How important is the restaurant industry to the U.S. economy?
A: The restaurant industry plays a very significant role in the U.S. economy with sales equal to approximately 4% of gross domestic product (GDP) -- this year, industry wide sales are projected to be $580 billion 1
. On any given day, more than 130 million people are served by the foodservice industry in America. Restaurant industry jobs are critical entry level positions and provided a first job for more than 25% of adults in America. According to the National Restaurant Association, the industry employs approximately 12.7 million people or 9% of the U.S. workforce.
1 National Restaurant Association, 2010 National Restaurant Pocket Factbook
What types of concepts (fast-food, casual dining, fast-casual) have been able to raise capital these days? Which ones are finding it the hardest and why?
A: For equity capital, growth potential is most important. For debt
capital, predictability of cash flow is critical. And equity investors
get excited when they see something unique, a brand that’s able to
differentiate itself from the pack.
Fast-casual brands have not had a problem raising capital, as long as
the type of capital (debt or equity) is appropriate for the company’s
stage of development. There are many chains in the fast-casual
space that have tremendous growth potential and several larger
ones with enough stores to provide assurance to lenders of getting
repaid.
On the other extreme, casual chains are having difficulties attracting
capital because the growth story is unclear given overbuilding in
the sector and operating trends remain challenged. Although it
feels like sales will come back in 2010, results will likely be mixed
depending on the brand. The profit drivers of 2009, primarily
commodity costs and rethinking store level operations, will not
drive increases in profits in 2010 but rather increasing sales will be
necessary to increase profits. As long as there is uncertainty on the
sales front, casual dining will remain capital challenged.
In the middle is QSR (quick service restaurants), where generally
you have a predictable cash flow stream and probably good growth
prospects. Debt is generally available for QSR companies because
of their reasonably good performance through the economic cycle.
Do you see financing opportunities improving in the future?
A: For larger chains and franchisees of top brands, financing is
already improving, and credit terms are getting more favorable
towards borrowers. For smaller chains and small franchisees,
financing is still difficult. For businesses that are not performing
well, capital remains very hard to come by.
The difficulty in providing debt financing to a business with falling
sales is a lender is not sure how much cash flow will be available
to pay interest and repay the loan. Restaurants have a significant
amount of fixed costs (rent, utilities, minimum staffing levels), and
as sales fall, profits fall faster. If there isn’t much cushion between
cash flow and debt repayment obligations, a relatively small drop
in sales can lead to financial stress.
I believe you’ll see a direct correlation between improving sales
and increased financing opportunities. As sales improve, lenders
will have more confidence in the sufficiency of future cash flows to
pay them back.
What advice would you give an individual looking to sell a franchised restaurant business?
A: The current performance of a business and its growth potential
are two of the primary factors that determine a business’
attractiveness to a potential buyer. Another important element is
the purchase price and what the return on the equity investment
will be. The state of the lending market for restaurants determines
how much of the purchase price can be borrowed and how much
must be contributed by the buyer as equity.
So, ideally, if you’re looking to sell your franchise, you should
wait for your business’ performance to return to historical norms
with trends that support growth in cash flow through improved
sales and profits and potentially new store development. Also, to
achieve a strong result, you need a lending environment that’ll be
accommodating to the buyer so they can get a reasonable loan to
finance a portion of the purchase price. Generally, when debt is
not readily available, purchase price multiples suffer.
In the current environment, if your business performed well in
2009 and has continued to perform well this year, this may be
the ideal time to sell. There is a tremendous backlog of larger
restaurant deals that will be coming to market when business
fundamentals improve across the economy. Well-performing
franchise businesses (especially Tier 1 franchises) are again able
to attract financing and growth prospects are strong given the
economic fundamentals. If you wait too long, the market may
become more crowded with sellers as the performance of others
catches up with your performance.
What advice would you give someone considering purchasing a franchise?
A: First, understand the business opportunity. If financial
information is provided, focus on averages and what’s realistic.
Don’t focus on what’s possible, but what’s probable when it comes
to sales and profits. Second, make sure the franchisor will provide
you with the support you need. The age old adage “location is
everything” still holds true today. Picking a location is the most
important decision you have to make, and it’s difficult to correct a
mistake. After opening, you need marketing programs and support
to help you drive sales. You should fully understand the quality
of what you get from the franchisor in exchange for your monthly
royalty payments.
What is the state of financing for equipment purchases/upgrades?
A: Your best source for financing equipment purchases or
upgrades is your existing lender. Financing is also currently
available on a one-off basis for purchases of new point-ofsale
systems, kitchen equipment and furniture, but this type of
financing tends to be more expensive than conventional bank
loans. However, it can be a source of funding for smaller operators
with limited access to capital.
What’s the upside in the current environment for the restaurant industry?
A: In general, now is a good time to be investing in the restaurant
industry. The recent economic data support a recovery in
consumer discretionary spending, and restaurants are a relatively
inexpensive extravagance for the average consumer.
While store unit growth may remain subdued for some period of
time, individual unit productivity should increase with improved
sales and profits. And while you have to be careful looking for
the “next big thing,” I think that consumers are looking for higher
quality product and more convenience in their lives; thus the rise
of fast-casual concepts. Brands that can deliver high quality and
high convenience will outperform their peers -- think Panera and
Chipotle, both concepts which deliver in well-established segments
of the restaurant business (bakery/deli and Mexican) but have an
established brand image (and execution to back it up) of higher
quality than their competitors.
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Members of the press who have an interest in speaking with Robert (Bob) Bielinski can contact curt.ritter@cit.com
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