Season 2 Episode 4: Review of Select QSR Brands and Emerging Concepts



Also Listen On:


Welcome to The Restaurant Boiler Room, Season 2, Episode 4. I'm your host, Rick Ormsby, Managing Director at Unbridled Capital. Today in the Boiler Room, we're going to talk about the recent franchise investment conference with Franchise Times. The Restaurant Boiler Room is a one-stop shop for multi-million dollar merger and acquisition activity and financial complexities affecting the franchise restaurant industry. We talk money, deals, valuations, and risks delivered to the front door of franchisees, private equity firms, family offices, large investors, and franchisors on a monthly basis. Please feel free to find our content at Unbridled Capital's website at

Now, let's enter the Boiler Room. Monday, March the 9th through Wednesday, March the 11th, was the Franchise Times Franchise Investment Conference in Texas. I just wanted to talk about some of the findings there. We'll talk about some select brands that presented there. We'll talk about Wingstop, CKE, Wendy's. We'll talk about the Dealmaker of the Year Awards, overview from the Inspire Brands Team that was there, and then a little bit more close talk of two of their concepts, Arby's and Sonic. Then I'll make some comments on some of the new emerging concepts that presented and gave some pitches on their business in what would be a little bit of a Shark Tank format. It was an interesting time.

Our first keynote speaker was Charlie Morrison, the CEO of Wingstop. You'll know Wingstop is a Wings brand, and they've been public since 2015. They were a Rourke portfolio company that was rolled out and sold. It's really had just a massive success story over the last 20 years or so. Charlie did a good job talking about the Wingstop way, and talking about their authentic service minded, entrepreneurial, and fun atmosphere at Wingstop. You really got a feel that the culture and the growth are really quite outstanding. I'd loved their focus on entrepreneurial franchisees, which I thought was fantastic too, but he did a great job in the presentation. His vision and their vision is to be a global top 10 restaurant brand with over 6,000 restaurants in potential, with 3000 coming from domestic and 3000 coming from overseas. The domestic, they talked about 1,231 restaurants in 44 States currently, and 154 restaurants in nine countries internationally.

A couple of other comments to note, they want to digitize every transaction. They said that today they're at about 39% delivery and digital, and their goal is to be about 100%, obviously. Some of it through incremental delivery growth, organic digital growth, and above restaurant, and then in restaurant growth. It's one of the things I'd note as an M & A advisor that I see as a trend in this industry, not just because of what we've seen with the coronavirus, but just the industry itself is moving, I believe, to a model where key pieces of real estate may not be as pertinent and relevant as they've been in the past.

Now, people may disagree with me about that, but Wingstop's one of the brands that, with a great app, a great delivery platform and take out ordering, they seem to be just doing great business with a different type of focus. I love it that they have such a paired back and narrow menu as well, and they had very little menu change over the life of the brand. I think that's a great way to show the consistency to your customers, and obviously for your operations as well.

A couple of other areas of note that I thought were interesting. Back in 2012, they had domestic system AUVs of $900,000, investment costs of $370,000, and then unlevered cash on cash return of about 30%. In 2015, their AUV was $1.1 3 million, investment cost was $370,000, the same, and the cash on cash return was over 50%. Today they say that their AUV is about $1.2 5 million, their investment cost is $390,000, and their unlevered cash on cash return's about 50%. Now, the reason why, obviously the AUV increases, you can see them, they're a publicly traded company. They've had incredible same-store sales growth. But what I note here, is that the investment cost over the last nine or 10 years has basically stayed somewhat flat. The low investment costs really does make an attractive entry point for somebody who wants to be a small operator and wants to just buy a few, or somebody who might be a larger operator and tagging on Wingstop as a second or third brand of their portfolio.

Now, they share, since 2015, some of their best in class results. Charlie said that they had over 500 net new locations since then, 13.1% unit development four year compound annual growth rate. They've operated in 10 countries this globally, and then their performance, 31.3% stacked same store sales growth since the 15 IPO, 16.5% system-wide sales increase over a four year compound annual growth rate, 17.7% adjusted EBITDA, 93% average cash conversion ratio, and prior to the recent mess up in the markets here, 406% total shareholder return since the IPO, and $338 million in capital returns since the IPO. So, by all measures, these numbers are fantastically successful.

I would just say from an M&A standpoint, it's my opinion that a lot of the Wingstop franchises are smaller franchisees, and you typically don't see a lot of, we don't at least at Unbridled Capital, see a ton of M&A action in the Wingstop world, primarily because I think you have operators who are trying to build new units and grow and are really achieving this big, big sales growth and unit growth for the brand.

The time will come where there'll be larger franchisees that have businesses that become more attractive for family office and private equity groups, but that's largely not the case now. Whether that's the model or not for Wingstop, I can't say, but I do get lots of phone calls from people who think it is a hot brand and would love to be a part of it if they had a bigger opportunity to do so. So, that's Wingstop.

There were a number of, I'm just counting, one, two, three, four, five, six, there's like 12 restaurant franchises and 12 non restaurant franchises that spoke during the convention under 30 minute time blocks. Obviously, listened to most of them, but can't talk about all of them here. Instead, I wanted to just pick several select ones. Jim Sullivan, who works for CKE, which is the franchisor of Carl's Jr. and Hardy's, he spoke. Very familiar with the brand as a child, and as a young adult in Kentucky here, Hardy's, were all and are all around us.

So, just a little bit of a glance at CKE. They've been in business for over 50 years. Hardy started in 1960, Carl's Jr. in 1956. All this information was given through their presentation at the conference. 3,875 restaurants between the two brands, almost four and a half billion dollars in system-wide sales, and a 1,350 development commitments, 94% franchise, 350 franchise entities plus, at putting the average franchisee, by my math, a little over 11 units per franchisee there, in 42 countries, in 974 international locations, and have had 970 new opening since 2015. The Hardee's brand that I know, of course, is known for the made from scratch biscuits. They've got some great indulgent products. Their domestic AUVs are about $1.2 million, so $1.35 million roughly, $1.34 million for Carl's Jr., and $1.1 million for Hardee's, and international is just over $1 million. Again, they're about 6% company owned, and 75% of their business by sales is domestic with 25% overseas.

They talked a little bit about the new design that might be coming out. Both Hardee's and Carl's Jr had been talking about and rumored to have a new remodeling program and a new design and image that's being tested and about to roll out in the franchise system. We were shown a couple of renditions of what that looks like. The hope is that the costs are reasonable. From looking at a couple before and after pictures, I would say that they look like they're substantial, but not overly substantial, remodels from a cost perspective. So, that might be a good thing. The hope is that the results will be indicative of increased sales and will be something that will inspire and enthuse the franchise space to remodel and those brands. Those brands have been a little bit languishing over the last couple of years. They've had their challenges for sure. So, we look forward to seeing their reemergence, hopefully, in the next several years, and certainly there was some optimism from the CKE folks about the future of both brands.

We bump next into the Wendy's brand. Wendy's was there speaking. They just had some key points there. There's a lot of optimism in Wendy's around the new breakfast, of course, and the hope that that's going to drive sales. They were going to use those sales from breakfast to promote breakfast as well. That was the hope, and some scuttlebutt around the convention. They were talking about nine years of same-store sales growth in the Wendy's brand, and an average AUV of $1.7 million now. Their new image activation, they said at the year end of 2019, were 58% completed. They had 182 global openings in 2019, 107 of which were domestic. Then if I do the math right here, I guess that means 75 are international. We saw some of the pictures of their new image activation, and some of the buildings indeed looked gorgeous. They were really excited about both breakfast and development.

In the M&A world, Wendy's continues to be a very desirable brand, not quite as desirable, obviously, as Taco Bell, but certainly on the second tier and in the top echelon of brands that franchisees would like to acquire, especially family office and private equity groups that are looking for big portfolio assets to acquire, that the healthy same-store sales growth and a pretty stable base, and a good management team, and a nice value proposition as well, and heavy focus in the Midwest away from a lot of the big minimum wage states. I think Wendy's continues to be a brand that's going to attract the attention of investors, and lenders, and buyers, and the whole M&A circuit.

Next, we fell into the little dealmaker of the year there, and that was interesting Franchise Times does that. They picked 12 dealmakers of the year and we were one of them, Hey! Unbridled Capital. I was excited to be there to accept the award with Derek [inaudible 00:11:00] our company and Robert Rodriguez, who is a buyer at Tasty Huts, which is owned by a private equity group out of LA area that is also a Burger King franchisee. They bought 117 Pizza Hut restaurants in eight states, primarily in North Carolina, from Bob Geist. We were the sell side representative. Bob was one of the original franchisees of the Pizza Hut brand. It really was a landmark acquisition of just a long time storied franchisee. We were there to accept one of the awards and honored to be there to do that.

Let me talk about a little bit of the other awards. You had ACE Hardware bought some units, it looks like. They had a Wendy's group that did a buyout. We had some big news with Chicken Salad Chick, CEO, Scott Deviney was there. They attracted a PE firm, Brentwood Associates, buying out their old financial partners. They really had a great story of growth. So, we're excited to see what happens with Chicken Salad Chick, which I believe was started in Auburn, Alabama. I have a sister-in-law there who I think knows the founder, so it was a pretty cool story about how quickly they've grown. You had a Taco Bell group, franchisee group, that came into the system, Vantage Edge Partners, that invested in a long known Taco Bell and KFC franchise this last year that won one of the awards. You had a fitness deal that made it, you had a modern acupuncture deal that attracted some equity in the marketplace. Another award was Premium Service Brands acquired Kitchen Wise, Made Right, and Renewed Crew, self-esteem brands picked up Anytime Fitness and Waxing the City. Sun Holdings, led by Guillermo Paralis, bought a bunch of locations and rights to the McAlister's deli brand. Then you had WKS restaurant group, which acquired almost 100 Denny's.

So, all in all, it's kind of indicative of what I would say across the entire franchise industry, not just restaurants, but across the entire industry, you saw a proliferation of deals happening in the middle market space with franchisees. Across whether it was restaurants, or you heard fitness companies, you heard other types of health and wellness companies as well, and so I think this is a continued push into M&A across all franchises. Someone told me that, I don't know that these numbers are right, but that 30% of franchising is now outside of restaurants in the United States. Of course it's growing at a much higher clip than restaurants are, so something to continue to notice as this convention and others show that the strength of the non restaurant franchises as something for the future.

We talked a little bit about Inspired. The Inspired team, Bert Lane, and Joe Sieve came, and they talked about the five concepts that Inspire has, Arby's Buffalo Wild Wings, Sonic, Jimmy John's, and Rusty Taco. Just to give you a little bit of a background, Arby's has $4 billion in sales system-wide, 3,500 units, 66% franchise owned. Buffalo Wild Wings, $3.8 billion in system sales, 1,280 units, and 50% franchise owned. This is from their documentation in the presentation. Sonic has $4.7 billion, which interestingly makes them the largest of all of their brands, with 3,526 units, 94% franchise owned. Jimmy John's has $2.1 billion in system-wide sales, at 2,787 units, and 98% franchise owned. Then Rusty Taco has $29 million in system-wide sales, with 33 restaurants and 73% franchise owned.

They talked a little bit about the Inspire operating model and platform, which I thought was interesting. Joe very clearly said that, hey, they're opportunistic and potentially looking at new brands to acquire as well, which is no surprise to anyone listening to this who knows about their company, a portfolio company, I guess, of Rourke Brands. But they talked about scalable shared services as part of their operating model. So, they obviously acquire a restaurant concept and then they fold in the finance, corporate HR, legal, construction, enterprise, IT, communications, facility management, all these different pieces.

They talked about operational brand functions, and then they talked about strategic platforms and strategic brand functions. Clearly, several discussions were made about the purchasing power of both food and vendors when you have a bigger platform. But very much the operating platform seems to be to centralize and congregate some of the common functions, and then to drive the investment in the particular brands themselves individually. It was quite impressive. I think anyone looking at the situation is thinking that Inspire's got some major momentum in the industry as maybe one of the four or five major consolidating franchisors across the US in the restaurant space.

Then we went into a little discussion on Arby's with their $4 billion in system-wide sales, 3,500 restaurants, 291 franchisees, 1.18 million system AUVs, and nine years of same store sales increases, which I thought was impressive, and a little bit about their model being a little more fast casual, but they call it fast crafted, which was a mix between quick service and fast casual.

The Arby's brand obviously has done really, really well over the last few years. It's AUVs have come up substantially. Their story's not quite like I was talking Wingstop earlier, but nonetheless, it's still very much a very steady rise as the brand has really been under great leadership and done just a great job. With 3,500 units and fairly heavily amount of corporate ownership for that brand too, with the franchisees owning a majority, but not a substantial majority of those restaurants, I'd say you would expect continued acceleration of development in that brand and hopefully they can keep their momentum alive too. A lot of people call me asking for Arby's acquisitions. There aren't too many out there, and there aren't too many platform like acquisitions either of decent scale. Once you take out a couple of the really big franchisees who've transacted recently, and then of course you take out the corporate owned stores. So, that remains a brand that I think people are keeping their eyes on, for not only consolidation, but for investment and growth for the future.

Then we have just a couple more on this podcast. One is Sonic. Sonic $4.7 million in system sales. The Inspire folks were talking to us about it. It started in Shawnee, Oklahoma, 65 years of brand heritage, 316 franchisees, 56% of sales come from beverages, snacks and frozen treats. They've got a very diverse menu, obviously. They say the most diverse menu in QSR, which is a positive and maybe a negative for operations. 3,526 restaurants, they have a really nice app and digital platform, I think, that's really going to be a key to their growth, and they have a nice menu board potential with the new pops POS upgrades that they've done in all of the car hops in the locations that have them.

They showed us a little rendition and rendering of maybe a new Sonic image and remodel for the future. I think it was a prototype design that the folks even said is brand new off the press, but it looks beautiful. I just think in general, there seems to be quite a bit of optimism about the Sonic brand. This is the newest brand to the Inspire folks, so we'll see how that folds into their portfolio. But I've known the Sonic brand for a long time and know many of the franchisees, and I just think it's a brand that has done a great job regionally. They're very distinct and unique in what they do. Their real estate model has always been a little bit tricky because it's single purpose real estate. For that reason, you see them operating a lot in small towns and you haven't seen a lot of financial players and strategic buyers come into the business in large quantity, a lot of original and second-generation founders in the franchise arena, at least, in these companies. That system, in my esteemed opinion, is one that has a lot of upside, both for the brand itself and the sales and the trajectory, but also for new franchisees coming in and maybe consolidating and operating a bigger portfolio over time, especially as the brand tries to continue to figure out, to build and develop outside of its core area.

The last thing I would say, just a little quick walk down down some of the franchise businesses that were there that are brand new or were smaller and just pitching their story. I found that quite exciting. So, we had Venture X that came out, and they were a kind of a shared space platform for office space and workspace. You had Modern Market Eatery, Rise Southern Biscuits and Righteous Chicken, Orangeleaf Frozen Yogurt, Image Studio 360, which it was kind of much of a real estate play, where you have hairdressers and folks who rent space from the franchisee who buys real estate, and then creates the spaces and the stalls for rent and use. You had a barbecue concept and a kebab concept, a tire express concept. Later on, we had a craft creamery concept, Everbowl, trampoline park, doghouse, press waffle company, which I thought was really kind of a neat, smaller concept with a really fiery founder, and then we had a dog franchise there as well. They each had five minutes to make their pitch for their business case.

I thought it was a great way to learn a little bit more about these new concepts that are coming up in franchising, ones that maybe are trying to do it with a little less capital investment, maybe a little nimbler, obviously, and maybe something that's trying to not be the next McDonald's, if you understand what I mean. Something that's trying to do a spin that's a little bit different, maybe appeals to a different demographic, maybe is a little younger and hipper, and is not afraid to be a food truckish like business that has great unit economics, inspires maybe smaller operators to get involved, but also maybe has a little better lifestyle to it than the big scale, large franchise organizations out there.

I think, for those of you who follow this, these small private companies do pretty well. Typically, a founder will have one unit and then they'll get a second or a third or fourth unit maybe in place. In this market, now we're at the end of the up cycle here, obviously, but in this market, investors and buyers will come in with capital and pay very big multiples of EBITDA for really smaller sub 10 unit franchisor concepts, if they can get a majority ownership and if the results have been good.

So, I will tell you, if you listen to this or just eat at some of these new concepts across the country, I tell the founders all the time, I say guys and gals, what you want to do is you have to have 100% success in your first six or seven or eight units. You don't want to have two losers and five winners in your stores, whatever concept it is, because it doesn't show well, obviously, if you have failures in your first few, it puts puzzling looks on the faces of investors. So, be very cautious. You've got a great concept and you've got one or two units that have done really well, don't jump too quickly to a new market or to a questionable piece of real estate or a questionable investment. Be conservative and go slowly at first, and make sure those first six to seven units are successful. Don't franchise too soon. In many cases, you might not choose to franchise at all in the first couple of years of starting your new concept.

If you do it, whether company, development, or through franchising, and you do it early in the life cycle of the brand, make sure not to start your first unit in, oh, let's say the East Coast, and then your second market out on the West Coast, because what you're trying to build as a little bit of marketing, and a little bit of brand awareness, and a little bit of synergies from operational and training standpoint. I've seen so many small franchisors do the opposite, which they build up a couple of markets that have really been successful, and then they have a buddy who lives in Phoenix 2000 miles away, and they sell him some franchises or a joint venture.\ And then it goes out there and it's like starting fresh once again. It just doesn't do as well. Then your storyline is not a good storyline for an investment group.

But nonetheless, these small franchisors have a lot of energy, have a lot of promise. A lot of them, interestingly, are pitching their businesses as a way to be a second or third franchise platform to a financial sponsors portfolio. That's smart, because a lot of these financial sponsors, private equity, and family office groups, they want two or three legs of the stool. Even increasingly, as I'm watching these days, you keep hearing these guys talking about non restaurant, non restaurant. So, I think that's wise. If you have one of those concepts, the way you have to appeal to a large family office backed group is, they don't necessarily like to put money in the slow snail's pace development mode. They want to acquire EBITDA in many cases. So, the model of buying a five or six unit concept, and then employing tons of capital against it for a bunch of slow unit development, is somewhat of a distracting model for a large group.

So, if you were in that situation, you have to be the type of brand, I think, that makes it easy for a 100 unit Pizza Hut franchisee in Florida, to be able to put your brand easily from an operational standpoint, from a real estate standpoint, from a diversification standpoint, really right within the same trade areas that that franchisee operates. That is the way that you overcome this notion of having to buy an idea that may have 10 units nationwide, and then having to sink money into it for a slow but steady return. You have to appeal to their trade area and be complimentary to what they're doing on main and main and XYZ city USA.

I hope you enjoyed that. It was a great convention. Thank you so much for listening today. In closing, thanks so much for entering the Boiler Room today. You can find our podcast on iTunes, Google Play, Stitcher, and Spotify. If you like these podcasts, please listen, rate and review. I also encourage you to visit our website at for the best franchise M&A and financial resources in the industry. Our website includes podcasts, videos, white papers, webinars, analyst of our M&A transactions. Please note that neither Rick Ormsby, nor Unbridled Capital, give legal, financial, or tax advice. These podcasts represent opinions that may be prepared and have been prepared for informational purposes only. We expressly disclaim any and all liabilities that may be based on such information, errors there in, or emissions there from.