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Can the multiple brand approach turn struggling chains around?

RB’s The Bottom Line examines why investors are suddenly flocking to distressed restaurant concepts.
Photograph courtesy of Tilted Kilt

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It’s a good time to be a struggling restaurant chain.

Well, maybe not. But at the very least, such concepts have a host of potential investors willing to take them out and bet on a brand turnaround.

Several such investors are currently looking at acquisition opportunities, including High Bluff Capital-owned Rego Restaurant Group, which last year bought Quiznos and Taco Del Mar.

They also include FoodFirst Global Restaurants, which acquired Bravo Brio Restaurant Group last year; Romano's Macaroni Grill, which bought Sullivan’s Steakhouse; Arc Group, which bought Tilted Kilt; Elite Restaurant Group, which bought Noon Mediterranean and is buying up other, similar concepts; Fatburger owner Fat Brands, which has made several deals in just the past year alone; Shari’s Pies, which bought Coco’s and Carrows; and many others.

The companies’ acquisition push is coming as a consolidation trend in the restaurant space takes hold. Several larger companies are acquiring, too—we wrote yesterday about a speculated purchase of BJ’s Restaurants by brand operator Darden Restaurants, for instance. Companies such as Roark-owned Inspire Brands, Restaurant Brands International, Yum Brands, Dine Brands Global and probably others are potentially looking at deals.

But there are other elements at work pushing investors in small and midsize chains to look at acquisition opportunities.

To be sure, investors are always willing to take bets on struggling chains. It’s difficult to actually kill a restaurant brand once it’s established. And there have long been investors that cobble these concepts together into a multibrand outfit.

What’s different is the proliferation, as well as the reasons behind the midsize chain consolidation.

Investors see continued profit challenges in the industry going forward, as labor and other costs rise and demands for things such as technology and remodels increase. Midsize chains have a tough time keeping pace with the investment larger chains are making.

Corporate overhead, or general and administrative (G&A) spending, is another reason. As Rego CEO Tim Casey said on RB's podcast, "A Deeper Dive," last week, such costs can be expensive for a single brand.

“A stand-alone brand requires significant investment in G&A structure,” Casey said. By bringing multiple brands together, an investor can leverage that structure over multiple brands. And the larger company can attract more talented executives than could a single brand.

Plenty of examples exist of multibrand companies that have successfully operated their concepts, and Wall Street more recently has looked at this effort more favorably.

In addition, there are a lot of brands available. At least 31 restaurant chains in the Technomic Top 500 Chain Restaurant Advance Report saw sales fall 10% or more last year. Many others have seen sales fall at least 5%.

“There are opportunities out there where maybe things are not where they need to be, and it could be better if you sold,” Arc CEO Seenu Kasturi told me recently.

A few investors have successfully collected smaller brands into larger companies.

Canadian collector MTY Food Group now operates more than 70 brands and has made acquisition announcements a regular feature of its business. Landry’s owner Tilman Fertitta became the “Billion Dollar Buyer” thanks largely to acquisitions of low-cost brands.

Roark Capital-owned Focus Brands operates larger concepts, such as Moe’s Southwest Grill, Cinnabon, Jamba Juice and others, and is routinely speculated as a potential IPO candidate in the near future. It also proved the business case for newly created, Roark-owned Inspire Brands, now the owner of Arby’s, Buffalo Wild Wings and Sonic Drive-In.

At the same time, however, turnarounds are not easy work. A single turnaround is challenging enough, let alone two, three or a half-dozen. “You’ve got to have a certain DNA to be part of a turnaround,” Casey said.

Such turnarounds can be so challenging that they don’t work and lead to a breakup. Fidelity National Financial Chairman Bill Foley acquired a number of turnaround brands out of the recession, including Bakers Square, Village Inn, Max & Erma’s and O’Charley’s, and turned them into American Blue Ribbon Holdings (ABRH).

ABRH has had some financial challenges more recently, however, and failed to merge its Ninety Nine Restaurants concept with J. Alexander’s as the latter company’s investors balked at the plan.

Still, the days of multibrand companies are just beginning—whether a chain is big or small.

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