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Seldom
can someone write an article in a publication criticizing
its publisher and editor. Thanks, John and Mary Jo, for
this opportunity. The word "criticism" may
be too strong, but in reviewing the last five issues
of the Restaurant Finance Monitor, I (the eternal
optimist) have come to the conclusion that the editors
may be just a little too pessimistic. Like the Beatles,
I say, "Here comes the sun".
The last lead Monitor article was entitled "Enron Chicken." While it was a very well written, substantive article, it reflected some of the negative aspects of our industry. In November the headline was "A Good Ol' Restaurant Workout Tale." Again, this article was entertaining and truthful yet negative. In December, the lead article, "Picking Up the Pieces in Securitized Lending," was a discussion of what went wrong. Finally, in October, there was an article entitled "Revised Downward" that had a discussion of Technomics' projections as to the forecast for the food service industry and growth.
To be totally fair, the Monitor did run an upbeat article in January called "The Restaurant IPO Market Will Heat Up in 2002." There was some cautious optimism and the following wonderful quote from Alan Hickok, "The bald fact is that the restaurant business has been a bright light in a pretty dismal market."
What does all of this mean? This means difficult things happen, and we may see other tough times. However, I would like to pose to you, the reader, that for the entire restaurant sector, regardless of whether you are an emerging company striving for an IPO, a struggling franchisee or a high growth franchisor: "Here comes the sun". I am optimistic for the following reasons:
1. The QSR Segment. First, we understand that the retail sector is the largest sector in the economy. The restaurant segment of this sector is a very substantial part of the retail sector. Restaurants have been here forever. The QSR segment is a vital part of our economy and a vital part of the restaurant sector. Much of the restaurant industry downturn has been in the QSR segment. The QSR segment, while it has had tough times, has learned and is taking the steps necessary to turn things around.
This turnaround is evident in the number of successful workouts we have seen. I can think of few industries that have been able to complete so many successful workouts. The high-tech sector could certainly learn from the workout approach taken by the restaurant industry. Recent transactions such as Tricon's purchase of A & W and Long John Silver brands provide evidence of a turnaround and optimism for better times. Obviously, the pudding is in the tasting, and there still is much tasting left to be done.
2. Reasonable Values. The business values in the restaurant sector are now priced to again attract capital. When you have multiples at two, three, or four times cash flow, these businesses present a very attractive investment. Where there is good cash flow, low multiples and attractive valuations, money comes. It is not necessarily the same type of money as before. It is certainly not securitized loans or traditional collateralized bank loans, but new equity funds and debt from new finance companies that have stepped into this sector. The entrance of this new money is largely driven by low valuations and new equity invested into this sector.
3. Downturns and Over-leveraged Situations. Downturns in sales and over-leveraged businesses have a way of weeding out the problematic situations. Restaurant franchise companies need to periodically refocus on what is important; i.e. strong operators who have geographical concentration and adequate capital.
4. Balance Sheet Problems. Most of the financial problems that have crept up in the restaurant industry have not been a result of poor concepts but the result of poor balance sheets. Balance sheet problems can be fixed. Debt can be restructured. Equity players can be attracted. If the concept is strong, the concept will turn around. Even concepts that have significant problems such as Taco Bell, Pizza Hut, and Burger King have such a large critical mass that they are able to turn themselves around given adequate time, money and effort on the part of the franchisor and franchisee.
The analogy is sometimes made that a floundering non-franchise large multi-unit restaurant company is like an ocean liner that goes off course. This wayward course is declining sales and decreasing profitability. The ocean liner, with enough time can reroute itself in a direction to bring back profitability and sales. A great example of this is Darden with its Red Lobster concept. While a franchise operation is more like an armada of boats, trying to get all of the boats turned in the same direction is somewhat problematic. This new course takes time and a great deal of effort, but we have seen the efforts of Tricon, and we are now seeing the efforts of Burger King to turn around systems. These franchisors are getting the backing of the individual boats to move the systems back into a profitable and growth position.
The sun is shining again. The seas are beginning to calm, and a substantial portion of the restaurants out there are again beginning to sail smoothly. It is a tremendous time to be involved in this industry and to provide capital, debt, and services to an extremely vital part of our economy.
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