Traditional, well-established restaurant brands face a delicate balancing act between attracting younger patrons and satisfying their existing clientele while also maintaining a strong balance sheet.
“Millennials don’t have all the money, but they are driving new restaurant concepts that are gaining real traction,” says Roger Matthews, who runs the restaurant business in the Investment Banking Consumer & Retail group at Bank of America Merrill Lynch.
FAD OR FUTURE?
Although the jury is still out on the staying power of these new themes, a restaurant business must be built for the long-term. “Operators might not be able to secure substantial credit for new franchised properties on an enterprise-value basis,” cautions Cristin O’Hara, group head of the Restaurant Group at Bank of America Merrill Lynch. She adds, “They will need to maintain strong balance sheets and liquidity with their well-established brands to finance emerging concepts."
Since lenders often target established franchises, a prudent franchisee should determine whether an appetite exists for financing an emerging brand. Low commodity prices, inexpensive borrowing costs and rock-bottom gasoline prices that have been favorable to restaurants may not last, while minimum wage increases are now in effect across the U.S.
“I’d be cautious about making any seismic moves in my franchise portfolio,” Matthews says. “At the same time,” he adds, “you need to be proactive in embracing new trends and brands — as long as you do it in a prudent way.” That might involve allocating revenue from existing profitable franchises to reduce a new venture’s financing costs, as well as establishing a bigger capital cushion against an unfavorable economic turn.
Cleaner food: Health-conscious patrons are seeking fresh, organic, less processed, lower-calorie menu items.
Ethical sourcing: Livestock conditions, farming techniques and where restaurant food comes from are key priorities for millennials.
Community connection: Younger patrons look to the businesses they patronize for community engagement and “giving back.”
Customization: The emerging generation wants food prepared “my way” and they seek the flexibility to modify standard menu choices.
Special, social experiences: Whether quick-casual or formal, dining experiences need to be authentic and meaningful versus utilitarian and predictable.
For those with an eye towards expansion, there is another option: “Within established traditional franchise brands, there is an opportunity to at least diversify geographically by expanding into under-penetrated markets,” notes Anna-Marie Mundle, senior credit products officer for franchise restaurants at Bank of America Merrill Lynch.