Edit
Financing

No more megachains?

The days in which a concept can expect to become really big are probably over.
Photograph: Shutterstock

top 500

One of the most interesting deals of recent vintage was announced in February, when the fast-casual growth chain Modern Market said it plans to merge with fellow fast-casual growth chain Lemonade Restaurant Group. It was a rare combination of two modestly-sized growth concepts. But it also could be the wave of the future.

One of the engineers of that deal, Modern Market cofounder Anthony Pigliacampo, joined me recently on Restaurant Business’“A Deeper Dive” podcast to explain it—and his reasoning is something every smaller or midsized chain needs to consider. “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 Millie 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 Company in 1987 (or the founding of Au Bon Pain in 1980). It is now the 10th-largest restaurant chain in the U.S., according to Technomic’s Top 500 Chain Restaurant Report. 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 with quick-service chains that are dominated by a handful of companies, led by McDonald’s, Starbucks, Subway, Taco Bell and Chick-fil-A.

Such chains can do things like invest $200 million into delivery—as Taco Bell owner Yum Brands did with Grubhub last year—or spend $300 million on a company just to get ahold of its proprietary menu board personalization technology—as No. 1 McDonald’s did in buying Dynamic Yield. Large chains are increasing the cost of doing business, and last year the largest fast-food chains easily outperformed smaller and midsized quick-service concepts on average, according to Top 500 data.

For another thing, today’s chains tend to be more specialized and aimed at smaller groups of consumers. Chipotle has been able to grow, in part 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, better-for-you 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 vast 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 that rockets up our Top 500, they can create the next mega-operating company.

Want breaking news at your fingertips?

Get today’s need-to-know restaurant industry intelligence. Sign up to receive texts from Restaurant Business on news and insights that matter to your brand.

Trending

More from our partners