Taking Restaurants PrivateJune 22nd, 2010 | Posted by in Uncategorized
Last week’s deal to take Burger King private caught few by surprise, given the intense focus of PE on the restaurant sector and the many struggles of BK. A few months ago, Mill Road announced a deal to buy Rubio’s. In late April, another firm (Apollo) came over the top of Thomas H Lee to buyout CKE for about $1 billion including assumed debt. All this comes on the heels of 2010 acquisitions of On the Border (Golden Gate Capital), Papa Murphy’s (Lee Equity Partners), and Wingstop (Roark Capital Group).
Amid speculation that there are more restaurant buyouts to come, we’ve been thinking about what PE firms need to do to thrive with these new investments. Here are three ideas that can unlock huge profits. The problem is that all three are risky… unless you test / measure impacts and use those analytics to drive decisions:
1) Profitably reduce media spend by more rigorously understanding incrementality. Cut spend that doesn’t pull its weight.
- As one of the largest cost items, media expenditures are a logical place to start improving profitability. The question, of course, is how to ensure cutting costs doesn’t kill sales in the process. APT recommends a two-step process for attacking the issue. First, mine historical variations in media spend (e.g., TRP differences across DMAs over time, FSI circulation differences, etc) to identify “natural experiments”, times when markets had greater media exposure than others. Analyzing these variations can point towards major spend reduction opportunities. Second, test these spend reductions to make sure the sales impacts are in line with expectations.
2) Understand “accretion”, the sales/traffic that accrue to a neighboring site when you close a site nearby.
- By analyzing past site closures, you can understand the effects on nearby sites (using a control of like sites to determine the incremental impact of the closure). Adding up that effect across all nearby sites, then dividing by the closed store sales, yields the “accretion” (percent of sales that you retain when you close a site). Of course, that number varies greatly, based on distance to nearby sites, competitive site locations, demographics, and the uniqueness of your brand. Quantifying these effects enables a restaurant owner to model the accretion for every site in the network. Use the data to prune the network, closing marginal sites where volume will be retained nearby. Better yet, use results as leverage in lease renewal negotiations. If you know you can retain 30% of sales when you close the restaurant at 2nd and Main, you can push the landlord harder on the rent he’ll have to give you to stay.
3) Focus the menu and promotions by understanding the item loyalty and preferences of guest segments.
- For restaurants that get the data, check/transaction-level detail, tied to hashed credit card IDs, provides a treasure trove of information. Is there a small segments of guests who LOVE an item I’m thinking of rationalizing? Are there certain items my most loyal guests order again and again? Based on past ordering, what is the “implied cost” of the giveaway in Promotion A versus Promotion B? By mining the transaction detail, you can know before you change the menu, pick the products for the next media campaign, or choose the next promotion.
None of these are new ideas of course, but few get the answers right. The problem is “noise” – all the things that impact restaurant sales beyond the action you are trying to measure. By using a rigorous Test & Learn methodology, new PE owners (or restaurant companies themselves) can cut through the noise and understand the true actions required to improve the chain’s economics.
Reach out to us if you’re interested in learning more.
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