OPINIONFinancing

Will Subway make Roark Capital too dominant? Not really

The Bottom Line: The addition of the sandwich giant will make Roark a bigger player than McDonald's in the U.S. But its position in the sandwich market will not be all that unusual.
Roark Capital
Adding Subway to a roster that includes Jimmy John's will give Roark Capital a huge piece of the sandwich market. | Photo courtesy of Jimmy John's.

The Bottom Line

Assuming Roark Capital completes its purchase of Subway for $9.6 billion, and that appears likely, the Atlanta-based private-equity firm will have solidified its status as the go-to buyer of franchised chains.

But it has raised questions about whether it has become too dominant—to the point where its competing buyers wondered whether the U.S. Federal Trade Commission would nix the deal.

And, indeed, an acquisition of Subway would effectively make Roark Capital the largest owner and/or investor in restaurant chains in the U.S., based on sales, taking it past current title holder McDonald’s. And it would give Roark a dominant position in the market for sub sandwiches, thanks to its existing ownership of Jimmy John’s.

But this doesn’t mean that Roark will have a level of dominance that it should put that deal into question. The restaurant industry is broad, big and diverse, even if it is shifting more toward chains than independents. And how consumers pick their restaurants is entirely too complicated.

Roark owns Inspire Brands, Focus Brands, CKE Restaurants and other chains and is a major investor in Culver's. We examined the system sales of the chains Roark Capital is acquiring, using data from Restaurant Business sister company Technomic. And we compared the private-equity firm’s holdings with the market share of other major restaurant operators. We did not include Cheesecake Factory or its chains into the calculation, given that Roark is a shareholder of a publicly traded company.

Still, there is little question that the Subway deal will put Roark into a stratospheric territory. Subway last year generated $9.8 billion in system sales, making it one of the 10 largest chains in the U.S. based on that metric and giving Roark three of the 12 largest chains along with Dunkin’ and Sonic. All told, its restaurant brands generated $49.2 billion in system sales last year.

That is slightly more than the $48.7 billion in U.S. system sales McDonald’s generated last year.

Roark’s holdings accounted for more than 7% of total restaurant sales last year, which is a substantial percentage only in the context of the industry’s overall diversity. Yet it is not that substantial compared with other industries such as, say, grocery.

At the same time, the restaurant industry has shifted substantially toward larger chains and larger operators.

Combined, in fact, Roark Capital, McDonald’s, Yum Brands and Restaurant Brands International—just four companies—accounted for more than 21% of total restaurant sales last year.

Yet it is also worth examining Roark in context of the markets it is in. First, we can look at its limited-service holdings in relation to the overall market for limited-service restaurants, under the idea that consumers will generally opt for either full or limited service and will then decide from there.

In that context, Roark’s holdings are smaller than that of McDonald’s, which accounted for nearly 14% of the $355 billion in sales generated by limited-service restaurants last year. Roark’s fast-food brands, which generated $44.6 billion in sales last year, accounted for less than 13%.

Then there is the market for sandwiches. This is where the analysis gets particularly complicated.

The question of competition is always a tricky one in the restaurant industry because consumer decisions are not quite so cut-and-dried. You might choose McDonald’s for breakfast over Cracker Barrel, for instance, because you wanted an Egg McMuffin and wanted to get to your destination more quickly. But maybe you changed your mind, take your time and get some chicken-fried steak and eggs instead.

We generally think of Subway as competing with the likes of Jimmy John’s, Jersey Mike’s and Firehouse Subs. But the company views its competitive set much more broadly. They consider McDonald’s a competitor, for instance, though the feeling is not quite reciprocated. And Subway definitely considers many of the Roark brands to be competitors, including Arby’s and McAlister’s Deli.

Those brands fall under Technomic’s definition of limited-service chains. Roark again has a big position, but not any more dominant than some of the biggest chains enjoy in their respective markets.

Roark before the Subway deal already had a substantial piece of this market, thanks to its ownership of Arby’s and Jimmy John’s, about 19%. Subway will more than double that total, to 42%.

That does not particularly stand out. For instance, McDonald’s accounts for 47% of the limited-service burger market and Chick-fil-A somewhat surprisingly makes up 41% of the chicken business. Taco Bell accounts for 43% of the Mexican market.

To be sure, if we do narrow the competitive set to the segment of sub-sandwich chains, then Roark does have a dominant position, accounting for 60% of those sales.

Then again, Roark is buying a chain whose sales have been weakening and which has been closing locations. Subway alone would have 60% of the sub sandwich market last year if its sales had simply kept pace with inflation over the past decade.

Then again, if that were the case then Roark probably would not have been able to acquire Subway in the first place.

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