Not that long ago, Wall Street couldn’t push multibrand restaurant companies hard enough to sell off concepts.
Now, Wall Street can’t seem to push restaurant companies into buying additional brands.
Exhibit A is The Cheesecake Factory.
On Thursday, Maxim Group analyst Stephen Anderson wrote in a note that he expects the Calabasas Hills, Calif.-based chain to make a decision in the next couple of quarters on a potential acquisition.
And he expects that acquisition to be of North Italia, a 13-unit upscale-casual chain created by Fox Restaurant Group.
Two years ago, Cheesecake Factory invested in two Fox concepts, North Italia and Flower Child, a nine-unit fast-casual concept.
When Cheesecake agreed to invest in the two concepts, the agreement included the right to acquire a majority ownership in “either or both concepts.”
Anderson believes that North Italia is a better fit with the 218-unit, upscale-casual Cheesecake. It parallels the company’s demographic reach and its real estate strategy focused on class-A malls; the chain is growing, with four units planned this year, and could gain share in the coming years as competitors such as Bravo Brio close locations.
It would hardly be surprising to see Cheesecake make an acquisition in the near future. For one thing, companies are increasingly looking for growth. The U.S. restaurant market is largely full, making growth more of a challenge given real estate constraints and labor challenges.
Companies eager to generate planned revenue and profit growth, therefore, are looking more at buying existing chains.
Del Frisco’s Restaurant Group, frustrated that it couldn’t generate unit growth with its Del Frisco’s Grille concept, acquired Barteca Restaurant Group.
Some publicly traded company, likely Del Frisco’s, tried buying Fogo de Chao before it went private.
Last year, Darden Restaurants acquired Cheddar’s just a couple of years after it famously was pushed to split up its eight concepts—and after it actually did unload one by selling Red Lobster.
Dine Brands Global, the owner of Applebee’s and IHOP, has once again stated a desire to add a third brand to its company.
The challenge in acquiring ancillary brands, of course, is that a company can get distracted by one chain at the expense of another. The bigger potential problem: The acquired brand isn’t a good cultural fit.
And of course, Wall Street can later change its mind. Once a company begins to struggle, activists will frequently come out of the woodwork and push for a divestiture. Indeed, Jack in the Box recently sold Qdoba as it had activist investors hovering around the company. And Buffalo Wild Wings last year sold PizzaRev as it faced a battle with activist investors. Interestingly, it kept R Taco, and after the chain was sold to Arby’s, the fast-casual taco chain will be a growth concept for the new, multibranded company Inspire Brands.
As for Cheesecake, perhaps investors are OK with an acquisition. The company’s stock is up 10% so far this year, after falling 17% in 2017.
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