Predicting the Future of the Restaurant Business

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Welcome to Dana Delivers by Aprio podcasts, the podcast that helps restaurant owners and operators learn from industry experts about trends and opportunities. On every episode, Dana Zukofsky, the leader of Aprio’s restaurant advisory team, explores a topic impacting our industry in a candid conversation. And now, let’s hear what Dana is serving up on this episode.

So, today, on the podcast, we have John Hamburger, who probably everyone here listening to has been to at least one conference that he has organized. John, thanks for joining us today.

Thanks, Dana. Looking forward to it.

Thank you. And I always like to start the podcast with the first time I met someone. And although I don’t know exactly what year it was, when I thought back, it has to be almost 20 years ago. I attended my first Restaurant Finance and Development Conference, and it’s been about 10 years that I’ve been speaking. So John, thanks for that opportunity, because as every year comes up, it’s one of my most exciting things to look forward to, the conference. I feel like I’m going to a high school reunion and a prom all at once. So thanks for that. 

You’re welcome. 

So why don’t you give a little bit of background, just for the people who might not know, a little bit about you, the upcoming conference, and then we can talk about what you’re seeing in the industry as probably someone who talks to more people than anybody else.

Yeah. Well, thanks, Dana. The Restaurant Finance and Development Conference is actually 32 years old. It started back in 1990. The first one was in Minneapolis. And then for about 10 years, we went from, alternated between Chicago and Dallas. And then in 2002, we finally moved it out to Las Vegas. As it grew, we needed more space and more hotel rooms, and of course, Vegas has all of that. 32 years, there has been a lot of change. If you go back and look 32 years ago, there were a few banks in the space, one or two M&A people and there was still a sale leaseback market back then, but all of that really, really mushroomed as restaurants grew over the years. And now it’s a pretty active finance space. We’ll have over 200 exhibitors, we’ll have about 3000 people, and the finance business in the restaurant business has become its own little industry.

Oh, for sure. And it’s become, as it grew, I think a lot of it, organically, and with the markets and people just loving being in the space. I remember when I first started, bankers weren’t so interested in it, right? People looked at it as a cash business, there weren’t that many assets to lend against. And now, it’s definitely completely changed.

Yeah, lending to restaurants back in the day was perceived as a no-no. Local banks didn’t want to touch a restaurant loan. And as multi-unit restaurant companies, they became multi-unit, and they started going to different states. Their local banker couldn’t help them. And so that’s really when the financing took off in the banks. And I think McDonald’s was really kind of the first one where banks started putting together programs. And now you see these, whether it’s Wells Fargo, MUFG, Bank of America, BMO, they all have multistage lending programs for chain restaurants.

Right, and everyone wants to get in now, or I guess that’s what we could talk about, they did want to get in. So now we’re in this weird part of the economy where no one really knows what’s happening next. So as someone who has been speaking to a lot of bankers and lenders getting ready for the conference, tell me a little bit about what you’re hearing as far as lending goes to restaurants. I’m sure people who are listening to the podcast are either looking for money or starting to think about it.

Yeah. Well, I think the restaurant business reflects what’s going on in the real economy. If I look back over the years that I’ve been in it or been working on the conference, banks, as many of you know, they can blow hot and cold. They can become really excited about lending money, and then they go through a period where they’re not very excited about lending money. I think that we’re in that period right now of caution. I would say that what’s going on in the economy with inflation, and with the rise in labor costs across all industries, is affecting the restaurant industry.

Right. It’s not just the rise in labor costs. It’s also the lack of labor availability.

Yeah, just trying to find people to work in just about any industry. My dentist tells me that he’s short of people. In any industry, they’re having trouble trying to find people. And this is reflected in the economy. And it’s impacting restaurants, and because it’s impacting restaurants, we’re going through this period of margin squeeze. Last quarter, I saw Chili’s. If you took a look at their store level operating profits of the Chili’s restaurants, they were down significantly last quarter. Domino’s just reported on Monday, their company’s store margins were down. So these are big operations. You can imagine what’s going on in the smaller restaurants and the franchisees. And so when they report this information to the lenders, the lenders say, ‘Oh, my God, I can’t believe these numbers are the way they are.’ And you have a lot of issues. You have covenant issues, where restaurant borrowers are breaking covenants. I think it’s a fairly significant number right now. And so what happens then is the lenders say, ‘Timeout, let’s hold off for just a second. Let’s see what’s going to happen here before we commit more dollars.’ And I think if you’re an operator who has been able to work through this, you’ve been able to see sales increases, you’ve been able to protect margins to some degree, I think you’re going to be fine. I think the lenders, your lenders, your relationship with your lenders, I think can withstand these problems. If you’re just a recent borrower, you just put a deal together, you’ve got a syndicate of big lenders in your credit, and now you’re starting to have some problems, it’s going to be a lot harder to get more money. So I think there’s real, real changes that are going to take place here over the next year or two as we work through this.

Right. And that’s one of the things we talked about in the prep is worse having a lot of conversations with people in the industry, who, they’re going now to their bankers to talk about covenants, right before we start doing year end audits. But what about the people whose money is coming due? Those conversations and the relationships are really what’s going to help through this time, as much as it could, I guess.

Yeah, well, banks, they don’t like to put people out of business, I mean, contrary to what some people would believe. So when you said it comes due, I think that we’re going to be over the next year or two, we’ll see what happens with inflation, but I think over the next year or two, we’re going to be in kind of a quasi-workout period where the banks are going to be taking a closer look. They started looking closer at these during the pandemic. Again, like everything, there’ll be some brands that are going to find this a perfect opportunity for growth. And I think there’s some brands that are going to contract, and they’re going to have trouble. And Warren Buffett has always talked about who’s out there swimming naked when the tide comes in. And I think over the next year to 18 months, we’re going to find out who’s naked.

Right. And brands, some growing, some contracting, legacy brands versus new brands. Again, I feel like if anyone has the closest thing to a crystal ball because of the access to information, I’m going to give it to you. So what are you thinking?

Well, the way that I think is I like the outlook for emerging restaurant brands. I think that I’ve been talking about generational change for the last 5, 6, 7 years. I think we’re in the midst of a big generational change, where Gen Z and Millennial interest in restaurants is very high. I think they like to spend dollars in restaurants. This generational group is growing, it’s going to be a significant part of the population. And so I’m really optimistic about emerging brands. Like any downturn, I’m not that optimistic about some of the older brands, brands that have been around a while. They’re tired. I think a lot of operators are, frankly, worn out from the pandemic. This has been a tough business, Dana, over the last couple of years. I mean, all the work that people had to do through the pandemic, and then now having to deal with inflation and staffing issues. It has become a tough, tough business. And I think there’s a lot of brands that are tired. I think there’s some operators in those brands that are worn out. This is what’s happened over the last 50 years in restaurants. The older ones, the tired ones, go away and they’re replaced by newer ones. 

Hot new thing.

Yeah, and I think that’s what’s going to play out here over the next couple of years.

Right. And I guess also, I mean, as we see in the papers, that going out to eat at certain restaurants is the same price, if not sometimes less expensive, than grocery shopping. And we know that those two generations, they, as Kevin Burke always says, they consider putting milk in your cereal making dinner.

Yeah, I’ve never liked that comparison. They say, well, grocery prices are rising faster than restaurants. I can tell you that it’s still cheaper for me to go to the grocery store and buy two burgers and a six pack of beer and some frozen fries that I can cook. It’s a lot cheaper than me going out to some casual dining restaurant and ordering the same thing, but it’s not the same. And I think that restaurants that are offering good food and experience, that there’s still value there.

Is there something that you’ve seen recently, or someone you’ve spoken to that’s going to be at the upcoming conference, and you don’t have to give necessarily a name, or an idea that really excited you, whether it be a brand or a technology or something?

I think the one thing that’s interesting about a lot of these emerging brands is they come into their concept with technology. I mean, technology is part of their creation as they build these restaurants. And I think a lot of older brands are playing catch up, you know what I mean? Their POS is old, their back office software is old. They’re having to implement this, where a lot of the newer brands start out with technology. And so I think that’s kind of exciting. And there’s so much technology out there. I mean, it’s interesting, and I think I just gotta mention one thing in the technology space. I think you’re going to see, if you think restaurants have been hit on the funding side, I think technology companies have been hit just as much. And you’re seeing valuations come down on a lot of those emerging technologies. I think that’s going to be an interesting area over the next year or two as they consolidate. Anyway, we’re not here to talk about technology. 

No, but I agree with what you’re saying. With even just the restaurant technology, right, when we – I’ll go to myself – 20 years ago, everything was on an Excel sheet and QuickBooks, and then all of a sudden, in the past, let’s call it 10 years, there’s been an influx of technology, and there’s so much. The restaurant industry went from zero to 100 in a minute. It was quick, and there were so many options. And first to market, we know, isn’t always best, but I think now people are realizing which is the better and best and just starting to have that shakeout. So I understand what you just said about valuations going down, because I think everyone got so excited about all this new stuff, and now it’s like, let’s stop and breathe a second, take a beat.

The one interesting thing that I think, private equity still has a lot of cash. There’s a lot of money out there. You look at what the combination with the government and the Federal Reserve printing money, there’s still a lot of cash out there looking for deals. There’s a lot of opportunity out there, I think, or there will be over the next year or two, I think, and I think that’s exciting.

Yeah, and I was going to say, for me, the more I talk to people, I think there is the cash out there, which we know. But I think people are sitting on it a little bit longer than they might have a year or two ago and kind of talking a little bit more and dating a little more just to see what happens with the things we spoke about earlier, whether it be good for the economy.

We know there’s not a lot of deals right now. Sellers look at the margin compression they’re experiencing and thinking there’ll be a better day in the future. And maybe it’ll be better to sell their operation a year from now or two years from now when margins come back. But one of the things I think people need to keep in mind is that as interest rates rise, the cost of capital is rising as well. You’ll see some multiple compression as well.

For sure. We’re definitely seeing that as well. But John, I love talking to you. I can’t wait to see you and the whole team in Vegas. Everyone who’s listening, come watch me. I’ll be presenting. Can’t wait. Love my panel. And John, any last plug for the conference or anything else going on?

You know, Dana, you just gave one of the greatest plugs of all time. I don’t need to follow up on that.

Okay, perfect. Well, thank you very much, and I’ll see you in November.

Thanks, Dana.

Thank you to all of our listeners to the Dana Delivers by Aprio podcast. If you liked today’s podcast, please hit the subscribe button. Dana Delivers is brought to you by Aprio, a premier accounting and business advisory firm with offices across the US and clients around the globe.

About John Hamburger:

John Hamburger is the founder and president of Franchise Times Corp., a national publisher of business trade journals in finance. He also started the Restaurant Finance & Development Conference in 1990, which continues to thrive, and recently began the Food on Demand Conference. John has 40 years of experience in franchising and finance and speaks often about financial matters in the hospitality industry.

John attended St. John’s University in Collegeville, Minnesota and the University of St. Thomas in St. Paul, Minnesota where he graduated with a B.A. in accounting.