The mergers and acquisitions market in the restaurant industry has been on a bit of a tear of late, reflecting a broader M&A trend of 9% CAGR growth across industries throughout the past five years.
According to Aaron Allen and Associates, this trajectory is attributable to a number of factors like private equity growth, consolidation as the restaurant sector saturates and easy access to capital. Biz2Credit reports that restaurants have a 51% approval rate on small business loans, for example, which is higher than any other type of business.
In other words, the M&A market is not expected to slow anytime soon, and the activity is no longer just for giant holding companies. Smaller players are also jumping in as they look for ways to expand their footprint and increase efficiencies to navigate cost headwinds.
Steve Salis is one entrepreneur riding this M&A wave. He created Salis Holdings in 2015, which now includes Kramerbooks & Aftewards Café, Ted’s Bulletin and Federalist Pig.
Salis isn’t a restaurateur by trade, but he co-founded &pizza in 2012 when he was 27 and got hooked on the industry.
“In today’s environment, offering great products and hospitality may put you in rarified air, but those factors alone may not be enough. Brands must drive consumers to profoundly connect, whether that’s through a sensory or an emotional connection. Our entire team gets a tremendous amount of fulfillment watching our guests enjoy their experiences with us, which is a major catalyst for why I pursue what we do,” he said.
That’s not to say his company doesn’t face the typical challenges, however. Salis breaks those challenges into two categories–business/regulatory and consumer/competition. For the former, rising wage rate mandates continue to pressure operators, particularly for middle and higher-income earners.
“As the floor increases, it puts the other earners in peril. As such, it’s forcing us to continually think of new ways to streamline our operations,” he said. “The reality is, the world is less binary than it’s ever been. Whoever can operate in the different hues of grey effectively will be the most successful.”
Which brings us to the M&A piece. Salis hasn’t been timid about growing his holding company, leading with what he calls an operational and brand engineering mindset that drives to the financial engineering of the organization.
“Everyone has different needs for what they’re doing. Some companies need to buy companies to re-energize their business and shareholder base. Others are pursuing a focus around cuisine and are willing to own up and downstream from premium to QSR, driving economics and purchasing scale to increase leverage,” he said. “We lead with a qualitative focus that then drives our quantitative strategies or thematic objectives.”
He adds there is an agnostic playbook for fulfilling M&A transactions.
“We view the world more from a content aggregation mindset, so we have to continue to build horizontally and vertically as needed,” Salis said.
Distilled, that means he wants Salis Holdings’ brands to have mass-market cache and adoption, while also building around a consistent core audience.
“(We want) our brands to have an interconnectivity, but recognize the need to celebrate and respect the individuality and persona each offer to our consumers to further harvest a more specified experience,” he said.
Salis Holdings not only acquires brands but also ideates new brands from scratch. The company recently opened a reimagined Ted’s Bulletin in Arlington, Virginia, that features a store-within-a-store concept with his original coffee bar, bakery and confectionary called Sidekick.
Aside from shared back-of-the-house space, each brand has its own dedicated resources. Salis said this is an effective way to leverage energy, create enhanced usability and frequency because each brand provides different needs.
“It’s excellent for a new brand that is looking to eventually spread its wings by leveraging an older, more recognized brand to assist in creating early loyalists and adopters for that new brand. And, therefore driving more volume to the location, which can be mutually beneficial for both brands,” he said.
Ted’s Bulletin, with six locations across Washington, DC, Maryland and Virginia, offers a modern take on American food, with signatures like country fried chicken, milkshakes and an all-day breakfast menu. Salis Holdings acquired the brand in late 2017. The Federalist Pig offers regional barbecue dishes, and Kramerbooks & Afterwards Café features upscale American fare.
Such a diversified portfolio, as well as the capability to start something new like Sidekick, allows the company to operate in that so-called “hues of grey” environment referenced earlier by Salis.
From a macro perspective, he expects more consolidation to come down the pike, mostly due to the intensifying competition in the restaurant space. Salis also predicts that more companies will go under.
“The reality is there probably aren’t 1,000 good locations in this country for a single brand anymore,” he said. “I believe many of the best brands in our space are taking a slower growth, ‘micro’-output approach in order to maximize potential dilutive impacts and ensure a higher level of quality assurance at all touchpoints.”
Unit growth as the only measure of success in driving long-term value will not be as important as it once was, he also believes. Indeed, some brands have had to learn this the hard way. Retrenchment has occurred across segments, from Subway to Applebees.
Salis also believes that a recession is inevitable. He’s hardly alone; nearly 70% of America’s CFOs believe the U.S. economy will enter a recession by the end of 2020. While certainly concerning, he sees such a fate as an opportunity for the restaurant business.
“No one really knows when and to what extent those will be affected. I do believe there is an uneasiness that’s evolving and though the underlying fundamentals in many cases seem to be strong, sentiment is everything,” he said. “Regardless of whether or not there is a recession, the strong brands that manage their expenses and focus on the right things will prevail and still warrant top dollar.”
For Salis Holdings and its brands, those “right things” mean a pragmatic growth approach and distinctive and high-quality experiences.
“There are so many places and only so much time and money one wants to expend,” Salis said. “This is why I put so much weight on the importance of building a brand and continuing to strengthening our relationship with consumers. We strive to make our consumer feel special at each interaction.”