In this edition of the Franchise & Hospitality newsletter, we open with an interview of Jonathan Tibus. Mr. Tibus is Managing Director at Alvarez & Marsal and also CEO of Ignite Restaurant Group. Prior to joining Ignite, he served as CEO of Last Call Operating Co., as Chief Restructuring Officer of Quiznos and as COO of Max & Erma’s. Mr. Tibus discusses his thoughts on the challenges in the restaurant industry.
Q: What are general pressures facing the restaurant industry today?
A: This should be the best of times for the restaurant industry overall – unemployment is the lowest it’s been in 17 years, gas prices and interest rates are low, and commodity prices have been pretty tame. But, the reality for many operators is that times are tough. Traffic is down, there’s not a lot of room to take price and costs are creeping up across the income statement. Simply put, there are too many restaurants for too few people.
Over the last 10 years, the restaurant space has been a great place to be, with the NRN Restaurant Index up 225% (vs. 94% for the S&P). As investors and lenders have rushed in, the sector has become overbuilt. There are more than 620,000 eating and drinking places in the U.S., according to the Bureau of Labor Statistics, a number that has been growing at almost twice the rate of the population. On top of that, they way that people think about an in-dining restaurant experience has changed and there are many more alternatives available to consumers. You can watch almost any sporting event at home, and the growth of online retail means fewer people going to malls. Meal-kit delivery services offer an interactive home dining alternative, and the difference between grocery pricing and restaurant pricing is at historic highs. These factors have led to less traffic and lower sales. On the cost side, the restaurant industry has spent the last few years working through minimum wage hikes, menu labelling requirements, and payment-card compliance costs. Consolidation among food producers and distributors has led to higher distribution costs and a push towards private label products. When four companies control almost all pork, cattle, chicken, and milk production in the country, operators cannot do a lot of competitive shopping. Over capacity, eroding demand, new forms of competition, and increasing costs have continued.
Q: What is the biggest challenge in restructuring a restaurant company?
A: Restaurant turnarounds are somewhat counterintuitive. The first instinct, of course, is to start cutting costs – tighten labor, trim portions, engineer the menu for better food costs. This is what everyone does, and it’s the wrong thing to do. Being short on servers means not selling that extra round of drinks. Being short a cook means longer waits and fewer table turns. Using a food runner as a way to increase the number of tables a server can handle leads to the “food auction” – my personal pet peeve – where a server asks “Who had the cheeseburger? Who had the salmon?” It’s a bad experience. There is no “Easy” button. It takes someone with a willingness to invest in the stores, invest in the product, invest in the marketing, invest in the labor and then have the patience to see through a long and difficult operational overhaul. When traffic comes back, all of the metrics work. The most challenging thing, for me anyway, is having this conversation with restaurant owners and lenders: Do you have a checkbook and do you have a long time horizon to see this through? If yes, great. If no, doesn’t it make sense to get this asset – which is diminishing in value every day – into the hands of someone who does? Unfortunately, the answer is usually something more like “No, we were kind of hoping you had the ‘Easy’ button idea” or “No, we’re just going to freshen up the menu, get labor under control, and then when we start rolling over these easy comps, this problem just fixes itself.”
Q: What should distressed investors look for in evaluating restaurant investment opportunities?
A: LOCATION, LOCATION. LOCATION. A good location is going to have traffic, which means you can hire good managers and pay them well. Servers will be able to make good tips and it’s easier to hire good ones. It’s also easier to serve fresh food efficiently, as nothing sits in prep for days like it would in a low volume location. A good location also shields you from marketing blunders – your chicken wing promotion may be a misfire in downtown Nashville, but when 85,000 people wander out of a concert at Nissan Stadium looking for food, you’re going to do great. Good operators with proven track records make a difference as well.
