Archive | December, 2013

Why Do Restaurants Hate Private Equity?

23 Dec

Our simple philosophy is they shouldn’t. Private equity generally brings operational and financial expertise that many restaurant companies lack. While restaurant employees may be good on the qualities of running grills and booking tables, private equity is in the business of generating good financial returns, and the food service industries have very low – if any – profit margins.

Recently there was an article published combining 10 years of restaurant/private equity data. The results, at least to us, are not astonishing:

Store-level operational practices improve after private equity buyout, as restaurants become cleaner, safer, and better maintained. Supporting a causal interpretation, this effect is stronger in chain-owned stores than in franchised locations — “twin restaurants” over which private equity owners have limited control. Private equity targets also reduce employee headcount, lower menu prices, and experience a lower likelihood of store closures — a proxy for poor financial performance. These changes to store-level operations require monitoring, training, and better alignment of worker incentives, suggesting PE firms improve management practices throughout the organization.

The ideas of financial control, expense reduction and operational efficiency are generally lost on the restaurant industry while they are widespread tools in retail, grocery, finance, manufacturing and many other industries. Hopefully the restaurant industry can learn from decades of experience in other industries.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2336672