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What High Bluff Capital sees in Quiznos

The chain’s new owner sees opportunity in buying shrinking restaurant chains, says RB’s The Bottom Line
Jonathan Maze

The Bottom Line

Most people would not look at a restaurant chain that has lost 90% of its unit count over the past decade and think that was something they’d like to acquire. But Gerry Lopez is not most people.

Lopez is the operating partner for High Bluff Capital. Last month, the San Diego-based private equity firm bought Denver-based Quiznos, which has lost most of its U.S. units over the past decade.

He then turned around and bought another company with shrinking unit count in Taco Del Mar.

Why?

“Our firm thinks that there are a number of opportunities in the food and beverage industry, certainly the restaurant industry, to pick up brands that have very solid, well-established, long-tenured relationships with customers, and that for whatever reason have fallen on hard times,” Lopez said in an interview.

And his comments perfectly illustrate a reality in the restaurant business: Brands have value, even when they’re declining. There is usually somebody willing to pick up a declining concept and take a chance on the company.

These days, there are plenty of those investors around. Several private equity firms have emerged in recent months with the set goal of collecting declining brands and repackaging them under a single owner.

GP Investments bought Bravo Brio Restaurant Group, on the verge of bankruptcy, and created a new operating company called Food First Global Restaurants, with the goal of buying another concept.

Bravo Brio had another bidder in Macaroni Grill—which filed for bankruptcy protection only last year—and believes it, too, would be better off as part of a multibrand company.

“There’s a bunch of us doing it,” Lopez said. “But the good news is that the sandbox is huge.”

Indeed, there are plenty of smaller restaurant chains that all of these companies could acquire. There were 31 restaurant chains among the Technomic Top 500 Chain Restaurant Report that had sales declines of 10% or more last year, for instance.

But there are almost 100 that had sales declines of 4% or more last year. “With the industry at this maturity level, the industrial logic of what we’re trying to do to me is inescapable,” Lopez said. “Duh. Of course.”

But Quiznos is no ordinary restaurant chain on the decline. It has less than 400 units in the U.S., less than a 10th of what it had in 2007, when the company was one of the country’s hottest growth chains.  

A series of problems, both in and out of the company’s control, conspired to turn the chain into a zombie concept—a restaurant that is not growing but is struggling to survive.

To Lopez, the issues that hurt Quiznos are all done.

“All those issues are in the past. They are no longer our issues,” he said. “If a brand is going to turn around, this is the moment.”

And Lopez says this: Quiznos’ problem wasn’t fundamental to the brand itself. Consumers still love the sandwiches. That means there is something there for High Bluff to turn around.

“The one element of this brand that doesn’t get talked about or noticed is its relationship with the guest,” he said. “That has remained through it all and is largely intact. If you ask people about the brand, a majority of folks will say, ‘I remember Quiznos. That was good stuff. What happened?’

“No one is saying the sandwiches were terrible. They just say there used to be a store near them, and it closed, and they don’t know what happened. That we believe is a positive indicator.”

What the brand needs, he said, is stability and transparency, or “treating franchisees as partners and not a source of income or cash flow.

“We think the opportunity is there for the brand to stabilize and in short order show some positive growth.”

But, he said, “We don’t anticipate going back to the days of 4,000 stores.”

He also said it would be a long-term comeback. “To be succinct: It didn’t get here in two months. It’s not going to come back in two.”

Taco Del Mar has also been in decline. Domestic unit count declined 11% last year, according to Technomic data, while system sales declined more than 9%. It operates 87 units in the U.S. and 41 in international markets.

Its unit count is down by half from its peak, Lopez said. “It’s a very, very consistent, similar journey” to Quiznos, he said. “The numbers are different. The geography is different. But the pattern is there.”

Lopez believes that both of these companies can benefit from High Bluff’s patient capital. The private equity firm doesn’t need to sell after five years, so it can make investments to ensure long-term success. And gathering brands under one roof can help them benefit from sharing certain costs.

That said, any number of investors made similar efforts over the years, especially after the recession, with varying degrees of success. Landry’s, for instance, has thrived by collecting all sorts of brands.

But then there are companies such as American Blue Ribbon Holdings, a company formed when the title insurer Fidelity National Financial bought chains such as O’Charley’s, Village Inn and Bakers Square in the aftermath of the recession. American Blue Ribbon is currently splitting into multiple parts.

Still, companies are giving it another run. And Lopez believes that patient capital and treating operators as partners rather than “a source of cash flow” will work.

“We don’t have specific milestones,” he said. “We have targets, internal targets that we believe are achievable. They hinge on sustainable growth, finding the right franchisees and the right market opportunities, rather than just sign up a bunch of people. That’s been tried. And it landed us where we are.”

Then again, he said, “It gave an opportunity to our firm. It gave us the opportunity to pick up [Quiznos] at this stage of its evolution.”

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