6 reasons for restaurants’ massive consolidation wave

Here’s why chain owners are engineering the greatest merger wave in industry history, says RB’s The Bottom Line.
Photo Illustration: RB Staff

The Bottom Line

Soon there will be no more publicly traded restaurant chains, outside of McDonald’s. Everybody else will be part of a large restaurant conglomerate.

Or it sure seems that way these days, following the sale of Sonic Corp., coming on the heels of the sale of Sullivan’s to Romano's Macaroni Grill, coming on the heels of the sale of Zoes Kitchen, coming on the heels of Del Frisco’s purchase of Barteca, coming off Focus Brands’ purchase of Jamba Juice, coming off … well, you get the idea.

I did not expect the Roark Capital-backed Inspire Brands to take on another brand so soon after its creation following Arby’s acquisition of Buffalo Wild Wings and Rusty Taco earlier this year.

But the sale of Sonic means there is another, big brand consolidator out there operating, along with JAB Holding Co. and the 3G Capital-backed Restaurant Brands International (RBI).

There are also several smaller consolidators, including the just-emerged-from-bankruptcy Macaroni Grill, the new owners of Bravo Brio Restaurant Group and the new owner of Quiznos.

Plus, there are existing strategic buyers on the public markets that recently added, such as Del Frisco’s and Darden Restaurants.

Oh, then there is this: Recall that, before the John Schnatter incident, the founder of Papa John’s was talking with The Wendy’s Co. about a potential combination.

The upshot: This might be the most significant period of restaurant brand consolidation the industry has ever seen. And just about every restaurant company in the U.S. outside of McDonald’s and Starbucks is a potential target.

Why is this happening? Here are a few reasons.

Proliferation of long-term investors

There’s one commonality between Inspire Brands, JAB and RBI, outside of their obvious interest in the restaurant space: They are long-term investors, not five-year flippers.

Typically, private-equity firms exit their investments within five years. They will only pay certain prices, because they need to make a profit. But Roark, JAB and RBI don’t have such limitations, and they look more at the total price and the target’s long-term growth potential.

That means they can target bigger and more expensive companies. And restaurants such as Panera Bread, Tim Hortons, Popeyes and others that might have been too big for most investors to swallow have become targets.

Growth challenges

This is a saturated market. It’s harder to generate growth by simply operating one chain any longer. That makes the acquisitions market more attractive for restaurant companies, which view purchases as a way to get bigger.

That was certainly the case last year when Darden bought Cheddar’s Scratch Kitchen, a purchase the company made to hit its long-term growth targets. The same could be said for Del Frisco’s, which failed to develop its own growth chain and therefore bought the owner of Bartaco.

Copycat syndrome

Perhaps no business on earth is as prone to trends as the restaurant industry. There are sometimes good reasons for this, namely that consumers are fickle, and evolving with their changing demands is important.

But how often have we seen trends take hold quickly? There was the 1990s bagel boom. There have been two booms in frozen yogurt.

When some companies found success on Wall Street by refranchising, other companies decided to do the same thing.

After Chipotle and Panera Bread found success, investors and restaurateurs fell all over themselves creating and funding and expanding similar concepts.

When McDonald’s thrived after shedding ancillary concepts and concentrating on its one brand, investors pushed companies to concentrate on single brands. But the success of RBI and JAB have pushed the pendulum in the opposite direction.

Cost concerns

This is not an easy industry to operate in at the moment. Labor costs are high. So are rent costs. The business is super competitive.

Companies view consolidation as a way to improve their profitability, because such companies can share certain services to reduce central costs.

This is especially true for chains on the edge of survival, something I pointed out in a previous post. Buyers are finding struggling concepts and pairing them with similarly situated chains, hoping that they will help one another succeed. Or at least not die.


Interest rates are low, so the loans many buyers are using to make these purchases are relatively cheap, helping to drive up costs. The number of lenders operating in the space also encourages more deals.

As long as interest rates remain low, investors and strategic buyers will be willing to make deals.

Cheap chains

Restaurant companies’ valuations have fallen in recent years, as investors worried about sales and the companies themselves didn’t quite match expectations. That has made a number of chains ripe for the picking, especially when there are so many buyers out there.

So what now?

The consolidation wave currently hitting the restaurant industry probably won’t end anytime soon, unless some of these bigger buyers head for the sidelines to concentrate on actually running their restaurants.

But it could also pressure some other companies that not long ago focused purely on their own concept to reconsider going it alone. Maybe that means Wendy’s buys something. Perhaps Domino’s decides to work its technological magic on another brand, or somebody decides to buy Subway.

Whenever this consolidation wave finally recedes, however, the chain restaurant industry is going to look a lot different than it did just two years ago.

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