Lenders and institutional investors are rushing into the restaurant space seeing a more upbeat outlook for 2014.
The resulting availability of “cheap money,” as well as whether and how restaurant companies might take advantage of it, was an ongoing theme at the 24th annual Restaurant Finance & Development Conference, which wrapped up Wednesday at the Wynn Las Vegas.
Lenders interested in working with restaurants were few and far between just a few years ago, but their number has increased dramatically — now including a variety of sources, from regional banks to subsidiaries of foreign banks and institutional investors. As a result, financing opportunities have become plentiful, said attendees and panelists at the three-day conference, which gathers members of the financial community and restaurant operators from across the country.
“Lenders have a lot of money to put to work,” said Bob Bielinski, managing director of financial management and investment banking firm the CIT Group Inc., based in Chicago.
Capital is available for acquisitions, remodeling or development for brands of a sufficient size — though what size that might mean depends on the brand and the lender, he said. Competition between such lenders has also resulted in more favorable terms for borrowers.
However, “just because you can borrow it doesn’t mean you should borrow it,” warned Bielinski. “Borrowers have to be responsible for their own balance sheet and capital structure.”
For the most part, those in the financial community appeared bullish about 2014, saying the choke hold on consumer discretionary income is likely to ease somewhat, though the gap between the haves and have-nots is expected to widen.
This year’s soft sales in casual dining are expected to improve, especially for brands that focus on food quality and freshness, staying relevant with current trends. Still, most agreed that the fast-casual segment will remain the primary thief of market share, taking guests from both their casual-dining and quick-service brethren.
The biggest challenge for restaurants this year has been the dwindling disposable personal income, or DPI, for consumers, said Michael Kelter, lead restaurants analyst on Goldman Sachs Group Global Investment Research team. DPI typically grows by $400 billion to $500 billion each year, but in 2013 it was estimated to grow by only about $225 billion, he said.
The payroll tax increase earlier in 2013 took about $700 per household on average out of consumers’ pockets, which depressed DPI growth. In a recent Goldman Sachs survey, 42 percent of consumers said they curbed their spending as a result.
Haves vs. have-nots
The good news is that spending is expected to rebound somewhat next year, and ongoing improvements in the job market and wage growth will continue to climb. “We’re feeling good about 2014,” said Kelter.
The growing gap between the wealthy and the middle class, however, remains a consideration. On average, 90 percent of consumers with a household income of over $70,000 own their own homes, while only 50 percent of those earning less than $70,000 do.
With home values rising, home owners are likely to be more confident about their ability to spend, often called the “wealth effect,” while people who don’t own homes may remain wary about spending. That means restaurant brands that cater to upper income diners are likely to fare better in the continuing recovery.
“It’s really a haves-versus-have-nots recovery. A lot of people haven’t felt the recovery at all,” said Bielinski of CIT. “You need to see that big middle class participate.”
Restaurant companies are generally expected to benefit from more moderate commodity costs, though labor costs are expected to be a concern in 2014 as states, like California, increase their minimum wage.
Still, restaurant operators are getting much better at managing within their four walls, said Agustin Carcoba, president and chief executive of lender GE Capital Franchise Finance, or GEFF.
In addition, the restaurant industry has shifted from a three-daypart operation to six, with mid-morning and mid-afternoon snack as well as late night rounding out the traditional breakfast, lunch and dinner peaks. For example, Starbucks and Dunkin Donuts represented about 1 percent of industry market share 10 years ago, but now they capture about 5 percent to 6 percent, in part because their success with blurring dayparts, noted Carcoba.
While the Affordable Care Act was a hot topic at the conference last year, it was more of a sideline mention at this year’s conference. Trey Brown, senior managing director of GEFF, said he was worried that operators are “waiting and will manage to the full-time employee definition,” which remains uncertain. “The natural inclination is to procrastinate.”
The delayed debate in Washington, D.C., over the federal deficit is another potential obstacle coming in 2014.
“Having this approach of kicking the can three months down the line, it’s really harmful for businesses that need to invest for the long term,” said Carcoba. “Businesses need certainty. I’m hopeful at some point that both parties will figure out they need to work together for the next 100 years, as they have for the past 100.”