Why restaurants are on the private equity menu
One of Tuesday’s key corporate news stories came from the land of cold cuts. Private equity firm Blackstone has acquired majority ownership of the submarine sandwich chain Jersey Mike’s. It’s another in a string of private equity deals in the food service industry since the beginning of the pandemic.
When private equity firms are looking for restaurants to put their money into, they come to people like Tim Powell, a consultant at Foodservice IP. He said he looks for familiar restaurant concepts with a unique touch, like a pizza place he scouted in Chicago.
“It had such a loyal customer base and it had old wood paneling and just sort of the lighting that reminded you of a ’60s steakhouse,” he said.
These mom and pop places can be good bets for investors. But so can bigger businesses with thousands of locations. “Say, a chain that has good brand equity but it may not be operating at full efficiency,” Powell said.
Investors are looking for room to grow. Maybe the restaurant could expand abroad or bottle its sauces and sell them at big-box stores. All with the goal of becoming profitable enough to go public.
That’s the story of private equity investing in success.
“On the other hand, you’ll see some of these deals with really battered full service brands,” said Sean Dunlop, an analyst at Morningstar.
He said struggling businesses can be lucrative acquisitions too. “And in that case you’re looking for hard assets you can sell,” he said.
Like property. This has become a bigger piece of private equity investments as more restaurants file for bankruptcy.
Now, you’d think the failure rate of restaurants would be enough to scare private equity away. But Andrew Charles, an analyst at TD Cowen, said the industry hasn’t actually seen a lot of disruption. In other words, there’s no Amazon of food.
“I mean, the good news is people have to eat, and they have to eat three times a day,” he said.
And when they eat out? They increasingly choose fast-casual restaurants like Panera or Chipotle. Which sparks more investment in fast-casual.
“The restaurant industry is increasingly going towards a model of food as fuel,” Charles said.
Which may be why we eat everything out of bowls these days.
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