Wall Street may be learning its lesson when it comes to the restaurant industry, at least if you look at the current crop of industry IPOs.
Dutch Bros, which priced its upcoming offering this week, focuses on customer experience, which is notable given that it is a drive-thru concept. It doesn’t franchise any longer, relying instead on existing employees to understand the system and the culture before they earn the right to become operators.
First Watch, which filed its public documents on Tuesday, was quietly revolutionizing family dining at a time when investors were throwing money at a crop of “next Chipotles.” Its restaurants are open just 7.5 hours a day, and yet they bring in about the same revenue per unit as the 24-hour Denny’s.
Portillo’s, which has privately filed, uses a broad, unique menu to generate remarkable unit volumes. Sweetgreen, which has also privately filed, seems more technology company than restaurant chain.
To be sure, the crop of companies considering initial public offerings, or having just completed them, includes its share of concepts making another run at the public markets after earlier go-private deals, like Krispy Kreme, P.F. Chang’s and California Pizza Kitchen.
Yet the ones that appear to be getting the most interest from prospective investors are chains with more intriguing business models than usual.
The restaurant industry has won some fans among public investors in part because of its resilience—big chains in particular survived a pandemic that seemed sure to wipe much of it out just 18 months ago. Also, the government for the first time stepped in with direct aid to keep many restaurants afloat. The result provided something of a backstop for what has typically been considered a risky business.
Yet there are also a lot of restaurants in the U.S. So, businesses with models that push the envelope from a business standpoint often win favor among equity investors, at least early on.
Dutch Bros is a drive-thru coffee chain at a time when giants like Starbucks and Dunkin are pushing for more drive-thrus, and it offers the type of culture-focused operations model that tends to win over customers for the long haul.
That puts it years ahead of other chains that are only now realizing that experience in the drive-thru matters—especially given that 90%-plus of quick-service visits are now through such lanes.
First Watch, meanwhile, went in the opposite direction of many other restaurant chains that keeping its operating hours to a minimum. Over the years, chains pushed into new dayparts like breakfast or late night, hoping to yield more cashflow. First Watch instead gives its managers time off with a breakfast-and-lunch concept it calls "daytime dining."
“Time off” is an important consideration at a time when workers are hard to come by. The brand can focus on what it does best. And the 7.5-hour opening time limits access to the brand, creating a certain amount of demand—meaning that customers who really want First Watch’s breakfast items have to go at that time and can’t simply wait until dinner when it might be less busy.
To be sure, just because a company has an innovative concept that does well in the lead-up to an initial public offering doesn’t mean it won’t stay that way, either because circumstances demand change or investors get antsy following a couple of bad quarters. Or maybe the business wasn’t as strong as it appeared.
In 2014, Papa Murphy’s went public offering a different idea for pizza with its take-and-bake model. But it also had a load of debt and a bunch of angry franchisees filing lawsuits because the brand expanded too quickly into areas that had no idea what take-and-bake pizza was. The company has since been sold to the Canadian brand collector MTY Group.
Ten restaurant chains went public between 2013 and 2015. Six of those chains were fast-casual concepts hoping to become the next Chipotle. Two of those six have been sold. Two others are still trading below their offering price.
One of the remaining two was Wingstop. The Dallas-based chain’s 2015 IPO flew somewhat under the radar at the time. But it introduced us to the idea of takeout chicken wings and since then has inspired an entirely new generation of delivery-only wing places. If you bought $10,000 worth of shares at its IPO you’d have $93,000 right now. Pushing the industry envelope pays.