it bounced back, growing to 87 menu items in 2017. The recent increase in complexity had a serious impact on drive-thru performance, with speed of service deteriorating by 13%.
With 60% of QSR revenue coming through the drive-thru, these slowdowns can significantly damage performance.
Starbucks Needs a Food Formula
Starbucks has also struggled to get its drive-thru performance right. The chain established an effective formula for ordering from its drink menu: size (venti), hot or iced, drink name (vanilla latte), and any additions or changes (no whip, quad shot). This system makes it easy for guests and baristas to navigate an incredibly complex set of offerings. In fact, it works so well, Starbucks has radically simplified its menu boards, showing only a handful of drinks, with pricing and nutritional information for the grande size only.
This method worked for Chipotle. Though their menu boards have fewer than 50 words on them, guests can build more than 65,000 possible options. In contrast, QSR menus have about 800 words but only 64 items.
Starbucks should follow Chipotle’s (and its own) example with its food program. Though there is a system (the breakfast sandwiches go meat, cheese, egg), the descriptive names of the ingredients — not just bacon but double-smoked bacon and reduced-fat turkey bacon — creates confusion for guests and baristas.
Throughput Almost Triples for Chains with Simple Menus
Changes to the menu cascade across the operation, impacting crew-level employees’ day-to-day activities. Altering the menu can constrict or improve throughput massively.
Though large menus don’t necessarily translate to fewer transactions per location, there’s a lower pay-off per item.
Among some of the top QSR players in the U.S., those with the simplest menus saw 2.7x as many transactions per item (considering the median of the group) as those with the most complex menus. This underlines the profound impact of menu strategy on what will surely be one of the biggest stories in foodservice in 2019: labor.
In 2019, Labor Challenges Must Also be Met with Improved Menu Strategies
Restaurants have benefitted from favorable commodity costs in many geographies globally. Even still, restaurants had price inflation 3x that of grocery stores.
With labor costs increasing around the world in 2019 — and competitive pressures continuing to build — getting it right with the menu will be very important. Labor will not only become more expensive though; in some key markets the labor pool is really a labor puddle, making it especially difficult to fill positions that require skilled crews.
Improvements should happen through the lens of product development, day-part and profit center growth opportunities, pricing strategies, labor optimization strategies, enhancements to the guest experience and to operational systems to increase speed of service and order accuracy and reduce unit-level complexity.
Menu Strategy Must Be Holistic
One of the surest and quickest means to improving performance for a restaurant chain is through effective menu engineering strategies. It’s about more than tactical design, merchandizing techniques, promotional tactics and pricing strategies though. When done correctly, a holistic improvement is possible that also delivers benefits in terms of operational efficiency, brand and competitive differentiation, media interest that garners positive publicity, guest appeal that stimulates new trial and frequency, sustainable lifts to sales and profitability, and even reinvigorated morale and employee engagement at the unit level.
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 have helped evaluate and engineer menus for some of the world’s largest restaurant brands, as well as helped restaurant companies around the world drive revenues, increase profits, and enhance the guest experience through improved marketing, messaging, and menu engineering.
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.
Executives championing change and technology in restaurants can learn a lot from the failure of a physicist and the loss of two billion dollars. At the time, the largest scientific investment in the history of the world was supposed to go to Waxahachie, Texas, just outside of Dallas, but the project evaporated. The decision came down to one question, or rather, one scientist’s inability to effectively answer one question, and that failed communication meant that one of the most important discoveries in the history of science took place in Switzerland instead of the United States.
Michio Kaku - Q&A - YouTube
When the scientists lost the project, they said they were victims of “the revenge of the C-students.” But the lawmakers said the scientists were too arrogant: they’re brilliant people, but they’re not salesmen. The scientists couldn‘t get the politicians to hear what they were saying, and the lawmakers couldn’t get the scientists to say what they needed to hear before approving another billion-dollar investment.
Those working to effectuate significant change within their organizations will eventually face difficult questions. What answers will satisfy the doubters while achieving the aims of the greater good for the company, employees, customers, and ultimately, the investors and skeptics, too?
The foodservice organizations that have most successfully harnessed technology share a few attributes. Most importantly, they started their transformations while facing significant threats. The technological answers they found focused around improving the guest experience rather than enacting change for its own sake. As a result, they increased market share, restored or reinforced relevance, and built incredible value for their organizations. Their secret was not to champion technology, but to champion change.
Breakdown Before Breakthrough
It’s easy to point to what the most innovative foodservice organizations have done and highlight their exciting ideas and applications. But if you trace these initiatives back, they came into being because the company needed to revive the business. The genesis of the best tech advances in the industry were turnaround efforts. These companies had breakdowns before they had breakthroughs.
The U.S. market has become incredibly competitive. Of the $2.7t global restaurant industry, $800m is spent here. More than 30% of all industry revenue is earned in the U.S., which has less than 5% of the world’s population. Share only comes at someone else’s expense. And the pressure isn’t just coming from the big guys: it’s also the up-and-coming chains.
These fast-expanding brands are increasing their footprints at a 37.5% CAGR. The industry as a whole grows by 3%, on average, annually. If the largest chains are claiming billions, and the newcomers are taking 30%–40% growth, it’s squeezing those in the middle.
The challenges and opportunities facing the foodservice industry are fairly universal across categories, geographies, and the size of the business. One of the constant refrains is, “Are we relevant?” This question has plagued casual dining over the past ten years. Since 2007, it’s had zero growth.
Many companies are turning to technology to restore and maintain their relevance. Others are doing so to create more efficient, and employee-friendly, labor models. Just as mobile order-and-pay apps make restaurants more convenient than ever for guests, so do scheduling apps for their crews, enabling them to swap shifts on their phones (much improved from the old days of driving to the restaurant to put in a shift change request on a corkboard). Some organizations were pushed to make these changes after losing market share while others did more than they had to before they were forced to, but all did so in hopes of meeting and exceeding consumer and employee expectations.
Domino’s Won Over Its Critics by Focusing on Convenience
Domino’s has reinvented itself as a tech company that sells pizza, but it wasn’t too long ago that it was really struggling. It lost its position as the largest pizza company in the world and had to figure out how to win that title back.after
Domino's® Pizza Turnaround - YouTube
To champion change inside an organization, the harshest critics have to be convinced. For Domino’s, that was customer. In other operations, it’s internal stakeholders. Technological change requires alignment all the way from the crew to the CEO. And even then, the CEO has to answer to the board or public markets, or try to recover from waning public perception.
Of course, Domino’s numbers speak for themselves. The customer videos above were shot in 2009, and Domino’s stock price has increased tenfold since then.
And not only that, but the pizza chain eventually came to far outperform Google, Apple, even Amazon, whose CEO just became the richest man in the world. These incredible returns come from Domino’s commitment to making its delivery service as fast and convenient as possible. To put the prescience of this decision into perspective, 10% of all foodservice revenue globally (~$270b) is expected to go through delivery in the next ten years.
Domino’s even went so far as to build its own car. An organization that was suffering partnered with Ford to develop a vehicle specifically for delivery. In a lot of ways, that thinking may seem counterintuitive, but it’s part of what worked. First, it relates to Domino’s core competency as the leader in pizza delivery. Second, it speaks to how the brands and companies that survive over decades must constantly reinvent themselves. It’s probably not a coincidence that Domino’s sought out Ford as a partner: they’re both historic Detroit-area brands that joined forces to find rejuvenation.
Domino’s “Anyware” program has been very successful. Consumers can say, “Hey, Alexa, order pizza,” and their favorite Domino’s pizza will show up at their door. They can push a button, and their order processes. That level of convenience, which strips out all of the unnecessary friction points inside the ordering process, can move tremendous amounts of revenue and market share very quickly, as Domino’s has.
But before Domino’s could launch these programs, its leaders had to win support from top to bottom. In 2012, Patrick Doyle sent Kelly Garcia, SVP of eCommerce Development and Emerging Technologies, and Dennis Maloney, Chief Digital Officer, to the board with their plan to transform the company. They won the board’s support and secured the necessary budget. But next they had to win over everyone else, so the company set about changing the culture. It began using the tech transformation as a recruiting tool, so that they could surface the most excited and committed applicants. Now, the chain has very low turnover because its staff is bought into what the company has done — and what it has the potential to do next.
Panera Thought Beyond the Quarter and Saved Guests Ten Years of Waiting
The Panera 2.0 program only cost $40m. Of course, $40m is a lot of money, but on a $5b company, it’s a very small percentage. Panera eventually became one of the top-performing foodservice stocks in history, but CEO Ron Shaich became more and more frustrated by investors’ short-term thinking, so much so that it contributed to his decision to leave the company.
Much of this frustration came from the fact that he couldn’t get buy-in for what he really believed the company should be doing in terms of technology. But the investments did pay off: JAB acquired Panera in 2018 for $7.5b, a 20% premium on share prices at the time of the sale. Technological transformation doesn’t take place overnight, and leaders need to develop strong commitment from all levels of the organization to see these initiatives through to success.
McDonald’s Is Building a Moat Competitors Will Struggle to Cross for Years to Come
McDonald’s, like all long-lived organizations, has ebbed and flowed through the years. As a result of the breakfast wars, they experienced a major drop in same-store sales starting in 2013.
In 2015, Steve Easterbrook took over as CEO to a tremendous amount of public criticism. The initial turnaround initiative was packaged in a complicated, 14-point plan that would be almost impossible to execute within such a large organization. But the executive team simplified those ideas, and they’ve been investing heavily in technology.
The rebound has been remarkable. Easterbrook acknowledged that things had changed more outside the business than inside the business in the last five years. And that’s when he realized that McDonald’s had to move faster. It’s done so, investing hundreds of billions of dollars per quarter in the Experience of the Future initiative. This CAPEX spending is so large, it will make it almost impossible for the rest of the industry to catch up. The market has rewarded this transformation, adding (at its peak) $42b in market capitalization.
Many leaders in the industry may question whether foodservice has to move as fast as technology. But both industries share the same consumer (and discretionary dollars), whose expectations have been set by organizations like Apple, which unveils a new phone each year, obsoleting the last one. Now restaurants are facing their own challenges of heightened consumer expectations, and the largest players are able to invest hundreds of billions of dollars per quarter in technological advancement — more than most restaurant companies will probably ever see in total sales, let alone CAPEX budgets.
In the U.S., almost half of public company CAPEX comes from just a few companies. Billions upon billions of dollars are being invested in technology, and the organizations that fall a few steps behind now will find themselves at the back of the pack within a few years.
Starbucks Customer-Centric Tech Outpacing the Competition
Starbucks became the second-largest foodservice company in the world by adding 2,500 units each year. Operations in the lower portion of the 100 largest chains still haven’t reached that number, and Starbucks is adding it every year. But former CEO Howard Schultz was rejected 217 times when he initially tried to get funding for expansion.
One reason for Starbucks’ incredible success is that very tenacity. As customers move to the loyalty program, the coffee chain is seeing all guests — high-spend, medium-spend, and lower-spend customers — add 20%, 30%, and 70% to their orders. In an industry that grows 3% a year, Starbucks is increasing its footprint annually and growing check averages by incredible percentages. Those figures are meaningful not just for Starbucks but for everyone in the industry.
Starbucks’ tech initiatives aren’t specifically aimed at driving sales. The company is leveraging technology to better serve customers. Its mobile order capability lets guests skip the line, and it has recently installed menu boards that allow..
Already in 2018, $1.5t has changed hands in mergers and acquisitions in North America and Europe. In foodservice, the number of deals is comparable to the first three quarters of 2017, and valuations remain in the 10x EBITDA range.
The trends most impacting Q3-2018 restaurant mergers and acquisitions are:
Consolidation: from small restaurant groups like ARC to giants like MTY, many portfolios are making a number of acquisitions very quickly.
Going private: more and more companies are leaving the stock exchange to stage turnarounds or expansions away from the pressure of quarterly earnings reports.
Authentic, healthful concepts: a number of on-trend chains are turning to minority investors to expand.
Convenience: foodservice tech remains hot, as top players are using buyouts and minority investments to try and claim market share.
Mergers and Acquisitions Across Sectors Reaching Record Sizes
Record-breaking mergers and acquisitions are taking place in all sectors. Over the last decade, deal size has almost doubled in North America and Europe, with platform buyouts more than tripling in size since 2009.
Though the pace of activity has decelerated (by 7% in North America and 19% in Europe), there’s still plenty of capital (and concepts) changing hands. In the first half of 2018, deals totaled $512b in Europe and $956b in North America.
Empires Are Rising
The Q3-2018 restaurant mergers and acquisitions landscape saw a handful of small restaurant groups go on buying sprees. ARC, founder of Dick’s Wings & Grill, bought the struggling Tilted Kilt in June, and in August, it announced its acquisition of Fat Patty’s, a four-unit casual-dining chain. While ARC depends on franchisors to grow its concepts’ footprints, Elite Restaurant Group will expand its concepts with corporate-owned locations. In April, the Los Angeles–based Elite announced its acquisition of Daphne’s, a Mediterranean concept with 23 units in California. Since then, it’s already shortened the name, updated the menu, and launched remodels. In August, Elite purchased Patxi’s Pizza. Meanwhile, Sinelli Concepts, out of Dallas, added the 45-unit gelato concept Paciugo to its 438-unit Which Wich brand. Sinelli also owns Burguesa Burger, with two units, and will debut its new concept, Supernova Coffee, by the end of 2018.
These deals might be the beginnings of new restaurant empires, but ARC, Elite, and Sinelli have a long way to grow before they can rival the two of the undisputed giants in global foodservice: MTY Group and JAB Holdings. With almost 75 brands, MTY Food Group is a major force in North American foodservice. Specializing in franchised concepts with units in malls, movie theaters, and convenience stores, the concepts in MTY’s portfolio have over five thousand locations. From Chinese and Japanese cuisine to burgers, sandwiches, and snacks, MTY most recently added sweetFrog, a self-serve frozen yogurt concept with almost 300 units, most of which are in the U.S.
Through its subsidiary Krispy Kreme, JAB acquired Insomnia Cookies in July 2018. It also added Core Nutrition, a bottled water company, thanks to a purchase by Keurig Dr Pepper. JAB’s dominance in the beverage sector may have prompted Coca Cola’s $5b+ purchase of Costa Coffee, a U.K.-based coffee house with over three thousand locations worldwide. The acquisition not only gives the soda company entry into the fast-growing coffee category, but it also provides essential brick-and-mortar locations that will get more Coke products in front of more consumers.
JAB and MTY concentrate on specific kinds of foodservice operations, but they are both pursuing the same strategy: consolidate a category. These kinds of initiatives require long-term planning, which often conflicts with the short-term demands leaders of public operations must face. This helps explain why we’re seeing so many public companies go private.
Private Companies Avoid the Most Common Pitfalls of Short-Termism
When Ron Shaich announced his resignation as CEO of Panera Bread, he explained that he wanted to “really push this debate… about how short-termism has infused our capital markets.” The focus on short-term results, he went on, “stops innovation. It stops the very things that drive economic growth. And it makes us less competitive as an economy.” This is why Shaich took Panera private: so the company could focus on more complex, long-term strategies like digital integration that may reduce more immediate payouts but can significantly increase future returns.
Shaich’s harsh words for the industry have made the merger between Zoës Kitchen and Cava, financed by Shaich’s Act III, huge news. The two Mediterranean concepts will have a combined footprint of 327 stores. Though Zoës has struggled with declining traffic, especially in regions where over-expansion resulted in self-cannibalization, Shaich’s involvement in this deal signals that the chain still has a lot of potential.
Zoës is one of nine public restaurants to have gone private in the last two years. Together, they represent $14.4b.
Jamba Juice and Sonic both announced deals to go private this quarter. Jamba has been under pressure since two activist investors (Glenn Welling of Engaged Capital and James Pappas of JCP Investment) took board seats in 2014. Now Focus Brands, owned by Roark Capital, has taken the company private, adding it to its other snack concepts, which include Auntie Anne’s and Cinnabon.
Inspire Brands, another multi-concept portfolio under the Roark umbrella, acquired Sonic for $2.3b. It adds the drive-in burger concept to an empire that already includes Arby’s and Buffalo Wild Wings. The group has a proven track record for bringing back struggling concepts: since the Arby’s turnaround began in 2013, the roast beef chain has increased sales by 20%. CEO Paul Brown focused on making the brand more appealing for young people: social media became less corporate, more emphasis was put on high-quality ingredients, and stores were remodeled (which also helped with efficiency). Similar changes may be in store for Sonic, even though it has faced fewer difficulties than Arby’s. Like Shaich, Brown is focused on longer-term strategy.
Minority Investments Funding Expansion and Technology
A number of minority investments have taken place already this year, with the much of the activity directed toward expanding operations. There has also been consolidation among franchisors and a few notable tech investments.
Many of the chains taking on investments to expand are in close alignment with larger consumer trends. Roti Modern Mediterranean received $20m from Valor Equity Partners. This deal is more evidence that the Mediterranean segment will gain market share in the coming years. Dobbs Equity Partners invested an undisclosed sum into Corky’s BBQ, which currently has eight locations across Tennessee, Mississippi, and Arkansas. Its claim to authentic Memphis barbeque gives guests a strong sense of place. Meanwhile, vegan concept by Chloe took on $31m from a variety of investors to open 20 new locations, highlighting the increasing popularity of plant-based diets.
The second-largest category of minority investments took place in technology. It’s been a busy year for tech mergers and acquisitions as foodservice-focused companies continue to consolidate. This quarter, Grubhub bought the loyalty program LevelUp for $390m. The platform should allow the delivery company to better integrate with client restaurants’ POS systems, reducing friction in the ordering process and offering more opportunities for direct engagement between guests, Grubhub, and individual restaurants.
Grubhub isn’t just buying; it’s also taking on investment. Yum! Brands made news in February 2018, when it put $200m into the delivery platform, the largest investment made into a third-party tech company by a foodservice operation. But competitor Doordash claimed more than twice that figure the same month in a funding round led by SoftBank Group.
While Doordash and Grubhub are fighting for control of the delivery market, start-up Ordermark is trying to help restaurants make sense of the crowded market. Its products centralize orders from all the major delivery platforms through a single dashboard and POS. The company received $3.1m in seed capital in March 2018 and an additional $9.5m in September, which it plans to use to go national.
Acquisitions Reveal Strategic Moves to New Categories
After acquiring Barteca in May 2018, Del Frisco’s has sold Sullivan’s Steakhouse to Romano’s Macaroni Grill for some $32m. Sullivan’s had been experiencing a serious decline in traffic, and Del Frisco’s had been considering a sale since 2016. These two deals show Del Frisco’s understanding of changing consumer desires: Bartaco, the larger of the two concepts under the Barteca umbrella, is in the faster-growing fast-casual segment.
Meanwhile, the tumultuous meal-kit segment saw more changes thanks to Q-3 2018 restaurant mergers and acquisitions activity. True Food Innovations, which focuses on developing long-shelf life meal kits and other consumer-packaged goods, bought the assets of Chef’d, a higher-end meal-kit delivery service based in California. True Food will pivot Chef’d to brick-and-mortar retail rather than keeping it in the overcrowded online kit space. Many of the online-only, subscription-based meal-kit services have struggled in the past year, revealing that diners want their meals delivered cooked. But putting these same products in grocery stores, where they will be a welcome relief to time-starved consumers who would prefer not to hunt all over the store for ingredients.
Due Diligence More Important than Ever
Acquisitions will become more and more decisive in developed markets like North America and Europe. Foodservice operations in these economies are reaching the limits of organic growth and turning to strategic acquisitions to grow and enhance enterprise value.
As the size of deals continues to increase — and competition for concepts that align with buyers’ existing portfolios and skillsets heats up — it’s more necessary than ever to perform due diligence before any deal is finalized. Not only will a comprehensive commercial and operational due diligence engagement uncover both risks and opportunities for a target company, but it will also ensure that the potential investment aligns with rapidly evolving consumer preferences.
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 model, ownership type, and phase of the business life cycle.