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Landry’s and Inspire Brands continue the consolidation trend

The presence of growing operating companies will continue to put pressure on stand-alone chains to get larger, says RB’s The Bottom Line.
Photograph courtesy of Jimmy John's

the bottom line

With its purchase of Jimmy John’s last week, Arby’s owner Inspire Brands has in short order become one of the country’s largest restaurant operators, with five brands, including four large concepts, in a variety of menu types.

Meanwhile, multiconcept operator Landry’s added a few more concepts into its already sizable fold, agreeing to buy Del Frisco’s Double Eagle Steakhouse and Del Frisco’s Grille, along with Restaurants Unlimited.

We’ve lost track of how many concepts Landry’s operates, but the Houston-based company owned by Tilman Fertitta has chains accounting for well over 500 overall locations.

While both deals make sense for their respective owners, they continue an unmistakable pattern of consolidation in the restaurant space. Strategic buyers have been especially active in recent years, snapping up concepts large and small as they’ve sought to get larger by bringing on more chains.

Earlier this year, for instance, Cracker Barrel made an investment in Punch Bowl Social and then detailed its strategy for becoming a three-concept company. The Cheesecake Factory, meanwhile, made the year’s most interesting acquisition with its purchase of restaurant creator Fox Restaurant Concepts.

Other companies are clearly on the hunt, too. The Del Frisco’s Restaurant Group bidding, for instance, featured several potential buyers: a handful of private-equity firms eyeing growth chains Barcelona Wine Bar and Bartaco, and a handful of strategic buyers gunning for the steak concepts.

Private-equity firm L Catterton won the bidding largely because it was willing to buy the whole thing. It then kept the growth chains for itself and found an eager buyer for the steak chains.

Private-equity firms want growth chains and will pay big to get them. But they are increasingly willing to let strategic buyers take on the more established names.

Strategic buyers are taking on these more established companies because it’s getting increasingly difficult to grow otherwise. Cheesecake and Cracker Barrel are both slow-growth concepts, and they’re banking on their acquisitions to help correct that.

At the same time, however, there is a growing sense among executives that they need to get bigger to increase their competitiveness and fund efforts to increase data use and add consumer-facing technology.

The restaurant industry has, overall, entered into a low-growth era. There are too many restaurants and too many chains. Consumers are diversifying their spending and are demanding more convenience, which has led to an incredible shift in the way they use restaurants, and which restaurants they use.

Large chains thus have to spend big on innovation to develop products that customers are interested in, and they have to spend big on technology to take advantage of the takeout trend.

And the largest companies continue to spend big on their own efforts, which is only adding to that pressure. McDonald’s, for instance, has made two technology company acquisitions this year in Dynamic Yield and Apprente.

Restaurant Brands International, meanwhile, set its Popeyes Louisiana Kitchen menu development team to work over the past couple of years. The result was a chicken sandwich so popular it has largely upended the fast-food business.

Inspire Brands was created two years ago with the combination of Arby’s and Buffalo Wild Wings. It has since added Sonic Drive-In and now Jimmy John’s, and plans to operate as many as 10 chains. By operating more concepts under one roof, the company will be better equipped to fund all of their respective needs.

The risk in all this is that it becomes difficult to keep all these chains heading in the same direction. Investors have proven themselves very willing to demand breakups at companies that can’t demonstrate consistent operating growth—illustrated by the recent Del Frisco’s breakup, for instance, as well as demands from some investors that Bloomin’ Brands sell some of its chains.

Still, as the industry continues to grow more competitive, technology becomes more important and social media demands a constant flow of innovative products, we’d expect more chains to consolidate in the future. And stand-alone chains that can’t generate growth on their own will feel more pressure to join the fray.

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