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After an abundance of successful business ventures, David Lobel founded Sentinel Capital Partners, a private equity firm that specializes in buying and building middle-market companies in the U.S. and Canada. Along with other prosperous investments, Lobel and senior partner and cofounder John McCormack have made their mark in the quick-serve industry. With past investments touching brands like Taco Bell and Church’s Chicken, Sentinel and portfolio company Southern California Pizza own 224 Pizza Hut restaurants in the Los Angeles area—the third-largest franchisee in the Pizza Hut system.
Lobel and McCormack share their tips on making smart decisions when expanding a portfolio company.
1. Assess the Risk Involved with a New Brand
First and foremost, stick with what you know. As soon as you step out into something new, it adds untested grounds and waters that could be dangerous for you and your investment. As a franchisee, we are not fans of having multiple brand types within the same portfolio or cobranding. Our success with the Pizza Hut franchise came from concentrating on the core brand and core strategies. If you try a new brand with no prior expertise, you must have the ability to transfer your core business strategies. Just because you understand the pizza business does not mean you should get into the hamburger business. The only time it might be a good idea to branch out and cobrand is when there are no more growth opportunities in your geography.
If you do end up in a cobranding scenario, make sure you go and recruit an executive or partner who is best in class with that brand. When we back a management team, we try to find the best operator in that system and create a team specifically for that franchise and that brand. Almost without exception, when we talk with operators focusing on one specific, core brand, they say operations are good and smooth. But with cobranders, not so much, and that’s because even for the best operator out there, it is not an easy thing to do.
Our success in the quick-serve industry came from focusing on the specificity of location and core business strategies. We’ve hitched our wagons on a franchise that has been around for a long period of time. New concepts that are introduced into the industry are a risk and can make or break your ventures. There is no proof of the longevity potential and how the market will respond. The quick-serve industry does have some resilience, but if there isn’t a response, there isn’t a profit.
2. Look for the Right Price, Location, and People
Find the great deal, both with the right brand and the right place. When you think about your growth strategy, try to concentrate your stores in a tight geography. With this strategy, you get more muscle and advantages such as catering to community specifics or local advertising. Don’t get seduced by spreading yourself too thin. Even though you might be with a big brand, you can still concentrate on the small things in your geography and have it be successful.
These markets are huge and not easy to grasp right away. It’s important to find operators who have demonstrated their brand’s success and have support from the franchisor. More often than not, operators who are relatively young and have not made a lot of money should be a red flag and might not be the best choice. Focus on operators who want to get into a growth vehicle and not just expand to see what happens.
Starting a new brand should start with a new executive team who can nail the brand’s concept. Just because you manage one brand doesn’t mean you can manage another. If you bite off more than you can chew, you run the risk of losing a lot. It’s important to have individuals in your corner that know that particular market segment. Where the franchisee runs into trouble is when he or she tries to do it alone.
3. Maintain a Tight Strategy
You will find very few people who manage their core brand just as well as their others brands. Success will come if you can keep great operations at multiple locations. If you expand too fast geographically or with too many brands, it becomes difficult to transport operations to suit the brand type. The challenge is that the quick-serve market needs constant attention. More specifically, each segment needs additional consideration. What we concentrated on in the pizza market might be different than what we concentrate on for the taco market.
Pizza Hut Corp. was selling a large piece of Southern California. We loved it because it was all in one place and we could focus on a specific market in a specific area, thus our core strategy would remain intact and operations relatively all the same. When we started the investment, we had half of that piece. Focusing on performance and operations, we now have the second half.