News

GE Capital: Expect slow, steady restaurant industry gains

April 3, 2011

GE Capital, Franchise Finance held its Restaurant Leadership Conference last week. The conference included results from the 21st edition of the Chain Restaurant Industry Review. GE Capital, Franchise Finance, a major lender for the franchise finance market, surveyed the largest 150 operators and top 100 chains for the study.

The research predicts consumer confidence and spending to increase, which will put the restaurant industry in a favorable position to begin growing in 2011. Also, in spite of margin pressures caused by commodity-price hikes, the industry also should experience more capital availability and strong merger and acquisition activity. These developments, while optimistic, are expected to happen gradually.

"The restaurant industry is seeing slow and steady improvement as consumers begin to spend a bit more and the economy continues to improve," said Agustin Carcoba, president and CEO of GE Capital, Franchise Finance. "With low interest rates, accessible real estate values and more liquidity in the financial markets, franchisees have an opportunity to develop an asset strategy, be it through remodeling, conversions, transitioning existing units to new locations or building new units."

GE Capital's research echoes recent data from the National Restaurant Association predicting 2011 to yield the foodservice industry's first real growth in four years.

GE Capital's Industry Reviewalso found that many respondents are concentrating on expanding within their current markets (44.4 percent) and reimaging units (31.1 percent).

These CAPEX opportunities coincide with a strategic shift at the franchisor level. Earlier in the decade, brands were more focused on building co-owned units. Recently, they have shifted their asset strategy to franchising to capitalize on a targeted brand focus, achieve a steadier revenue stream and mitigate risk, thereby creating opportunities for well-established franchisees.

Other important trends highlighted in the report include:

• Improved consumer spending: Consumers are more price sensitive than before the economic downturn, seeking out bargains and using social media to research restaurants and find deals. Operators are responding by offering bundled value meals and changing their menus to emphasize less expensive ingredients due to commodity price increases.
• Rising commodity prices: Despite significant increases in the prices of pork, wheat and coffee in the second half of last year, the industry overall saw the slowest annual rate of menu price increases in 55 years. Concerned about driving away price-sensitive consumers, many operators elected not to pass along the price increases and instead absorbed the higher costs themselves. That's expected to change this year, as 60 percent of operators have already announced plans to raise menu prices. The Industry Review's survey found that 88.9 percent of operators see commodities as the No. 1 factor that will impact their business in 2011, followed by financial markets and gas prices (tied at 33.3 percent).
• Margin pressures:To cope with the margin pressures caused by rising commodity prices and price-conscious consumers, operators are reacting with menu modifications, emphasizing less expensive ingredients, such as chicken over pork and beef. They also are locking in supply contracts and improving operations.
• Increased M&A activity:U.S. restaurant M&A activity is expected to continue to be strong in 2011 due to the improved credit environment and increased liquidity. Private equity firms are looking to put capital into the restaurant industry due to its unit growth potential, strong cash flow generation and strong cash-on-cash returns.

The Industry Review reports that the total number of restaurants in the U.S. was 579,102 in 2010, of which 46.2 percent were chains. Chain restaurants gained share at the expense of independent operators; chains' compound annual growth rate (CAGR) 2000-2010 was 2.3 percent, compared to -0.4 percent for independents.