Winter Of Despair Followed By . . . A Spring Of Hope?

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Charles Dicken’s A Tale  of Two Cities famously opens with “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness … .”

This opening could be applied to the results of the last political election, the public health of our nation, or even the strains of work and family under the current challenges. The words also fit the dichotomy exhibited in the restaurant and franchise commercial environment today.

We miss our restaurants and they miss us. Before COVID-19, off-premises dining was a cutting edge concept being investigated as a supplemental income stream. Now curbside and delivery, as well as architectural changes, are a necessity and a matter of survival. Let’s see how this is playing out now, and will in the future.

First, dine in restaurants had to learn about new architecture. Plexiglas counter windows, masks and expedited ordering required additional investment in infrastructure. In the meanwhile, cooks and servers had to fight the virus and dwindling customers. Labor lawyers were called as often as physicians to address the difficult issues of compliance with public health initiatives as applied to labor issues. Restaurants had to go to curbside pick-up and reinvest in delivery options, often sacrificing margins and profitability to survive.

The Winter of Despair

Even before Covid, many restaurants were financially challenged. Older chains were under pressure from changing demographics, increased competition and rising costs for years. Even those restaurants which began reconfiguration in 2019 found their progress stymied by the impact of COVID-19, resulting in accelerated closure of both franchised and company operated locations. The coronavirus broke the back of iconic chains such as Chuck E Cheese, Sizzler, Toojay’s Deli, Il Mulino, Le Pain Quotidian, California Pizza Kitchen, Cosi, and Friendly’s Restaurants. The companies were forced to file Chapter 11, close underperforming locations, reject overpriced leases and sell to strategic buyers with the wherewithal to continue the best practices of the brand. Experts predict somewhere between 40-60 % of restaurants nationally will close permanently. For these restaurants, this is the season of despair.

Many of these franchised chains have huge franchisees which also had to reorganize in Chapter 11. The largest franchisee of Golden Coral, 1069 Restaurant Group LLC almost took the chain down by itself. NPC International Inc., the nation’s largest franchisee of Pizza Hut and Wendy’s restaurants, filed bankruptcy and wants to sell its entire company to the Flynn Restaurant Group LLC.

The Season of Hope

The bankruptcy of NPC International also shows that the death of restaurants has been somewhat overstated. With reduced competition, bidding wars and increased merger and acquisition activity of restaurant chains have developed.

As of December 1, 2020, Wendy’s has opposed NPC’s the sale to Flynn, the largest restaurant franchisee in the U.S.  Wendy’s instead has made its own offer with a consortium of regional franchisees. Wendy’s is in talks with NPC to drop its opposition in return for an agreement by Flynn to invest tens of millions of dollars in NPC’s Wendy’s restaurants. San Francisco-based Flynn owns more than 1,200 restaurants, including Applebee’s (452), Arby’s (639), Taco Bell (282) and Panera Bread (136) brands across 33 states. Some of those brands compete with Wendy’s. as defined in some of the Wendy’s franchise agreements, but not in others.

Dunkin’ Brands, operator of both Dunkin’ Donuts and Baskin-Robbins, has agreed to be acquired by Inspire Brands for $11 billion. Inspire Brands is backed by private equity firm Roark Capital. Inspire Brands is also the owner of Arby’s, and of Corner Bakery. Corner Bakery is exploring a strategic acquisition as well. Zaxby’s, the 900 unit chicken restaurant chain founded by two partners 30 years ago is selling a significant stake to Goldman Sachs to allow it to go national. Merger and acquisition is alive and well.

Overheard at the Restaurant Finance and Development Conference in November 2020 was the report that franchise and restaurant investment capital is plentiful, but not at traditional banks. Some banks are open to it, but most of the bankers interested are in those non-traditional banks, who have little competition, and charge accordingly. Private equity and private placement money is available as well at reasonable costs.

Some chains are going public. Burger Fi, a 77 unit Florida based “better burger” franchise chain has sought be acquired by a special purpose acquisition company (a “SPAC”). A SPAC is sometimes referred to as a blank check company, because the investors’ money is collected first and then an acquisition is targeted. In this case, the acquiring SPAC is Opes Acquisition Corp. If acquired, Burger Fi will have additional cash to saturate markets outside of its core market in Florida and be nationally competitive with a high quality meat burger.

Companies positioned for increased delivery, drive thru efficiencies and home delivery have prospered. Pizza restaurants have reported steady 20% increases, and some brands have even quadrupled their sales. Yum Brands, a publicly held owner of various brands reports same store sales increases for its US operations, including KFC up 9%, Pizza Hut up 6% and Taco Bell up 3%.

As we move forward in 2021, more restaurant shakeouts and consolidation will occur. Independent chefs will move into the former space of aged out restaurants, and continue the cycle of rejuvenation. All the more reason to visit your favorite eateries now, and to look forward to the innovations which will adopt to changing customer needs and values.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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