There was a buoyant sense of optimism at mid-November’s Restaurant Finance and Development Conference (RFDC) in Las Vegas, fueled by a decisive election favoring a candidate many believe to be pro-business, easing interest rates, more amenability and interest from regional banks, and an uptick in non-traditional capital options.
Above all, however, there was the benefit of hindsight — of 2024 being largely behind us. The year was dominated by bankruptcy, closure, and restructuring headlines and turned out to be much more challenging than anyone anticipated. But challenges can often create opportunities.
“I think in tough times, that’s when you as a business, as an operator, you figure out how to operate. Then when good times come back, you’re more efficient,” Shauna K. Smith, CEO and cofounder of Savory Fund, said during a panel at RFDC. “I think that’s why there are more deals on the horizon. I’m refreshed by all the silver-linings talk.”
Savory Fund focuses on emerging brands, but it’s not the only equity investment firm expected to come off the sidelines in 2025. The general consensus — at the conference and elsewhere — is that it will be a very active year ahead for mergers and acquisitions after a relatively quiet 2024 (give or take Blackstone’s deals with Jersey Mike’s and Tropical Smoothie). According to a TD Bank survey, 84% of restaurant operators believe mergers and acquisitions activity will increase in the new year.
“There is some pent-up demand,” said Alicia Miller, cofounder and managing partner of Emergent Growth Advisors. “Those who want to trade can find buyers. Others have the capital to deploy but have been sitting on the sidelines for two years. I’m cautiously optimistic we’re heading toward stability that will allow more transactions to take place.”
That stability comes largely from a bank environment that has settled down following the failure of many regional players in 2023 — registering the biggest disruption in the sector than at any time since the 2008 financial crisis. High interest rates through 2024 further pressured balance sheets, and the result was mismatched supply and demand. With easing rates and a focus on higher-quality loans, many banks have been able to recover heading into the new year.
“A lot of banks backed off this industry and that is easing. They’re in better shape now and it’s time to reallocate their portfolio,” said Mark Wasilefsky, head of TD Bank’s Restaurant Finance Group. “The banks that pulled back are putting the car back into first gear.”
2024 headlines haven’t deterred interest
This gear shift is happening despite the ominous headlines affecting much of the industry, or, perhaps, because of them.
“With every bankruptcy that happens, the industry gets stronger because it’s an opportunity to shed underperforming stores,” said Jeffrey Pielusko, managing director of investment bank Carl Marks Advisors. “The overall portfolio of stores is strengthening.”
“I believe we’ve washed out a lot of highly levered transactions. All the bankruptcies and restructurings from the year, we’ve washed through most of those at this point,” Wasilefsky added. “That improvement in liquidity will provide a stage for growth.”
It also opens up the potential for more investment opportunities, according to Miller. She said that as the environment improves, there will be improving prices for assets that are high quality. She predicts more investors will consider “good” exits and not just “optimal” exits, as was the case in ’24 given all the risks.
“There is an appetite for good, solid assets. The markets have recovered a little, so why not now? Don’t become so enamored with optimal that you lose sight of great,” she said. “How much longer can you wait? If you’re not going to deploy it, put it somewhere else.”
There is also a timing factor to consider heading into 2025. Following the early days of COVID, many deals were completed in late 2020 and into 2021 as we witnessed a surge in consumer demand to return to dine-in. The typical five-year investment cycle is why Wasilefsky believes there will be a lot of activity in both 2025 and 2026.
What kind of activity?
Wasilefsky believes there will not only be busier M&A activity in 2025, but also some pickup of initial public offerings (only Pinstripes went public in 2024, and did so through a special purpose acquisition company — or SPAC — in early January). He expects IPOs to really pick up in 2026 and 2027.
John Gordon, founding principal of Pacific Management Consulting Group, said there are six or seven brands that have been hoping to go public but haven’t yet because of the continued disruption and volatility. He expects more strategic M&A — similar to Darden’s deal to acquire Chuy’s in 2024 — and a couple of IPOs in 2025 as that volatility smooths out.
Matthew Pilla, who runs Guggenheim Securities' restaurant practice, told a crowd at RFDC that the expectation is to see the IPO market return in 2025, as long as there is material traffic improvement in the industry.
“We’ve seen [private equity] take a step back from multiunit, asset-heavy type concepts. That doesn’t mean they’re not there; they’re there, but not in the same quantum as two, three, five years ago,” Pilla said. “Hopefully, as other markets recover, we’ll see a class of buyers re-engage and become more active. We’re optimistic about ’25. I think we’ll see significantly more activity and momentum in deals than we did in ’24.”
It's worth noting that while there is more optimism, plenty of uncertainty remains. Pielusko said, for instance, that concerns about the economy and tariffs promised by the incoming Trump administration could prove restrictive toward the free flow of capital and have “dampened outlooks.”
“Also, there is an expectation that things will revert back to pre-COVID,” he said. “There are rumblings about people going back to the office, but we’re never going back to five [days]. There is no going back to normal, and that applies to restaurants. Everything seems to say that economic uncertainty will continue heading into 2025.”
While Pieluski reiterates that the economic turbulence from the last few years has “weeded out less proficient operators,” creating a stronger overall industry, the outlook remains uncertain enough that people will continue to behave with a less optimistic outlook.
“There is a lot of caution still,” he said. “I don’t think huge rate cuts and spending will come roaring back. Everyone is still in the mindset of battening down the hatches and not spending freely. We’re still cost and capital conscious.”
How to control the genie
Even if spending and investments don’t come “roaring back” in 2025, there is still plenty of reason to be optimistic about a more stable environment in the months ahead. As investors start moving off the sidelines and expanding their scope of targets, the goal is for concepts to move from “struggling” to “good,” “great,” or “optimal” to catch their attention. A sharpened focus on unit economics should be the priority for brands as the environment settles down, according to Gordon.
“Somehow, we have to work our way out of customer’s angst over pricing. We all know why we took increases — because of food and labor inflation. But what we didn’t do is explain to our guests why this was happening and now we have to work our way out of it. I think there are a number of operational improvements that can be done — basic tackling and blocking. Value is much more than price; we have to improve ops and think about all of the sales channels we can utilize.”
Gordon adds that operators have to offset continued inflation somewhere other than pricing, adding that this requires a focused examination of the middle of the profit-and-loss statement through labor, utility, or capital spending efficiencies.
“With construction costs and the cost of money being up, we need to get much smarter about capital and new unit building and remodeling requirements. We have to save resources on the PnL and not rely on price increases,” Gordon said.
How does the industry do that? Gordon suggests flexibility in the product mix, creating a barbell approach where there is sufficient entry-level value alongside premium, full-margin products, suggestive selling, maximizing distribution contracts, and implementing energy management systems as examples.
“Utility costs are crazy in this industry,” Gordon said. “The kitchen is the key to the whole restaurant.”
He adds that it’s important in this environment — when the input-cost genie is out of the bottle — to comb through the entire P&L and ask tough questions. Is it more efficient to outsource your maintenance, for instance? Are you maximizing distribution contracts and routes? Is there a co-op opportunity within your market?
“There also has to be better thought about how many units we need to build because if we’re still building out old big-box stores, we’re not doing anything other than making a big capital investment,” Gordon said. “All of these things need to be rationalized.”
Speaking of old big-box stores …
Building out old big-box stores is one reason much of the casual-dining segment is struggling right now, Gordon adds. Consider the 2024 bankruptcies of Red Lobster, Buca di Beppo, and TGI Fridays, for example, or the dozens of closures from Denny’s, Hooters, O’Charley’s, and Applebee’s.
“Casual has become a sea of sameness. The economics are just not there to support it. If you can’t do $3 million [average unit volumes] in casual dining, you’re losing money,” Gordon said.
This $3 million target brings up another point worth zooming in on: Because of the escaped genie, the P&L is not the same as it was in 2019, where $2 million to $2.5 million would have been sufficient. Those days are gone. So, what should concepts, particularly casual-dining concepts, do to adjust to the new normal?
“Test fast, think about new concepts and sales platforms and delivery platforms,” Gordon said. “You have to try different things because in casual dining, there is still an ability to carve out a different experience with the same box.”
Restaurants’ investment priorities in the New Year?
The consensus is that the markets will improve, and the environment will stabilize, yet consumers will remain choosy, meaning the value environment will continue in the near term, which will continue to pressure margins. This should be top-of-mind for operators while contemplating their near-term investment strategies. Where should they start?
“Without a doubt, invest in your people,” Gordon said. “One of the bigger issues we have is our ops just aren’t strong enough, especially as we’ve gotten into this pricing mess, and that requires an investment in people and procedures.”
Second, according to Gordon, is an investment on product development — including on the menu and in the building.
“You’ve got to be refreshing the brand and trying new things and moving quickly to keep up with customer trends,” he said.
For TD Bank’s Wasilefsky, operators should prioritize the overall appearance of their restaurants, as well as technology solutions such as labor-saving systems and data collection. Artificial intelligence, he adds, should also be a focus.
“AI is going to help tremendously with kiosks, drive-thru, upselling, targeted marketing,” he said. “I can’t tell you how it’s going to look, but it’s going to be impressive, and the consumer might not even know it’s there. The value menu will still be an important part of the business, so margins will stay pressured and that’s why tech is important.”
Carl Marks Advisors’ Pielusko agrees that certain tech solutions are critical in this environment; for example, QR codes could allow operators to change prices quickly, inventory management systems to manage high input costs and avoid waste, and automated reservations platforms to make sure you’re not overbooking and that you have the right labor deployment at the right times.
“As consumers know they’re paying more, they expect more,” he said. “That means operators have to focus on execution and the sharpening of the pencil.”
Contact Alicia Kelso at [email protected]
