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How restaurants are mimicking the grocery business

A consolidation trend that started with supermarkets has spread to restaurant chains, and that has major implications for the industry, says RB’s The Bottom Line.
Photograph: Jonathan Maze

the bottom line

In recent years, supermarkets have done a lot to be more like restaurants, adding upgraded prepared food options and even entire restaurants, or, in the case of Hy-Vee, becoming a restaurant franchisee.

But restaurants have started following the grocery business recently in one very important manner: by consolidating.

A consolidation trend in the restaurant space picked up steam in 2018 and shows little sign of stopping anytime soon. In fact, it appears likely that various industry trends will continue pushing restaurant chains to gather together in groups for years—much of which is happening in the grocery space.

“There’s been a long consolidation wave occurring in the grocery sector over the past 20-plus years,” said Scott Moses, managing director for investment banking firm PJ Solomon, talking on our podcast earlier this month. “We think the same kinds of forces driving consolidation in the grocery sector are very much at play, although at more early stages, in the restaurant sector right now.”

There have been some major deals in recent years in the grocery business, such as the $28 billion merger of Delhaize and Ahold in 2016, the $9.4 billion Albertsons-Safeway deal the year before, and of course the shocking Amazon-Whole Foods Market purchase in 2017. There have also been many other smaller deals and a lot of activity in the wholesale part of the business.

My counterpart with Winsight Grocery Business, Jon Springer, told me that the grocery business is consolidating because companies need economies of scale to compete on price with Walmart and other discounts, and on convenience with Amazon.

What’s more, he said, there is a sense in the grocery business that major players will either have big stores, such as Walmart and Costco, or small ones, such as Sprouts Farmers Market.

All of this is driving a period of consolidation in what had been a traditionally fragmented market.

All of which appears to be on the horizon in the restaurant business.

Earlier this week, I discussed the problems midsized restaurant chains are having and how that could drive more merger and acquisition activity in the coming years.

Essentially, consumers love independents and small chains, while large-scale concepts such as McDonald’s, Domino’s Pizza and Starbucks can spend big on delivery, digital strategies, remodels and marketing to drive more business to their restaurants. Midsized concepts can’t keep up.

In addition, rising labor, rent and construction costs, and periodic commodity inflation, all put more pressure on profit margins. Companies increasingly believe they can get more economies of scale by banding together.

There are numerous investors that view the midsized market as ripe for consolidation. Rego Restaurant Group, the owner of Quiznos; Fatburger owner Fat Brands; FoodFirst Global Restaurants; Pinkberry owner MTY Group; Tilted Kilt and Dick’s Wings owner Arc Group; and many, many others are all actively looking for restaurant deals.

“Our firm thinks that there are a number of opportunities in the food and beverage industry, certainly in 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,” Gerry Lopez, operating partner with High Bluff Capital, told me last year following the firm’s acquisition of Quiznos and Taco Del Mar. Now named Rego, the company is still looking for deals.

On the other side of this are the big deals for large-scale chains. Strategic acquisitions sped up in 2017, when Darden bought Cheddar’s Scratch Kitchen and Burger King owner Restaurant Brands International (RBI) acquired Popeyes Louisiana Kitchen.

That continued last year, when Arby’s bought Buffalo Wild Wings and created Inspire Brands, which then bought Sonic and apparently is looking at other deals. It might be no coincidence that the man behind Inspire, CEO Paul Brown, came from the hotel industry, which went through a consolidation phase of its own.

Multibrand companies have a mixed history. For years, investors pushed multibrand operators to split up or sell ancillary concepts to focus on a single brand. Those days are probably over, as companies such as RBI and Yum prove that multiconcept companies can do the job.

“I think we’re in an environment where you acquire or you get acquired,” Nishant Machado, CEO of Romano's Macaroni Grill, said last year before the brand bought Sullivan’s. The company is looking for another brand. “We want to be the acquirer.”

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