U.S. Restaurant Industry Growing, Private Equity Active
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U.S. Restaurant Industry Growing, Private Equity Active

The U.S. restaurant industry is beginning to sizzle, according to the 23rd edition of the Chain Restaurant Industry Review, published by GE Capital, Franchise Finance. Merger and acquisition activity increased to $3.9 billion from $3.7 billion, and the total volume of syndicated leveraged loans in the restaurant space increased almost 21 percent last year.

[Highlights of the 2013 Chain Restaurant Industry Review will be presented by Todd Jones, Managing Director for GE Capital, Franchise Finance, in a webinar on Tuesday, April 30, 2013 at 2:00pm EDT. Click HERE to register]

In a sign that the American consumer was feeling more confident about disposable income levels, nominal restaurant sales rose 4.2 percent to $425.6 billion in 2012. Sales are projected to increase 3.8% to $441.9 billion this year.

The Top 100 restaurant chains’ system-wide sales were nearly $210 billion, representing more than half of all restaurant sales last year, and gaining 0.5 percent market share from 2011. Their sales grew 4.7 percent year-over-year, outperforming both the foodservice and the restaurant industries, as well as nominal GDP. Total unit growth for the Top 100 at 1.8 percent was the highest since 2007. Franchised unit growth jumped 180 basis points to 77.3 percent of the total — the largest share since the survey’s inception 23 years ago.

Private equity firms paid premium purchase prices — multiples of eight to 10 times revenues — for growth companies and franchisors. Non-sponsor deals jumped 46.0% to $11.2 billion in 2012, while sponsor deals declined 11.2%. Nearly three-quarters (73 percent) of the total volume was driven by refinancing activity. After two years of single initial public offerings, four were successfully completed in 2012. Three companies went private.

“In contrast to the slow but promising recovery in the global financial markets, the U.S. restaurant industry has been very focused on growing and expanding,” said Agustin Carcoba, president and CEO of GE Capital, Franchise Finance. “The activity has been driven by the improving economy, changing consumer habits and shifting U.S. demographics. People who are investing in the restaurant industry understand the importance of three factors — operational performance, financial metrics and asset strategy — and how they have changed through the latest cycle.”

Full service restaurant (FSR) sales increased 3.1 percent to $202.2 billion, while quick service restaurant (QSR) sales increased 5.6 percent to $179.3 billion. The FSR category includes family, casual, high-end casual and fine dining restaurants, typically those that provide table service. The QSR category includes limited service, fast casual or take-out restaurants with limited menus and, typically, no table service. QSR menu prices increased at a 3.2 percent annual rate in 2012 compared to 2.2 percent in 2011. FSR menu prices increased 2.6 percent in 2012 compared to 2.3 percent in the prior year.

With the cost of goods sold (COGS) and labor costs comprising more than 60 percent of operating expenses at both FSRs and QSRs, it’s important for operators to understand how to achieve higher margins. By carefully managing COGS as well as advertising, rent, royalties, etc., operators may be able to achieve substantial savings and, thus, increase profits.

“Restaurants typically have relatively limited profit margins, so operators are always trying to adapt to changing consumer tastes while balancing their other costs,” said Mr. Carcoba. “Ultimately, these are successful entrepreneurs who are trying to grow their businesses by enhancing their endangered brand equity and pleasing their customers. When they’re able to reinvest, they can make capital expenditures — for example, investing in new technologies or making equipment purchases — and eventually open new locations and hire more employees. It’s the American dream in action.”

GE Capital, Franchise Finance specializes in financing mid-market operators with multiple stores in the restaurant and hospitality industries. With more than 30 years of experience and $9 billion in served assets, it provides financing to more than 2,000 customers and 16,000 property locations (www.gefranchisefinance.com).

© 2013 PEPD • Private Equity’s Leading News Magazine • 4-24-13

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