Industry News | January 17, 2012

Maximizing Profit in Slow-Growth Economy

David Johnson is a partner with ACM Partners.
image used with permission.

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The economic recovery in the wake of the 2008-2009 recession has been lackluster, but for the quick-serve industry, things have been even worse.

Pre-recession, through the early 00s, restaurant growth in the sector was brisk, as consumers, flush with high employment rates and increasingly comfortable with low savings rates, continued a trend of preparing meals away from home. 

With those larger economic trends having reversed (see exhibits 1 & 2), the trend line for the quick-service industry, despite pockets of growth, has been decidedly negative over the past few years.

Exhibit 1

Exhibit 2

The interest of lenders and private equity investors in the space has not significantly dampened the challenges the industry faces. Many of these capital providers supported growth plans that, in the face of a painful recession and uninspiring recovery, have proven overly optimistic. 

In 2011 alone, quick-serve companies Friendly’s, Perkins & Marie Callender’s, Real Mex Restaurants, Quiznos, and Sbarro, among others, embarked on restructurings, either in or out of bankruptcy court (see exhibit 3).     

Exhibit 3

For quick-serve operators, the question in 2012 must be how to thrive in the face of considerable headwinds. There are five areas operators should focus on in order to beat the competition in 2012: 

  1. Align HR With Structure: The services provided by the central office must be clearly defined. There is no right approach, but a highly decentralized approach implies a lean central office and highly talented managers in the field.

A more centralized approach, by contrast, argues for high-quality talent in the central office but calls for less initiation from the managers in the field. Either approach can produce results, but operators find themselves in trouble when they adopt HR policies that are at odds with their structure.

  1. Cut Losses: Most management teams are very good at executing growth plans and leading companies through day-to-day challenges. However, few management teams have the time or the specialized skills to simultaneously manage high-performing units while also turning around under-performing locations. Enormous value can be destroyed when under-performing locations are not acknowledged and dealt with directly.   
  2. Financial Planning and Controls: High-performing quick-serve operators know to treat budgets as living documents, constantly measuring actual performance against the plan, identifying the cause of variances, and holding management accountable. Additionally, every capital provider should be aware of the forward-looking budget, operational assumptions inherent in that budget, and should receive a regular and sufficiently detailed reporting package.
  3. Reassess Fixed Costs: There is a saying in the turnaround industry: All costs are variable. Quick-service operators would do well to adopt that ethos in their approach to rental expense. Many lease agreements were entered into at Bubble Era rates, and the opportunity to renegotiate those terms represents significant potential cost savings. There are lesser-cost-savings opportunities with other key vendors that should also be aggressively pursued.
  4. Systems: High-quality systems provide the data necessary to identify savings opportunity and execute on cost-savings initiatives. Companies of all sizes must embrace a data-driven ethos and abandon management by rule of thumb.

Quick-serve operators need to ask themselves honestly whether they have the data, analysis, and reporting capabilities they need to manage their company at peak efficiency. If not, further investment is a necessity.

Case Study 

Recently, a financial advisor was retained by a multiunit quick-serve operator. The operator had been recapitalized by a private equity buyer, and management was energized by the mandate to develop a growth plan. The advisor provided expertise in a number of crucial areas:

  • Cash Management: Through development and weekly reporting of a cash flow forecast, management and all stakeholders gained comfort in the company’s ability to manage financial performance to a higher level of granularity.

While the initial development and management of this forecast exceeded the ability of the internal team, after the forecast was developed and reporting became routine, existing staff was trained to maintain this functionality.

  • Strategic Plan: Management, ownership, and lenders were all supportive of a new growth initiative, but this did not eliminate the need for a detailed plan outlining how growth would occur. Working with all stakeholders, the financial advisor developed a detailed three-year strategic plan that outlined how growth would occur, identified the financing needs for that growth, and provided a clear roadmap to all key constituencies.

As a result of the dedicated efforts of management, equity investors, lenders, and financial advisors, the company achieved a remarkable turnaround in a short time frame. The turnaround from troubled, under-performing quick-serve operator to a recapitalized company aggressively pursuing growth opportunities was achieved in approximately six months.       

Conclusion

Despite the feel-good economic forecasts for 2012, the macro picture of the quick-serve space remains challenging.

There are too many units chasing growth at the same time that consumers are retrenching. In order to thrive, operators must focus on operational discipline and generating maximum cash per dollar of revenue.

While a rising tide has a tendency to lift all boats, companies can still grow value and profitability while the tide recedes.

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