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Unbridled Capital

QSR and Fast Casual

Video

03.15.2017

QSR has continued a steady pace of same store sales and traffic growth with certain legacy brands struggling with store closures, relevancy, poor assets and questionable operations.

The fast casual segment of the restaurant industry has been growing at the fastest clip, though they have a much smaller base than QSR and casual dining. Casual dining has been languishing over the past few years, but there are some bright spots.

Hey, this is Rick Ormsby at Unbridled Capital. Today I'd like to talk a little bit about three different segments of the franchise restaurant industry. They are QSR quick-service restaurants, or fast-food restaurants, generally, fast-casual restaurant segment, and then the casual dining restaurant segment. Let's start with QSR.

QSR is typically defined by legacy brands that have been around a long time and are on every Main and Main Street corner in America and have lots of penetration with lots of unit counts. The QSR industry has done fairly well in the last several years and has kind of had very moderate and predictable and stable overall same-store sales and traffic growth at a moderate level. Although certainly within the certain concepts, you have some that are really performing well and others that have been languishing with poor performance.

QSR has typically been a mix of large franchisees and a lot of small mom and pop franchisees. And over the last six to seven years, a lot of the private investment, private equity, and family office capital that's come into the space, has come in, particularly, to the QSR space, consolidating the smaller franchisees gradually to become large, multi-unit, conglomerate franchisees across the country that might own more than one or two QSR brands.

We see EBITDA multiples, prices, lenders all over this segment of the market, all the usual names, and a lot of activity. Expect it to continue in the near term.

In the fast-casual side of the business, it's a new area that, over the last 10 years, has been growing in popularity. And some of these brands are really taking off with unit count growth of 10 to 20% and initial EBITDA margins that are really high on high sales volumes. But the development cost, the cost of marketing, and the cost of implementing these brands from the ground up is oftentimes very cost-prohibitive and sometimes requires a lot of patience.

So typically you're seeing a lot of larger conglomerates who have another platform like a QSR brand, pick up a secondary brand in the fast-casual space with the ability to build one or two over time and not have to worry about floating cash or worrying how to operate it until you get the critical mass and scale to be successful.

These fast-casual brands are not on the market for sale as much, they're a little bit harder to finance on a standalone basis because lenders want to take a wait-and-see approach, but clearly they are finding a real niche in dealing with a customer who's younger, who wants more healthful food, who wants maybe more ethnic food, who wants it in a different delivery mechanism.

When you get to casual dining, casual dining is kind of a mix. You have larger operators and smaller operators, and it's been languishing a little bit over the last couple of years, as you've seen the mechanism of sitting down and paying a tip becoming less popular with the younger generations of our country and our society. However, they're still doing well and lots of predictable cashflow comes out of many casual dining brands. There are a lot of successes within casual dining, particularly in the breakfast segment, where groups like Denny's have really had a nice run over the last three or four years.

Overall, the restaurant business is doing well. Overall, in the last 10 or 15 years, we are at the most favorable times from a lending perspective, from a valuation perspective, a lot of buyers coming into the business, people considering a sale of their business at high prices, interest rates, and terms of loans being very competitive, and we have expertise across all of these segments of restaurants, but also non-restaurant franchises as well. If you'd like to talk more about this, I'd be honored to do so at any time.