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No more megachains?

The days in which a concept can expect to become really big are probably over, says RB’s The Bottom Line.
Photograph courtesy of Modern Market

the bottom line

One of the most interesting deals of recent vintage was announced last month when Modern Market Eatery said it plans to merge with Lemonade Restaurant Group—a rare combination of two existing growth chains.

One of the engineers of that deal, Modern Market co-founder Anthony Pigliacampo, joined me on the Restaurant Business podcast "A Deeper Dive" this week to explain it. And part of his reasoning is fascinating for today’s executives to think about.

“It appears to me very unlikely that somebody is going to build a monobrand that’s thousands of units over the next 10 years,” he said. “That’s not what the guest is looking for.”

In short, he said, the truly successful brands will be midsized when compared with the most successful brands of 10 years ago. He effectively says that chains’ growth ceilings are much lower than they’ve ever been.

To be sure, it’s never exactly been easy for brands to grow into large behemoths. Becoming a large national brand has always been something of a winning lottery ticket. For every KFC, there are dozens of Minnie Pearl’s Fried Chickens that never really amounted to much.

And there are some relatively recent examples of brands that have in fact emerged as large national players. Panera Bread traces its roots to the opening of the first St. Louis Bread Co. in 1987 (or the founding of Au Bon Pain in 1980). It is now the 10th-largest restaurant chain in the U.S.

No. 12 is Chipotle Mexican Grill, founded in 1993.

But it’s also true that the mountain for chains to climb to reach megachain status is a lot steeper than it once was.

First, the business is simply more competitive than it was just 10 years ago.

And existing megachains aren’t exactly surrendering their market share all that easily. That’s especially true in quick service, which is dominated by a small handful of companies led by McDonald’s, Starbucks, Subway, Taco Bell and Chick-fil-A.

Such chains can do things like throw $200 million at delivery or spend $300 million on fancy drive-thru menu boards. In so doing, large chains are increasing the cost of doing business, at least if you want convenience-focused customers.

For another thing, today’s chains tend to be more specialized and aimed at smaller groups of consumers.

Chipotle has been able to grow because it has a large customer base thanks to its customizable menu. But most of its fast-casual contemporaries have more focused, narrower menus—like, say, salad chain Sweetgreen.

Or they are targeted at a wealthier demographic, like Shake Shack—which is only planning to build a few hundred locations in the U.S., making it a rare destination fast-casual concept.

Such chains can’t expect to grow into megachains because they simply can’t attract the customer base to support it.

But Pigliacampo also believes that customers don’t want chains to grow too large. At some point, they lose what made them special.

“If there were 5,000 Shake Shacks, would it have the impact it has now when it has 100-something?” he said. “I don’t think so.”

The problem, of course, is that operating in today’s world is a lot more complex and expensive. Thanks in part to all that spending by the largest chains, it takes more to operate a fast-food brand now than it ever has.

As Pigliacampo noted, less than half of Modern Market’s orders originate in the restaurant these days. Nine years ago, that was 90%. “We’re running two different businesses now,” he said, referring to catering and online ordering, along with the typical in-restaurant experience.

The response to those demands: Merge one smaller growth chain, Modern Market, with another, and create a company that could possibly acquire more such concepts.

And so while entrepreneurs might not be able to create the next megachain, they very well could create the next mega-operating company.

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