Are activist investors a positive or negative force in the restaurant industry? RB Executive Editor Jonathan Maze and Editor-at-Large Peter Romeo offer opposing points of view. For the alternate take, see The Bottom Line.
I admit it: A few tears fell here when news broke of Sardar Biglari’s retreat from Cracker Barrel Old Country Stores, the venerable brand he’s nagged and derided since starting to amass shares in 2011. Now he’sselling some of his stock, without the hoopla that accompanied the purchases. Who wouldn’t weep for joy at seeing a professional bully rebuffed and humbled?
Biglari is the epitome of the activist investor, the gadfly who amasses enough of a stake in a restaurant business to merit management’s attention when he (and right now, they’re virtually all he’s) disagrees with the corporate strategy. The cage rattler insists he knows more than the brand’s longtime handlers about how to succeed in today’s restaurant market, even if his experience with restaurants amounts to dining in them.
Biglari did have experience, which he touted as irrefutable proof he was Cracker Barrel’s savior and a repairer of brands in the Warren Buffett mold. After all, he held the reins to Western Sizzlin’ and Steak ‘n Shake, powerhouses synonymous with McDonald’s and Starbucks (insert the first eye roll here).
I have nothing personally against Biglari, whom mutual acquaintances praise as a respectable figure with plenty of fundamental business smarts. But his modus operandi has been the industry equivalent of a Don Corleone business proposition, a practice that enriches investors at the expense of a brand’s long-term health. The big losers are customers and the employees who serve them.
Activists have been the Draco Malfoys behind some of the industry’s most detrimental present-day trends, from the asset-light approach to development, to letting someone else own the ground beneath a chain’s buildings. They have little faith in the vision and leadership abilities of CEOs and other C-level executives who rose to their posts in organic fashion, preferring their own inexperienced associates. The same mentality leads to demands that boards be reconfigured in accordance with the investor’s wishes, a standard operating procedure in the buy-and-bully process.
The renegades often find sympathizers among their fellow investors. Starboard Value, for instance, could not have replaced the whole board of Darden Restaurantsback in 2014 without the widespread conviction among stockholders that a change in the company’s direction was desperately needed.
Activists’ defenders are still crowing about what happened at Darden, citing it as the classic illustration of the good malcontents can do with their demands for change. The parent of Olive Garden and The Capital Grille seemed adrift beforehand, a victim of its own success. Starboard and its allies forced the company to make such moves as selling the real estate beneath its restaurants and reshuffling management. Now the casual-dining giant is out-pacing the industry by a few laps.
Few would argue that Darden needed a jolt, and management couldn’t seem to get the electrodes affixed. Problems arise when patience is more of an imperative than the need for change, but the activist isn’t willing to wait for a bigger payback. Instant redirection is demanded, even if the benefits are short-lived.
We’d likely see fewer franchisor-franchisee disputes today if chains had rebuffed activists’ demands that company stores be spun off to franchisees. Buying back stock can raise the value of the shares controlled by an activist, but it’s also a deployment of capital that could otherwise have been used for investments with a long-tail payback, such as securing better talent and technology.
Perhaps the biggest detriment is the loss of knowledge and passion, the collateral damage from forcing out seasoned management. Starboard is actually a case in point. After CEO Clarence Otis was pushed out, the activist and its hand-picked board decided to bring in someone from the outside. The expectation was that Gene Lee would serve as chief on an interim basis, and then ride off into the sunset himself.
Fortunately for all parties, the company recognized they had a star in house, and gave Lee the CEO’s post on a permanent basis. Few would refute that his leadership is key to the company’s outstanding present performance, but that turn of events almost didn’t happen because it veered from the Activism 101 text.
It really comes down to what constituency ultimately delivers success to a restaurant brand. Yes, shareholders are important. Employees are essential as well, especially in today’s challenged market.
But the true key is the customer, and somehow patrons’ well-being seems a minor consideration in the machinations of most activist investors.
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