Strong unit-level economics can paint a good picture for restaurant brands, but shouldn’t be the only consideration when calculating long-term success.
This was the message from John Weiss, a senior adviser at investment banking firm Harrison & Co., who shared insight for operators at the Restaurant Finance & Development Conference. In his presentation, Weiss dug into how cash-on-cash returns at the store level can be misleading for brands.
“It seems that almost all restaurant companies going public have a 30 percent cash-on-cash return at their stores,” Weiss said. “Does that guarantee future success as a business or as a publicly traded stock? The answer is ‘no.’ There’s nothing magical about a 30 percent cash-on-cash return at the unit level. These returns must be measured accurately.”
Just as important as the unit economics, Weiss said, is the depreciation factor, which he said should be treated as real expense.
“It’s an indication of future cash needs for refreshing and remodeling restaurants,” Weiss said. “Consumers are reluctant to go to a restaurant that looks tired and run down. In the case of models not done in a planned manner, in the future, they’re going to be facing a really big investment need, and if you’ve ignored depreciation as an indication of future expenses, you may have to shut your doors.”
Weiss added that initial investments should also be factored in, as some restaurant companies may minimize the amount by using less expensive material. It may produce a higher return on investment, he said, but can also lead to more repair and maintenance down the road.
“Investments in technology are becoming more and more important, too,” Weiss said. “As you know, technology is becoming obsolete pretty quick now, too. So, if you’re not amortizing or depreciating investments in technology, you’re really fooling yourself.”
Because of the complexities of store-level financial data, Weiss said companies and owners should resist growing too quickly, especially because of employment expenses.
“If you have 100 restaurants with a 30 percent annual turnover for general managers and 60 percent for assistants, and you have three assistants per store, you’re already hiring 210 general managers and assistants just on normal turnover,” Weiss said. “You’ll then need to hire 80 more to open 20 percent more restaurants.
“You’ll also need to hire a very large number of hourly crew members and train them in your culture,” Weiss said. “We believe that for smaller, emerging concepts, it’s better to compete with legacy chains by offering true hospitality, and expand at a pace dictated by your ability to select great sites at reasonable costs.”
Finally, Weiss advised owners and operators to focus on a return on investment that’s sustainable and attractive, not just those that provide a temporary high.
“Most everyone would agree that Texas Roadhouse is by far one of the most successful full-service restaurant chains,” Weiss said. “Their store-level ROI is typically measured in the low 20s percent-wise, well below the 30 percent to 40 percent you see in other brands. They’re also wiling to operate with a food cost of 33 percent, which is above its competitors. But at the end of the day, customers love it and reward the resulting value.”