On the Money: Reality Bites
Given the miserable economy and the havoc wreaked upon restaurants, is now the time for small players to focus on expanding?
By David Farkas, Senior Editor -- Chain Leader, 3/1/2009 12:00:00 AM
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"It’s the quality and reputation of the entrepreneur that's being invested in wheater they like it or not. No third party can substitute for that." —Al Baldocchi |
I'm good at helping people understand what they need to focus on now," says Al Baldocchi, a strategic adviser and former investment banker in Boulder, Colo., who likes counseling emerging restaurant companies. Given the miserable economy and the havoc wreaked upon restaurants, is now the time for small players to focus on expanding?
Does it make sense to open a new unit these days?
It's important to first take an objective look at the business and understand that today's economic conditions are a reality and a store's performance will reflect them. Performance, by the way, isn't necessarily going to revert to what it was last year, at least not quickly.
What if sales at existing restaurants are now down 10 percent?
So what is the cash flow, the profitably of the unit and the investment cost? What is the outlook for sales? If it's a high-end steakhouse and sales are down 10 percent in this environment, you have to ask: Can you really make a go of another steakhouse?
Which concepts stand the best chance to grow in a bad economy?
Today's buzzword is "value." Clearly concepts with lower average checks appear to be coping better than those with high average checks. Fast-casual price points and traditional QSR are better positioned. The higher the sales volume, the better the cash flow.
What's your best advice to those who need to raise growth capital?
It is going to be a very difficult year. Restaurateurs have to plan appropriately. I don't expect there will be much institutional investor capital available.
But what about so-called pre-VC sources of capital?
It's the same answer. Private investors are much more careful with their investment funds They already have plenty of demands from some of their existing investments.
Where can operators turn?
The first place an emerging chain should look is to existing shareholders. They have the highest odds. Going beyond that will be difficult in 2009. Valuations are down in public markets, so the entrepreneur has to be realistic on how he or she values their company for new rounds of capital.
What are you advising?
In terms of preparing for expansion, I'm telling them, you have to be conservative in G&A spending. Also, be conservative in terms of not committing to leases or investing in G&A to support future growth until they have capital in hand.
That's a marked change from the recent past?
These young companies have all done things like signed leases when they didn't have the money to open stores. They've all taken some serious risks. But that's the nature of the entrepreneur.
Build it and they will come?
It happened that way for Chipotle, Noodles, a bunch of them. But money was easier. In this environment, money is tougher. You have to factor in risk assessment.
Are managements at emerging chains prepared to calculate the risk?
The softness in sales has been a real eye-opener and has helped make most management teams more realistic about the future.
