Why has restaurant M&A activity slowed in 2022?


Last year marked one of the most frantic M&A schedules ever for restaurants. FAT Brands alone spent nearly $900 million in five months to acquire Global Franchise Group, Twin Peaks, Fazoli’s and Native Wings and Grill, bringing its total following to 17 concepts, 2,300 franchised and company-operated locations. worldwide and system-wide sales of approximately $2.3. billion. The other major change came in November when Burger King’s parent company, Restaurant Brands International, agreed to buy Firehouse Subs for $1 billion, adding a 1,200-unit sandwich chain to its lineup alongside from Popeyes and Tim Hortons. Jack in the Box also announced its $585 million roundup of Del Taco in December, a deal that closed in March 2022.

But while it might have seemed inevitable, the notion that the 2021 wave of deals would carry over into 2022 was not a given. The Restaurant Finance division of Mitsubishi UFJ Financial Group released a report earlier this year suggesting the opposite was more likely. Nick Cole, chief financial officer at MUFG, said strong industry-wide sales paralleled eroding margins, thanks to rising costs for food, fuel, labor labor and transportation. And these were not transitory realities, or at least short-term ones.

Indeed, according to the Bureau of Labor Statistics released on Tuesday, menu price inflation hit a new 40-year high in March. Out-of-home food inflation climbed 6.9%, year-over-year, the biggest 12-month jump since December 1981. Full-service restaurants saw their menus rise 8%, d year-over-year in March, while -services grew 7.2%. Food at home (grocery) prices rose 10% and the overall consumer price index rose 8.5%, a 40-year high for general inflation.

Cole’s prediction is that restaurants are taking the prices to recoup their margins in the face of commodity, supply and labor dynamics. Restaurant wage rates are currently 11% higher year over year.

According to the recent Producer Price Index (PPI) report, also released by the BLS, food prices rose 12.8% over the past year, including significant increases for vital ingredients for operators such as beef and veal (43.9%), cereals (22%), shortening and cooking oils (36.4%) and eggs (40.9%).

“The M&A market depends on a well-capitalized, cash-filled banking system, which we have now, but cash flow – and the price acquirers are willing to pay for that liquidity – are the key drivers. that are attracting buyers, so unless we see an improvement in margins, we expect the pullback to be significant,” Cole said.

Quinn Hall, who leads loan underwriting and portfolio management at MUFG, added that aggressive funding realities are fragile at this COVID turn. This too comes down to the supply chain. “In addition to vacancies for waiters, cashiers and kitchen staff, restaurants have had to contend with the effect of supply disruptions and labor shortages at food producers and transporters. commodities that have driven up labor and food costs,” Hall said.

Brand stories from the past few months reflect Hall’s rating. Starbucks said in February that staffing shortages in the supply chain had caused distribution and transportation costs to skyrocket. Supply chain-induced inflationary pricing, which really spiked in December, impacted the coffee chain’s US business by more than 170 basis points on the margin.

On the front line, labor is becoming increasingly expensive and diverse. “Since offering higher wages alone is not enough, catering companies will need to consider a series of improvements to their benefits and job offers – from health benefits to flexible working hours – that would increase also the costs,” Hall added.

At the start of the year, Hall pointed out, restaurant financing conditions were benefiting from a healthy supply of capital and record financial performance, particularly in quick service. Banks accepted a higher debt profile among borrowers and offered flexible amortization, pricing and commitment terms.

Still, if margins continued to erode, Hall believed funding conditions would tighten in 2022, especially if interest rates rise and borrowing costs rise.

So how has this evolved?

FAT Brands CEO Andy Wiederhorn told analysts in March that the company would likely slow down its acquisition this year to digest “what we’ve already acquired realizing the synergies.” But he also didn’t rule out doing so, adding that FAT Brands remains “active in evaluating additional accretive acquisition candidates that augment our existing brands.”

According to Aaron Allen, CEO and Chief Global Strategist of his eponymous Aaron Allen & Associates, US acquisitions now generate nearly 30% of revenue growth for publicly traded restaurant companies. That’s why consolidation keeps popping up and why it’s likely to return to the headlines. Think Panera Brands, which started in August as a combination of Caribou Coffee, Einstein Bros. Bagels and the coffee giant, a 4,000-location suite with 110,000 employees; and Inspire Brands, perhaps the fastest growing restaurant business to date.

Given the challenges, the leverage of shared resources appeals to many who are eyeing growth opportunities. Inspire, which runs Dunkin’, Baskin-Robbins, Sonic Drive-In, Rusty Taco, Buffalo Wild Wings and Arby’s, eclipsed $30 billion in total global system sales in 2021 – a double-digit year-over-year increase. the other which saw it expanded to 70 markets worldwide, including further expansion in Asia, the Middle East and Latin America. The company, formed in February 2018 following Purchase of Buffalo Wild Wings by Arby’s Restaurant Group for $2.9 billion, also drove U.S. digital sales growth of more than 35%, year-over-year, to more than $6 billion, or more than 20% of national system consumption. The company topped $1 billion in sales through a third-party marketplace. Overall, digital sales now account for more than $7 billion of Inspire’s global business. And on the data and digital cross-fertilization front, Inspire has a company-wide loyalty base of nearly 50 million members. It opened north of 1,400 stores in 2021, included more than 500 franchise-run units in the United States and 800 outside the country.

Yum Brands!, between Taco Bell, KFC, Pizza Hut and Habit Burger, dlaunched a network of 1,259 restaurants in the fourth quarter of 2021, bringing its year-end total to 3,057 net new openings. The company’s previous record was 2,040 net stores in 2019. Overall, yum! added 4,180 gross units, which CEO David Gibbs called the strongest year of growth in our history and setting an industry record for unit development.

It’s worth asking if the big ones will look to expand in 2022, or if the medium/small chains will look for mergers and investments in hopes of bolstering their resources. A recent example is Dave & Buster’s $835 million deal for Main Event contender, whose interim CEO Kevin Sheehan (Main Event’s Chris Morris will take over at closing) described as a “transformational combination”, noting that Main Event’s model, footprint and asset quality align well with that of Dave & Buster. The two concepts do not cannibalize each other either; while the Main Event targets families and children, Dave & Buster’s targets young adults.

The rationalization caused by the pandemic shutdowns has revealed battlegrounds for market share. And consumer demand is there, with rising costs in counterpoint. Yet, as in 2021, restaurants that have outperformed conditions and built more resilient and diverse business models could be poised to expand or be targets for investors and big business. On the other hand, brands unable to combat these costs, and perhaps headed for defaults in engagement with lenders, could trigger deals as they seek relief.

Morven Groves, vice president of 10 Point Capital, a company that fuels the growth of Tropical Smoothie Café, Slim Chickens and Walk-On’s Sports Bistreaux, spoke with RSQ on the state of mergers and acquisitions in the business and where the industry might go on that front.


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