RaceTrac, the convenience-store chain, completed its surprising acquisition of the sandwich brand Potbelly last week, and I don’t know that we fully appreciate just how interesting a deal that one was.
It is the largest acquisition of a restaurant chain by a convenience-store brand, at least in recent history. It is also a direct indication of just how much these two industries are competing for the same group of customers.
But it is also particularly risky. The track record of companies that aren’t restaurant chains owning restaurant chains is not good, which suggests that RaceTrac will need some wherewithal to make it work.
First off, a lot of convenience store operators own a lot of restaurants in one capacity or the other. But they typically operate them as franchisees or they have created their own, proprietary brand.
For instance, the c-store giant 7-Eleven plans to open 1,100 new restaurants by 2030. It already operates or franchises more than 600 Laredo Taco Company restaurants and 60 Raise the Roost Chicken and Biscuits. And a lot of convenience stores, like Wawa or Sheetz, operate like restaurants that sell gas.
But buying a restaurant chain outright? That doesn’t happen. The closest we could come to the RaceTrac-Potbelly deal came in 2015, when the truck stop operator Travel Centers of America (TCA) surprisingly acquired the strangely named Quaker Steak & Lube out of bankruptcy in 2015.
That deal did not work well. By 2021, TCA sold Quaker Steak for $5 million.
It is more common outside the U.S., but even then the track record is iffy. EG Group, the U.K.-based operator of convenience retailers. It has acquired a few restaurant chains over the years, like Cooplands and Leon. It divested the former and then shifted Leon to a grocery company in which the owners of EG held a majority stake, Asda.
EG does operate a lot of fast-food chains as a franchisee, such as Subway, Starbucks, KFC and Burger King. Interestingly, it made a play for Subway that ultimately went to Roark Capital, which would have been interesting, to say the least.
But on balance, convenience stores don’t buy restaurant chains outright for the same reason other businesses don’t: It usually doesn’t make much sense for a company in one industry to buy a company in another industry. Conglomerates are less common these days. And there aren’t the economies of scale to justify any such deal.
Maybe more to the point: While restaurants seem relatively easy to operate, they really aren’t. The business is competitive and eventually there is pressure to reverse the deal. Companies or their investors can quickly get buyer’s remorse.
Historically, a lot of restaurant chains like Burger King or Taco Bell were owned by companies in other industries, such as Marriott, Pillsbury or PepsiCo. They ultimately shed those chains because restaurants weren’t their core business.
In recent years there have been a few examples of non-restaurant companies delving into the restaurant business.
The most prominent recent example was Callaway Brands, the golf equipment maker that in 2020 bought the food-and-golf chain Topgolf. Callaway then renamed itself Topgolf Callaway Brands because it was so happy with the chain’s performance. But by last year Topgolf was headed for a spinoff. This year Topgolf laid off workers and watched its CEO take a job with Harley Davidson.
The owner of Edible Arrangements, which is restaurant adjacent, just acquired the fast-casual Mediterranean chain Roti. Sony Pictures, which has absolutely nothing to do with restaurants, acquired the movie chain Alamo Drafthouse. But in that case we should consider Alamo a theater operator and not really a restaurant.
And then there was Fidelity National Financial, whose chairman is Bill Foley, who was the CEO of CKE Restaurants in the 1990s. Fidelity began buying cheap restaurant chains coming out of the Great Recession, including names like Baker’s Square, Village Inn, Max & Erma’s, O’Charley’s and J. Alexander’s.
That era lasted just a few years before activist investors pressured Fidelity to unload its restaurants.
None of this is to say that RaceTrac can’t make Potbelly work if it does things the right way, perhaps by giving the sandwich chain some independence. As a family-owned company, RaceTrac can be patient and will avoid some of the pressure that results in diversification.
But, as the track record suggests, it won’t be easy.