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Don't Stick A Fork In 'Em Yet
Distressed restaurant opportunities are creating real estate plays for investors and expansion opportunities for selective chains.
August 13, 2008
The demise of chowhouses Bennigan’s and Steak & Ale, to some, represented another consumer entity toe-tagged thanks to a flagging US economy. To Atalaya Capital Management and CRG Partners, a pair of distressed mid-market investors, however, the restaurants represented an opportunity.
Atalaya and CRG bought out about 200 company-owned restaurants, and, sources indicated, are already drawing interest in the assets. At a time when tightened purse strings and spiking food costs are putting the squeeze on owners, rare opportunity is increasingly offering bargains to investors—Uno Restaurant Holdings was rumored last week to teeter on the brink of default.
One thing potential chain liquidation buyers should be mindful of is, as the adage goes, location, location, location. Gene McCaffery, who recently joined Livingstone Partners, a mid-market investment bank, as consumer industry advisor, said one of the reasons Cheesecake Factory, a nationwide chain that also implores diners to stick around for dessert, has enjoyed success over time is to its selective use of real estate. The company runs 139 restaurants in 34 states and the nation’s capital, but don’t count on seeing one open up in the spot the old diner just abandoned around the corner from the strip mall.
“They only took A, A-, maybe B+ real estate,” McCaffery said. “The thing that trips you up is real estate.”
If chains tried to replicate results achieved in prime markets after expanding to lesser-valued territories, it would likely see profit-per-square-foot level off, McCaffery added.
While, undoubtedly, some of Bennigan’s and Steak & Ale’s locations are those in the furthest reaches of suburbia, closer to a deli or a dollar store than a Bloomingdale’s, the chains’ real estate nevertheless contains some of those property gems for companies like Cheesecake Factory.
This, McCaffery said, is why Atalaya and CRG will turn their distressed venture into a money-maker. One industry analyst, who asked to not be quoted, said franchisees looking to capitalize on space the corporation took and made profitable have finally found the opportunity to do just that.
As for others, the analyst said, “Some [real estate] assets were pretty weak.”
The analyst predicted that more corporate real estate could become available from restaurant shutterings.
Others buyers, speculated Ron Paul, president of restaurant consultantcy Technomic, could include developing chains like BJ’s Pizzeria, Buffalo Wild Wings and even PF Chang’s.
To be realized in these highly-trafficked areas is a greater return on per-square-foot investment, McCaffery said. He acknowledged that some chains, particularly those with higher prices, might experience difficulty in a tightened economy if consumers continue to feel budgets constrict and if food suppliers keep charging the same rates. Ultimately, maintaining turnover at tables and keeping diners in them is all that can sustain a chain in a down economy—something that having A-grade real estate supports.
“If you can’t keep turning over tables your company is going to be on the edge,” McCaffery said.
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