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M&A activity is reaching near-record highs in the U.S. and globally, and the hospitality industry is no exception. Deals in the food and beverage industry grew at a 9.7% CAGR between 2010 and 2017, while the restaurant portion of that sector enjoyed 6.6% growth over the same period.
Emerging brands are studying incumbents and segment leaders for weaknesses to exploit — and some are, successfully. Those with size and scale are throwing their muscle and might into buying more muscle and might.
There are many explanations for this harried pace of buying, selling, merging, and spinning off.
- Capital is cheaper than ever, thanks to record-low interest rates
- The availability of capital is at near-record high, thanks to increasing corporate profits
- There are trillions in capital sloshing around global markets, seeking investments
- Foodservice remains a steady — and relatively easy-to-forecast — growth sector, expanding with inflation, population, and discretionary income
- Emerging and frontier economies will see the bulk of future growth, and conglomerates in these markets look to Western brands first to build their empires
Meanwhile, profit margins are compressing globally, most dramatically in the Middle East, as its foodservice economies move from emerging to developed markets. In response, many scaled chains have adopted a “grow fast or die slow” sensibility. And it’s working — power and dominance are consolidating.
Though restaurants have been gaining a steady share of stomach year-by-year in most geographies (though grocery stores in the U.S. have started to fight back), the battle for the biggest piece of that share is escalating. In mature markets, the slugfest is brutal and unapologetic. While industry growth is stable and steady, some sub-sectors and categories may be characterized by a sometimes-gruesome competitiveness. In some environments, it’s more dangerous to stand still than to take calculated risks.
Acquisitions make strategic sense in this era of cheap capital, fierce competition, and slow growth, but only if these moves are backed by solid due diligence and a forward-looking strategy. In that spirit, here are 10 ways acquisitions have been leveraged to drive growth for foodservice companies.
1. Dramatic and Consistent Top-Line Growth
When organic growth may be hard to come by, acquisitions can keep overall company revenue lines climbing steep slopes. An existing concept comes to its new owner with all its tangible and intangible value — from units and equipment to menus and brand — as well as its customer base with it. Combined, these new additions to the original portfolio accelerate revenue growth.
In August 2007, Darden Restaurants announced the acquisition of RARE Hospitality, owner of LongHorn Steakhouse and the Capital Grille, for $1.19b. The same year, it sold Smokey Bones Barbeque & Grill for $80m. Despite the loss of 73 Smokey Bones locations, Darden reported an 19% increase (~$1.1b) in sales the following year. With 305 LongHorn and 32 Capital Grilles (up from 287 and 28 when the sale went through), the new acquisitions accounted for 29.8% of Darden units. Another $591m increase in sales in 2009 more than paid for the cost of the deal. As of 2018, LongHorn represents 21% of Darden’s sales, behind only Olive Garden.
2. Expand Market Share
This strategy is especially useful for mid-sized firms hoping to increase their market share. In April 2018, rumors of a merger between DoorDash and Postmates began swirling. As of February 2018, Postmates controlled 9.1% of the U.S. delivery market while DoorDash claimed 13.9%. Their combined 21% would push them ahead of Uber Eats, which controlled 19.9%, and solidify their lead on Amazon (4.0% market share).
HelloFresh successfully completed a similar strategic acquisition when it bought Green Chef in March 2018. The purchase helped HelloFresh pass Blue Apron and become the largest meal-kit company in the U.S.
3. Enter Fertile and New Fast-Growing Markets
As the global economy has gotten more, well, global, the number of multinational corporations has quickly increased, doubling since 1990. This is as true in foodservice, where McDonald’s, Starbucks, and KFC have opened locations all over the world. These chains are relying on organic growth — alongside franchise and licensing agreements with local operators — while others use acquisitions to penetrate foreign markets.
For example, Amazon purchased the Middle Eastern e-commerce firm Souq in July 2017, giving the U.S.-based firm access to 45 million users in a region where online purchasing is growing at record speeds. E-commerce doubled between 2015 and 2017, and it is projected to post growth rates above 20% through 2021.
Amazon’s acquisition strategy also helps it gain a foothold in segments it has struggled to penetrate. Recognizing the growth in home-delivery for groceries — 70% of shoppers are projected to buy at least some of their food online by 2025 — Amazon launched Amazon Fresh in March 2017. By November of that year, it had discontinued service in nine states, with some employees privately blaming the U.S. Postal Service. The acquisition of Whole Foods is giving Amazon another shot: with brick-and-mortar stores to serve as hubs and independent contractors working as drivers through the Amazon Flex program, the company is set up to claim a significant share of this new market.
4. Diversify Guests
Adding brands to a portfolio can bring new kinds of guests into a system’s orbit.
For example, Coca-Cola has been buying up and developing new beverage lines for almost two decades. From Odwalla (2001) to Honest Tea (2008) and Costa Coffee (2018), the undisputed soda-champion is trying to reach more health-conscious customers.
These purchases, alongside the in-house development of brands like Dasani, give Coca-Cola an opportunity to sell to every consumer.
When Marriott International bought its former rival Starwood Hotels & Resorts in 2016, it acquired all Starwood properties — physical and intellectual. In the fourth quarter of 2016, Marriott reported a $42m increase in profit and a 47% revenue improvement. In addition to the revenue and profit benefits Marriott reaped with the Starwood acquisition, it also got its 21-million-member-strong SPG loyalty program
5. Stay Current with Consumer Demands
Foodservice is still undergoing seismic shifts, as fast-casual concepts, delivery, and meal-kit services fundamentally reshape the restaurant industry. This pace of change is expected to continue — if not accelerate — in the coming years, sparked not only by even more transformative technological developments but also by the arrival of Gen Z, set to become the largest demographic group in the U.S. in 2019. Acquisitions can help companies keep pace with the evolving industry, and Starbucks’ handling of its Teavana acquisition is a key case study in this strategy.
Since purchasing the tea company in 2012, Starbucks has integrated its products into its own units, building Teavana into a $1b brand. Where the parent company failed was in developing and nurturing standalone units: the real-estate strategy focused primarily on malls, which continue to suffer from declining traffic. In July 2018, Starbucks announced that it would close all 379 Teavana locations. Some were quick to classify this as another example of Starbucks’ spotty acquisition history, which includes Evolution Fresh juices and the La Boulange bakery.
But the company’s pivot from retail locations to grocery-store sales shows a canny understanding of market trends (and its solid understanding of corporate M&A strategies). Not only does the move rescue the brand from the graveyard of shopping malls, but it also gives Starbucks a new line of retail revenue, especially key after selling the rights to coffee sales in groceries to Nestle in May 2018.
6. Integrate Value-Enhancing Technologies
As recently as 2009, some restaurant operations still saw their online presence as optional. At the NRA conference that year, Sally Smith of Buffalo Wild Wings said her organization would take a wait-and-see approach to social media. Such an attitude today feels incredibly outdated: the question isn’t whether to integrate technology, but how to do it.
Acquisitions are a surefire way to add technology to an operation. In May 2018, Landcadia, the holding company that owns Landry’s Seafood, Morton’s The Steakhouse, and almost forty other restaurant and hotel brands, acquired Waitr, a delivery platform centered in underserved markets in the American Southeast. The deal will not only give the Landcadia restaurant group a dedicated delivery platform — freeing the company from having to create its own — but it also allows them to enter the booming delivery market, where enterprise value is growing at an incredible pace.
Yum! Brands’ February 2018 $200m (3%) stake in Grubhub follows a similar logic: the investment will make Yum!’s brands more accessible to consumers, but it will also give the QSR operation a share of the delivery platform’s stunning valuation.
7. Push New Products to Market
For multi-brand portfolios that want to add new concepts, acquisitions skip the development and proof of concept phase and go right to expansion. This strategy seems to motivate the massive MTY Food Group, which now controls over 70 brand names. In November 2017, it added two burger concepts, The Counter and Built Custom Burgers, to further expand its portfolio.
Other players in the food and beverage space are making similar moves. In May 2018, Kroger supermarkets spent $700m on Home Chef, a Chicago-based meal-kit company that already delivers 3 million meals to people’s homes every month. Home Chef will continue its original business while making its products available in Kroger grocery stores, allowing the chain to access the growing meal-kit sector, which is expected to have $10b in revenue in 2020.
8. Claim Brand Value and Intellectual Property
By 2015, intangible assets, which include intellectual property and goodwill, accounted for a staggering 84% of the S&P 500’s value. This shows a 394% increase in 40 years. Globally, the most profitable businesses are those in the idea and knowledge economies, and value increasingly comes from brands and trademarks.
Acquiring restaurant operations out of bankruptcy can revive still-valuable IP, adding its value the purchaser’s portfolio. In 2017, Landry’s won an auction for Joe’s Crab Shack and Brick House Tavern, spending just $57m for the two brands. With 95 locations open at the time, each unit cost Landry’s approximately $600k, a steal considering the concepts’ reported $3.1m AUV in 2013.
IP-focused acquisitions are also heating up the delivery space. In January 2018 Uber Eats bought New York–based start-up Ando; a company spokesperson explained that “Ando’s insights will help [Uber’s] restaurant technology team as we work with our restaurant partners to growth their business.” As delivery companies continue to consolidate, we’ll see more large platforms buying smaller competitors for access not only to their proprietary tech but also to the data they’ve collected on consumer behavior.
We support with both sell-side mandates and middle-market buy-side advisory for restaurant industry investments.
9. Complete Product-Line Puzzles
In the world of foodservice acquisitions, few firms have been as active — or as focused — as JAB. Since 2012, the German holding company has been building a coffee-and-bakery empire. Starting with Peet’s Coffee and Tea in 2012, JAB has bought up Keurig Green Mountain (2015), Krispy Kreme Doughnuts (2016), Panera Bread (2017), and most recently Pret a Manger (2018). Besides gaining market share in the café-bakery segment, JAB is also pushing competitors to make big moves of their own, as Nestle’s massive, $7b distribution deal with Starbucks demonstrates.
Large firms may make small acquisitions to consolidate market share, buy out competitors, or enter new markets. Many of the deals mentioned here qualify as bolt-on acquisitions, in which a smaller operation is integrated in a larger organization’s supply chain and distribution network. That’s the strategy General Mills is following as it adds brands like Annie’s Organic Foods, Larabar, and, most recently, Blue Buffalo Pet Products. The deals let General Mills enter the organic and healthful market and give the acquisitions access to many more retail outlets.
For this reason, lower middle-market leaders often look for a larger company to acquire them. As operations transition from emerging to emerged brands, they often find their capabilities — in human resources, marketing, supply chain, and governance — stretched their breaking point. They’ve gotten too big to keep staffing levels low and lean, but they’re still too small to completely fill out the corporate structure. Being bought out by a larger organization, with greater managerial capabilities, might be the safest way to grow.
The deal between Krispy Kreme and Insomnia Cookies, announced in July 2018, is a perfect example. With 1,400 locations globally, Krispy Kreme is more than ten times the size of Insomnia, which has just 135. Both organizations contribute unique capabilities to the deal: besides its standalone locations, Krispy Kreme sells its frankly perfect donuts in grocery and convenience stores, and Insomnia specializes in late-night delivery. More than that, Krispy Kreme, which has been in the business for more than 80 years, can help Insomnia move seamlessly out of the lower middle market as they transform from a start-up to a mature brand.
10. Buy Low, Sell Dear
In March 2018, Spice Private Equity acquired Bravo Brio Restaurant Group for $100m. The last registered valuation for the company was 2.8x (EV/EBITDA) as of December 2017 — well below the industry median of 10.6x. These fire-sale prices offer the new owners an incredible opportunity to build value over the holding period. If Spice can bring Bravo Brio’s valuation up to just the industry median, without making any EBITDA improvements, it would result in a more-than-doubled enterprise value.
This isn’t the easiest way to make money, of course: turning around a struggling restaurant concept, especially one in the casual-dining sector, is a task only the bravest in the industry are willing to take on. But the potential rewards match the challenge, with a successful turnaround creating ten- to twenty-fold returns on investment.
Grow Fast or Die Slow
M&A activity, especially in the foodservice space, is on an unprecedented run. Forward-looking executives are using mergers and acquisitions to fortify their operations: achieving top-line growth, consolidating market share, and adding necessary technological capabilities. The deals being made today will have a profound impact on the future of these organizations.
As interest rates rise and margins shrink, growth will become harder and harder to achieve in saturated categories and markets. Even frontier economies are quickly moving from fragmented to chain-dominated, and restaurants will have to do even more to stand out from their competitors and strengthen their systems with growth in size and scale.
This period of inexpensive capital and global opportunity is coming to an end, and leadership teams face a stark choice: execute a robust and aggressive acquisition plan to grow quickly or try to survive the squeeze against larger and/or more agile competitors that used this moment to lay the groundwork for a secure future.
About Aaron Allen & Associates
Aaron Allen & Associates works alongside senior executives of the world’s leading foodservice and hospitality companies to help them solve their most complex challenges and achieve their most ambitious aims, specializing in brand strategy, turnarounds, commercial due diligence, and value enhancement for leading hospitality companies and private equity firms.
Our clients span six continents and 100+ countries, collectively posting more than $200b in revenue. Across 2,000+ engagements, we’ve worked in nearly every geography, category, cuisine, segment, operating model, ownership type, and phase of the business life cycle.