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Why activist investors can be good for restaurants

Are activist investors a positive or negative force in the restaurant industry? RB Executive Editor Jonathan Maze and Editor-at-Large Peter Romeo offer opposing points of view. For the alternate take, see Reality Check.


My esteemed colleague Peter Romeo is not wrong when he talks about all of those bad things that activist investors can do to publicly traded restaurants.

Indeed, any time such a shareholder files with a restaurant company, I sigh almost automatically, a Pavlovian response that comes from years of watching these campaigns whip out the same, tired playbook.

Invariably, an activist will recommend franchising (anybody remember the activist pushing Darden to franchise?) or sell off real estate (even McDonald’s, which makes boatloads of money from its assets) or take on debt to pay to shareholders.

Worse, they can discourage long-term investment—one nearly derailed Panera 2.0 before it had a chance to be proven out. Or the activist has no idea what it got into, such as with Buffalo Wild Wings last year. Or the activists can nearly destroy a restaurant chain, like say Famous Dave’s.

But this is a point-counterpoint. And my job is to be the yin to Peter’s yang, and so I must argue in favor of activists.

And though I withhold some enthusiasm in this instance—much like I did when I argued in favor of private equity—I do believe activists can play an important role in the publicly traded universe.

Done right, they can light a fire under management teams, reminding them of the existence of shareholders, and of the need to innovate and change and move their companies forward. There are a lot of examples where this has worked.

One of them I wrote about this week: Sardar Biglari’s campaign against Cracker Barrel in 2011.

Anybody who knows me, or who has read me over the years, knows that I’m not exactly a member of the Biglari fan club. Biglari’s corporate governance practices are a problem. Seriously. His repeated efforts to get on the board at Cracker Barrel wasted a lot of money, time and effort.

But his initial campaign clearly helped spur Cracker Barrel to make changes. It overhauled management, bringing in Sandra Cochrane as CEO—and she has promptly turned the family dining concept into one of the better performing restaurant chains on Wall Street in the nears since.

She is probably the most underappreciated CEO in the business right now.

Biglari has made hundreds of millions of dollars off of that investment, for himself and other shareholders. And Cracker Barrel’s dividends have been a major boon to Biglari Holdings, the owner of Steak ‘n Shake.

Simply casting aside the annoying Activist Shareholder Playbook (Seriously guys, stop pushing franchising already), the prospect of an activist is important in the process.

Companies can get complacent. It’s up to investors to push those companies to make changes.

Among private companies, that comes from the private equity owners or the family or the entrepreneur who sits at the top to push for improvement.

When companies go public, that ownership gets diluted. The entrepreneur reduces their holdings. Private equity firms exit. Institutional investors take over. When stocks underperform, they quietly exit rather than push for improvement.

The danger is that chains can grow tired or complacent. Managers stick around for a long time. Stock prices can languish.

This is where activists can have an impact. They spur board members to attention, worried that they might lose their place. And the board pushes management to make changes that can be positive.

The incredible activist campaign that Starboard Value ran against Darden Restaurants—one that included the unfortunate idea that the company franchise and was notable for chiding Olive Garden for not salting its pasta water—was an especially successful campaign.

Starboard won every seat on the Darden board. That board then hired Gene Lee as CEO and let him do his job. The company focused on operations and has been a remarkable performer in the years since.

I might be holding my nose a bit here because activists can definitely cause problems. But it’s also good to recognize the crucial role they play among publicly traded restaurants.

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