For much of the past year—and before that, if we’re being honest—the market for restaurants was different depending on what kind of service the concept deployed.
Counter service with a drive-thru? That market has been hot. Got wait staff? Don’t hold your breath for much.
That could be changing. With the end of the pandemic in sight as cases plunge and more people get vaccinated, some investors are starting to consider putting their money into full-service restaurants. “I am starting to see more and more folks who see the light at the end of the tunnel and are therefore ready to wade into the right situations,” Josh Benn, global head of consumer, food, restaurant and corporate at Duff & Phelps, a Kroll Business.
“There are a good number of forward-looking investors with enough conviction to start to make investments into the full-service dining space.”
To be sure, the market remains different based on various factors. Fast-casual chains with heavy concentrations in urban markets remain difficult to value, and fast-food chains with drive-thrus remain the hottest concepts.
At the same time, a growing number of industry observers view the market as increasingly favorable for full-service restaurants coming out of the pandemic.
For one thing, there are fewer of them—chains such as Ruby Tuesday, Logan’s Roadhouse and many others have trimmed locations while large numbers of primarily full-service local restaurants have shut their doors. That has removed some of the concern of oversupply going into the pandemic.
There’s also a belief that consumers will return to full-service dining once the pandemic is over. “People want to get back out and socialize,” Gene Lee, CEO of Olive Garden parent Darden Restaurants said back in September, according to a transcript on the financial services site Sentieo. He believes that takeout and delivery will dip back below where it had been pre-pandemic.
Wall Street has generally seen it that way, too. Darden’s stock is up 40% over where it was a year ago, a big jump considering that it lost almost three-quarters of its value last March. Texas Roadhouse and Chili’s owner Brinker International are up by similar levels.
Red Robin Gourmet Burgers, Cracker Barrel and Ruth’s Chris Hospitality Group are also up over the past year, while Dine Brands Global, which owns Applebee’s and IHOP, and Denny’s are nearing a complete recovery of stock price valuation.
It’s one thing to buy stock in a casual dining chain and another thing to buy one outright, but the market for mergers and acquisitions often follows Wall Street’s lead.
To be sure, a number of casual dining chains have been sold either for rock-bottom prices or in credit deals out of bankruptcy. Quaker Steak & Lube was sold for $5 million—one-fifth of the valuation it had when it was sold out of bankruptcy six years ago.
But the Tilman Fertitta-owned Landry’s reached a merger deal with the special purpose acquisition company (SPAC) Fast Acquisition Corp. that will take the owner of Del Frisco’s and Golden Nugget casinos public. Fast had previously been looking for a fast-food chain. And the eatertainment concept Punch Bowl Social appears to be generating some interest in its bankruptcy sale.
Benn, for his part, believes that the environment for full-service restaurants is expected to be “choppy” for the balance of 2021. But, he said, “the demand is going to be strong as time passes. Whether it’s in Q3 or Q4, there’s going to be a strong consumer bid in the market to go out to have entertainment. All those things are going to drive a nice recovery.”
But, Benn added, “it will probably take into 2022 until we start to see 2019 levels achieved again.”