Harris Williams, a global investment bank specializing in M&A and private capital advisory services, recently came out with their Q2 2024 Restaurants Sector Brief. According to their data, the key trends directing M&A opportunities include enhanced to-go and off-premise sales in full service, automation and AI in quick service, and healthier options in fast casual.
They also noted that operators are continuing to adapt to the changing diner preferences as the first half of 2024 comes to a close. Here, we’ll explore the latest trends in the restaurant industry as seen through the eyes of a far-reaching investment bank and a global law firm.
Continuing Changes in the Restaurant Industry
More restaurants turn to value-added offerings as customers trade down, exchanging their Friday nights at a fine dining establishment for a casual dining location. Another notable change that’s been on the upswing for quite a while is menu simplification, a need that arose as inflation set in and remained.
Fast Casual Brands Seeking IPOs
The success of Sweetgreen’s IPO in 2021 and CAVA’s IPO in 2023 have provided an incentive for smaller fast-casual brands to follow in their footsteps.
According to Mike Esposito, Co-Founder & Managing Director of Franchise Equity Partners, “If you look at the history of time since the 1950s, the IPO market is 100% correlated with the equity market, and with equity bouncing back, IPOs should be strong by the latter half of 2024. We’ve had two years of very little IPO activity. If I’m a betting man, when the flood gates open, it will be unusually high.”
Restaurant M&A Sector
M&A activity in the restaurant industry has been more resilient than expected, moderating slightly since its heyday in 2021. Today, private equity is still the predominant buyer, with about 55% of the transaction dollars coming from these groups.
Harris Williams quoted Zachary Fadem, Equity Analyst, Wells Fargo Securities, “We’re taking a more selective approach to restaurants in 2024. Comps are slowing, price increases moderating, and we’re placing an added premium on quality, comp/margin levers, and growing traffic.”
Some recent acquisitions include Craveworthy Brands acquiring Sigri Indian BBQ and Untamed Brands, the parent company of Taim Mediterranean Kitchen and Hot Chicken Takeover. Blackstone, a New York City private equity firm, purchased Tropical Smoothie Cafe for $2 billion, including debt. American Express is set to buy Tock, the reservation platform, for $400 million.
State of the Market and Industry Trends
In May 2024, Nixon Peabody, a global law firm, led a panel discussion with F&B industry experts. Some of their notable insights were the profound impact inflation, increasing interest rates, and the continued pressure from rising labor, inventory, and operational costs have had on the restaurant industry.
Because of this changing landscape, restaurants have found it difficult to manage profitability and relevance. Operators considering M&A activity need to make sure they accurately assess earnings and valuation in our current market dynamics.
They also report that, despite a slowdown in 2023, capital investment was equal to that invested in prior years. In 2024, strategic acquisitions over sponsor-led deals have been prominent due to portfolio optimization.
Innovative Financing Structures
Because of the increase in the private credit market and the resulting increased competition, tailored, innovative financing structures have become more popular. These flexible financing options provide support through various growth stages and are an emerging opportunity for founder-led and family-owned businesses.
They also noted a resurgence in investors looking at these restaurant segments, especially around casual and quick-service establishments. Some of the continued areas experiencing growing demand include ethnic foods and healthy foods and beverages with functional benefits. As always, and even more so in our current market, restaurants that can adapt to changing diner preferences, market dynamics, and fearless innovations have the best chance of remaining resilient and overcoming today’s industry challenges.
At Emerging Concepts, we coordinate restaurants’ real estate, finance, supply chain, and labor business strategies, providing unprecedented value from one platform. To learn more about today’s market and the present opportunities, contact Emerging Concepts.
