Saturday, April 08, 2006

Shape of things to come?

The buying spree by private-equity firms has grabbed the headlines, but another sort of conglomeration is similarly shuffling restaurant-brand portfolios, without the hoopla. You could spot it in a recent edition of our Daily NewsFax, when three of the seven stories dealt with the acquisition of regional chains by companies formed expressly for that purpose.

Not coincidentally, every one of the buying concerns was hatched by industry veterans who can recall the days when “coffee shop” meant a place like Denny’s. Chain-headquarters executives with that depth of experience used to kick back during the final quarter of their careers by securing a few franchised restaurants and narrowing their focus to a territory. Now they build mini franchising empires.

Case in point: Sid Feltenstein, the man who midwifed Dunkin’ Donuts classic gotta-make-the-donuts campaign. Feltenstein made a bundle when he bought a nearly defunct A&W concept, spiffed it up, and sold it to Yum! Brands for a return that would’ve made Warren Buffet offer a high five. Instead of retiring, Feltenstein has teamed up with former Long John Silver’s and Marriott Corp. exec Ron Powell to amass established regional QSRs for a holding company called Sagittarius Brands. As we announced that day in the Fax, the company bought the West Coast-concentrated Del Taco system to complement the East Coast-centric Captain D’s fast-fish chain.

On the same day, an upstart called Restaurant Holdings Inc. disclosed that it had acquired 36-unit New York NY Fresh Deli—ironically, a franchise chain based in Phoenix. RHI was already the owner of the regional Steve’s Pizza and Playa Grille & Margarita Bar fast-casual chains. It, in turn, is the holding of Chris Thomas, the operations savant who saved the Sizzler family-steakhouse brand during one of its grimmest times, and John Creed, the man who founded the Chart House dinnerhouse group and built it into one of casual dining’s highest-volume concepts.

Completing that afternoon’s trifecta was another acquisition by a company that should be no stranger to regular visitors here, Creative Eateries, parent of the Kokopelli Sonoran Grill franchise chain. Led by former Ponderosa/Bonanza chief Frank Holdraker, the company added a fifth concept by buying Tuscan Italian Kitchen, a four-unit group of full-service restaurants in Los Angeles, for $2.8 million. Creative noted that it paid four times EBITDA for the brand, a steal compared with the multiples of many recent private-equity deals.

Those were merely the mini-conglomerates making news that day. There are plenty more out there, similarly led by seasoned chain builders. How will they fare as a pack?

They won’t. The success or failure of each player will depend on a host of variables—from the unit economics of the acquired brands, to how carefully the expansion is shepherded, to what kind of operators they sign as franchisees, to how many compromises in quality they’ll strike for the benefit of expansion and those all-important royalties.

But it’s interesting that these mini-Brinker Internationals are forming as many of the multi-concept giants are being forced to pare back their portfolios by activist shareholders. It’s as if the concept-stable approach is being damned on one echelon, but embraced as the new steroid on another.

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