Do you remember Clara Peller, the iconic actress who helped launch the catchphrase “Where’s the beef?” for the Wendy’s restaurant chain? In a recent post from December, I wrote about the current transformative trends in the quick-service sector of the restaurant industry. This post continues the discussion and focuses on the gold rush in the health-focused segment of quick service (so called “fresh casual”) that is generating significant interest in the capital markets.
Private equity firms, which have embraced the growth potential — and margins — of quick service, are fine-tuning their focus to exploit the hockey-stick growth of healthy dining chains. Perhaps the most widely watched recent deal is the buyout of Dunkin Brands by a consortium of private equity firms. But it is in the fresh, healthful, organic, gluten-free fare with plenty of vegan and vegetarian options that are ringing the cash register and attracting capital.
The smart set is capitalizing on the widespread shift toward better eating habits and a more active lifestyle — which puts new logistical pressures on chain real estate. Supply-chain issues are limited when store owners and franchisees have a near single source for supplies and prepared foods that are essentially reheated at the restaurant. The focus on fresh goes far: Is this beef antibiotic-free? Are those tomatoes organic?
The Syscos of the world are exceptional at moving standardized, long-shelf-life product, but fresh casual demands a more complex approach with a greater number of suppliers and a significant chance of waste which eats margin faster than Subway can make a sub. But the next time you are at Terminal 1 in Chicago’s O’Hare International Airport, make sure to try a fresh torta from Rick Bayless’ Tortas Frontera. The sandwiches are as fresh and deeply satisfying as the beloved Xoco on North Clark Street. The only way to serve fast food this good is to use only the freshest ingredients possible.
Chipotle Mexican Grill has an average customer check that is twice traditional fast food but is also subject to the vagaries of fresh — not frozen — produce. When avocado prices rose, the chain had to reconsider its guacamole food cost. The feared “Avocadocalypse” never occurred; the chain just raised prices without harming growth.
Let’s look at private equity investments. PE firms look for the following when deciding which fast casual restaurant chains to invest in: one, a clearly differentiated concept and/or food service offering; two, a capable, continuing management team enthusiastic on growing the business; three, strong store-level economics; and four, an ability to scale to larger business.
QSR-focused brokers and agencies looking to upgrade street-level and mall retail with this upscale segment of quick service need to watch carefully who is investing in what trending food-service concepts and add a more robust dialogue on logistics to their pitch. The benefit is the opportunity to serve a fast-growing brand or help your building or mall owner attract a better spend.