Last week, Alex Sloane, the cofounder of the private-equity firm Garnett Station Partners, acknowledged the risk when an investment firm buys a restaurant chain and then tries to do too much with it. “All companies are one or two private-equity decisions from becoming Ruby Tuesday,” he said.
To be sure, we’ve seen plenty of examples of strategic deals gone bad, too, for largely the same reason. But the quote came to mind almost immediately when news broke this morning that Blackstone, a giant private-equity firm, was buying a majority stake in Jersey Mike’s, one of the best-performing restaurant chains in the nation and one with a rightful claim as “the next Chipotle.”
And I wasn’t the only one who thought of it.
Posting this photo for absolutely no reason at all. https://t.co/35a964wahvpic.twitter.com/vNkso44B5N
— Jason Cox (@jasoncoxnc) November 19, 2024
Indeed, skepticism was a rather common reaction to the news.
nooooo they are going to ruin it, sad
— Adam Singer (@AdamSinger) November 19, 2024
The reaction is a testament to the reputation private-equity firms have in the finance space. Some of the year’s most notable bankruptcies can be traced to one or two of those aforementioned bad decisions. There’s Red Lobster (a bad sale-leaseback) and TGI Fridays (excessive debt) and pick-your-fast-casual-chain (expensive leases).
The key for Blackstone is to just let things be and enjoy the fruits of its investment. It is spending a large amount of money to acquire one of the best growth chains in the restaurant industry. Changing that too much could indeed ruin much of what has made the brand successful.
Jersey Mike’s is thriving largely because of owner Peter Cancro’s willingness over nearly 50 years to go against the grain and do what he believes is right for the business. The company has developed a culture that has enabled it to gain significant market share from the giant Subway while it outpaces all other fast-casual sandwich rivals.
The brand operates with a relatively simple menu, particularly compared with rival Subway and its massive set of offerings. It notably funded franchisees’ remodels, a decision almost unheard of in a franchise in which the franchisor doesn’t own a piece of the real estate.
The company’s quality, its marketing and those remodels drove unit volumes so high that the company more than made up for its remodel spending with the additional royalties. But it’s difficult to imagine a private-equity owner signing off on such a move.
Then again, it’s also difficult to imagine public stock investors signing off on such a move. Activist investors will often pounce on what they see as excessive capital spending. Any sort of slump after such an investment could bring some form of recrimination.
The sale also marks a much bigger move into the franchise restaurant space by Blackstone, which has made a number of notable deals recently for franchised companies. It is a big investor in 7 Brew. It paid a big multiple for Tropical Smoothie Café earlier this year. It now has a new “flagship,” as it calls it, in Jersey Mike’s.
While the market for buying actual restaurants remains weak, even if there are signs of improvement, private-equity firms and other buyers will almost always snap up a franchise and that profitable royalty stream. This year probably demonstrates that more than any other.
But there is no reason that Jersey Mike’s cannot thrive with a different owner from the one it’s had for more than 50 years. Blackstone just has to let the company do what it always has.