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Restaurants Pivot Amid Expensive Real Estate · Choppin’ It Up by Bloomberg Intelligence

0:23
Speaker 1: Welcome to Chopping It Up.
0:24
Speaker 2: I'm your host, Mike Hallon, the senior Restaurant and Food
0:27
Speaker 2: Service analyst at Bloomberg Intelligence. Our research and that of
0:30
Speaker 2: bi's five hundred analysts around the globe can be found
0:33
Speaker 2: exclusively on the Bloomberg terminal. Today, we're joined by Lauren Fernandez,
0:38
Speaker 2: founder and CEO of Full Course. Thanks for doing this, Lauren.
0:42
Speaker 3: My pleasure.
0:43
Speaker 1: Thanks for having us on sure thing. All right, you're
0:47
Speaker 1: a lawyer by trade. How did you get into the
0:49
Speaker 1: restaurant business?
0:52
Speaker 3: It got me? I caught the bug, you know. I've
0:55
Speaker 3: spent most of my career as an attorneys specializing in
0:58
Speaker 3: intellectual property and specifically product development. So I was in
1:03
Speaker 3: the land of Pharma, working for nov Artists and its
1:07
Speaker 3: Eyecare division, and had just launched a two billion dollar
1:11
Speaker 3: product in over one hundred and forty countries. It's the
1:13
Speaker 3: kind of stuff you dream of as a lawyer in
1:16
Speaker 3: this space. And the project was, you know, I think
1:20
Speaker 3: it would be fair to say, coming to a close.
1:23
Speaker 3: And I happened to get a call from Focus Brands
1:26
Speaker 3: and they were looking for someone to help run legal
1:29
Speaker 3: with specific background and brand licensing, product development, et cetera.
1:35
Speaker 3: And so we started a conversation and I was hooked immediately.
1:38
Speaker 3: I think the thing that impressed me the most was
1:40
Speaker 3: if I was going to make the jump from pharma
1:43
Speaker 3: to food, I needed to be a team in an
1:46
Speaker 3: environment that was welcoming and encouraging of me to learn
1:51
Speaker 3: and really get into this space. And indeed that's what happened.
1:54
Speaker 3: The team at Focus Brands at the time was just exceptional.
1:58
Speaker 3: Rusufenhower had just assembled this great talent, and that's where
2:03
Speaker 3: my journey began. I showed up on the first day
2:06
Speaker 3: and they were like, okay, great, here's your next sixty
2:08
Speaker 3: to ninety days. You're going to train in every single
2:10
Speaker 3: brand that we have. I was more like, show me
2:13
Speaker 3: your docket so I can make sure there's nothing burning
2:15
Speaker 3: down this house. And Russ was very clear about this.
2:18
Speaker 3: He's like, no, you are not tatching a single contract
2:21
Speaker 3: until you finish this training. And I said, yes, sir,
2:23
Speaker 3: and went and did it. And I think from that
2:26
Speaker 3: day forward, I was probably legitimately hooked. And that's the
2:30
Speaker 3: beginning of the journey.
2:32
Speaker 2: Really, all right, cool, well, why didn't you fill in
2:35
Speaker 2: the blanks from Focus Brands up up until full Course?
2:40
Speaker 3: So I did a solid run at Focus Brands. I
2:44
Speaker 3: was their general counsel and the head of Admin, so
2:46
Speaker 3: I ran both of those departments and had a lot
2:49
Speaker 3: of input to both international deals as well as the
2:52
Speaker 3: bizdev around licensing and product And you know, I think
2:56
Speaker 3: there was just a general shift in the company on
2:58
Speaker 3: the Focus level on on those initiatives, and it was
3:01
Speaker 3: time for me to move on, and I was looking
3:04
Speaker 3: for my next role and quickly figured out that there
3:08
Speaker 3: are not many CEOs out there who view their general
3:10
Speaker 3: counsel as a business asset and someone who can actually
3:13
Speaker 3: add strategic thinking to the discussions at an executive level.
3:17
Speaker 3: And I am a born entrepreneur. I think I started
3:21
Speaker 3: my first business at like fourteen. I think my dad
3:23
Speaker 3: will actually say thirteen. But I knew that I needed
3:26
Speaker 3: to do something different, and so while I was sort
3:28
Speaker 3: of sessing out what was going to come next for
3:30
Speaker 3: me professionally, I started exploring buying a franchise restaurant, and
3:35
Speaker 3: a lot of that is my desire. I'm first generation
3:37
Speaker 3: Cuban American, and I had seen so many of our
3:41
Speaker 3: multi unit franchisees kind of start with one and then
3:43
Speaker 3: do two and three and really create some serious generational
3:47
Speaker 3: wealth and that is one hundred percent where my heart was.
3:50
Speaker 3: I'm like, yeah, I'm going to invest in this and
3:51
Speaker 3: invest in myself and get some a first you know,
3:55
Speaker 3: front re view t ops. Never did I think I'd
3:58
Speaker 3: actually become an operator legit, Like, I was like, oh,
4:01
Speaker 3: this will be a great investment. And that's some advice
4:04
Speaker 3: I'd give to people all the time, like if you're
4:05
Speaker 3: going to buy a restaurant, beware, it's going to suck
4:08
Speaker 3: you in. It is not mailbox money. And that is
4:10
Speaker 3: indeed what happened. I took a partner, we started a
4:12
Speaker 3: development group. We ended up securing the rights to develop
4:16
Speaker 3: for Chicken Salad Chick in the Atlanta Augustine Athens market.
4:20
Speaker 3: So overnight we did a deal where we had to
4:22
Speaker 3: take over three underperforming units and stabilize the business, get
4:27
Speaker 3: it in the black. And then the development schedule was
4:30
Speaker 3: I think, in hindsight, I can say this punishing, you know,
4:33
Speaker 3: they just there was a lot of very rapid growth
4:35
Speaker 3: teed up. So I ended up opening eight units in
4:37
Speaker 3: twenty months and got it down to an absolute science.
4:41
Speaker 3: And that was in addition to building a catering program
4:44
Speaker 3: and testing delivery for the brand had a wonderful run. Honestly,
4:49
Speaker 3: don't know that I ever would have left that system
4:51
Speaker 3: and really enjoyed being part of it. And they needed
4:56
Speaker 3: different things from us. You know, we'd been a very
4:58
Speaker 3: good growth partner for them, but the brand needed to
5:00
Speaker 3: come to Atlanta as an HQ, and we were sitting
5:04
Speaker 3: on the territory, you know. So then we became a
5:07
Speaker 3: strategic acquisition and so we successfully exited in twenty eighteen,
5:12
Speaker 3: which then brought us to full course. So I took
5:15
Speaker 3: some time in nineteen to breathe for the first time.
5:19
Speaker 3: I turned forty, and I had that conversation with yourself.
5:21
Speaker 3: You're like, what do I want to do when I
5:23
Speaker 3: grow up?
5:24
Speaker 1: You know, I still have that conversation.
5:26
Speaker 3: Right right, And I really felt confident at that point
5:30
Speaker 3: I could build anything that I wanted for myself. And
5:33
Speaker 3: the thing I kept coming back to was what is
5:36
Speaker 3: the highest and best use of my talent, my education,
5:39
Speaker 3: my experience, my expertise, and how does that align in
5:44
Speaker 3: service to others? And I also was trying to solve
5:47
Speaker 3: for some problems that I had observed in the industry
5:50
Speaker 3: over my time in restaurants, and you know, one of
5:52
Speaker 3: them is a capital issue. We don't have a lot
5:54
Speaker 3: of emerging capital solutions for growing restaurants. We are devoid
5:59
Speaker 3: of what most other industries would have is venture capital,
6:03
Speaker 3: so to speak. That's just not really a great, exacting,
6:07
Speaker 3: very exact fit for us in terms of the restaurant
6:09
Speaker 3: growth models. You know, we also lack a lot of
6:13
Speaker 3: you know, development strategies for people, right like a reinvestment
6:17
Speaker 3: in people, especially the ones who often get overlooked, who
6:20
Speaker 3: are in the hourly wage positions, who are indeed where
6:23
Speaker 3: a lot of our diversity is trapped in our industry.
6:27
Speaker 3: You know, we look really great on paper at a
6:29
Speaker 3: high level, but you dig down and a lot of
6:31
Speaker 3: that talent is down at the hourly wage level. How
6:35
Speaker 3: do we elevate them into leaders? And you know, I
6:38
Speaker 3: also had a really clear vision on what the playbook
6:41
Speaker 3: needed to look like for growth, and it needed to
6:43
Speaker 3: include things like product manufacturer and development to create efficiencies
6:47
Speaker 3: in labor and operations and possibly even new revenue streams
6:51
Speaker 3: for restaurant brands. And it's easier to do that earlier
6:55
Speaker 3: than later. I can speak from experience. So Full Course
6:59
Speaker 3: was really born out of a need for capital solutions
7:03
Speaker 3: and reinvestment in people, but also a vision to sort
7:07
Speaker 3: of expand the ways that brands can grow and leverage
7:10
Speaker 3: some of the very proven techniques that we know work
7:13
Speaker 3: for large brands, but bring them at an affordable and
7:17
Speaker 3: accessible way to emerging brands who need that help too.
7:20
Speaker 3: And here we are today.
7:22
Speaker 1: Very cool.
7:23
Speaker 2: All right, So I go back it up a little bit,
7:25
Speaker 2: so I have a couple of questions. What was your
7:27
Speaker 2: first business?
7:29
Speaker 3: Oh? My goodness. So when I was fourteen, I figured
7:32
Speaker 3: out really quickly that we could knock on doors and
7:36
Speaker 3: talk about candidates who are running for local office. And
7:41
Speaker 3: you would do that with high school students. So you know,
7:43
Speaker 3: you get out of school at three and you've got
7:45
Speaker 3: these really articulate kids who are in debate, mock trial,
7:48
Speaker 3: and moot court. We'd put them in a candidate polo
7:51
Speaker 3: shirt embroidered name tag. They'd knock on super voter doors
7:55
Speaker 3: who were home because they were usually over sixty five,
7:58
Speaker 3: and they'd give their spiel about the candidate. We'd always
8:00
Speaker 3: send a boy and a girl together and they'd leave
8:03
Speaker 3: the materials. And we tested it on one campaign and
8:07
Speaker 3: we won by a landslide and a three way race,
8:10
Speaker 3: and I quickly became the accidental go to for those
8:13
Speaker 3: types of services for state and local campaigns all over
8:18
Speaker 3: the state of Florida. And I was like fifteen, I
8:20
Speaker 3: didn't even have a car, and my mom, to her credit,
8:24
Speaker 3: was so visionary. She's like, we got to make this scalable.
8:27
Speaker 3: And so what we would have is sort of like
8:29
Speaker 3: a campaign captain that we would train, we'd teach them
8:33
Speaker 3: the playbook, and we'd connect to the local high schools
8:36
Speaker 3: and kind of create this low key volunteer army. And
8:39
Speaker 3: we would pay them by the door knock or by
8:41
Speaker 3: the hour, depending on what it was. And it was
8:44
Speaker 3: wildly successful and I ran that business pretty consistently until
8:48
Speaker 3: I was about twenty one twenty two. Helped pay for college.
8:54
Speaker 2: Impressive. That's an impressive first business. Definitely beats a lemonade
8:57
Speaker 2: stand for sure.
8:58
Speaker 3: Yes it was. It was a no no advertising, no shingle.
9:01
Speaker 3: If you didn't know who I was and how to
9:03
Speaker 3: reach me, you were not able to book our services.
9:06
Speaker 3: So it was done through my network of other high
9:09
Speaker 3: school kids really across the state who competed in other
9:12
Speaker 3: similar events, like I did debate with cord et cetera.
9:16
Speaker 3: And that is really truly my first business that I
9:19
Speaker 3: ever ran before I came up to Atlanta from Florida.
9:23
Speaker 2: Very cool and chicken salad chick. They're crushing it. So
9:27
Speaker 2: what attracted you to that opportunity so early on?
9:31
Speaker 1: It? And it's, you know, development.
9:35
Speaker 3: Run by a woman, started by a female founder. It
9:39
Speaker 3: was one of the only fast casual restaurant concepts I'd
9:43
Speaker 3: ever seen that was specifically targeted to women. What I
9:48
Speaker 3: found out later is men love it too. We had
9:50
Speaker 3: one location in Atlanta, for example, that would pull in
9:53
Speaker 3: all kinds of really great guys from the local community
9:57
Speaker 3: and from business who loved that. It was keto and
10:00
Speaker 3: Paleo friendly.
10:01
Speaker 1: A crush chicken salad, crush it.
10:03
Speaker 3: Oh right, it's actually not too bad for you. And realistically,
10:09
Speaker 3: I really just loved the story that Stacy was able
10:12
Speaker 3: to tell about her founder journey and it was such
10:15
Speaker 3: a wonderful way to talk about the brand and its
10:17
Speaker 3: purpose and meaning. And I bought into that and to
10:20
Speaker 3: this day, that's how we build brands at full Course,
10:23
Speaker 3: like we are very careful to make sure that the
10:25
Speaker 3: founders why and their purpose is infused into everything that
10:29
Speaker 3: we do at the brand. Whenever and wherever possible, because
10:33
Speaker 3: I think that that makes brands a little stickier for
10:35
Speaker 3: consumers and it does help to generate a lot of
10:38
Speaker 3: loyalty and alignment with your consumer base when you can
10:41
Speaker 3: be clear on that and then deliver on it too.
10:44
Speaker 2: Yeah, I think you're right smart And as our audience
10:47
Speaker 2: can probably already tell full Courses in your typical private
10:51
Speaker 2: equity firm, so also the services you provide aren't typicals,
10:56
Speaker 2: can so can you talk about some of these those
10:58
Speaker 2: other services outside out of just making investments and restaurants.
11:02
Speaker 3: Absolutely, so. We are a three part business. We have
11:05
Speaker 3: a nonprofit side of our business that focuses on education, mentorship,
11:10
Speaker 3: and coaching for everybody in the industry. But it's also
11:14
Speaker 3: a resource that's available to our clients, to our investments,
11:18
Speaker 3: to their franchises, to their employees. We really want to
11:22
Speaker 3: help flatten that learning curve that makes it difficult for
11:25
Speaker 3: you to succeed as not just a business owner, but
11:28
Speaker 3: as someone who's a professional in the industry who wants
11:31
Speaker 3: to grow. So that is our contribution back to the
11:34
Speaker 3: restaurant industry, and that is the Full Course foundation. In
11:38
Speaker 3: the middle, we have a management company called full Course
11:41
Speaker 3: and that management company has a deep bench of experience
11:45
Speaker 3: with over two hundred and fifty years of subject matter
11:48
Speaker 3: expertise and everything from operations, supply chain, finance and accounting,
11:53
Speaker 3: marketing people. And then on the development side, we also
11:57
Speaker 3: have expertise and for a major t channels of growth.
12:01
Speaker 3: That's company store development, franchise development, product licensing and manufacture,
12:07
Speaker 3: as well as non traditional development into areas like stadiums, arenas, hospitals,
12:12
Speaker 3: universities and airports. And that is indeed at the hallmark
12:15
Speaker 3: of our investment strategy. We are an omni channel developer
12:18
Speaker 3: and we build brands that have very solid revenue platforms
12:22
Speaker 3: and a ton of runway for growth. Now, the third
12:25
Speaker 3: leg of this stool, if you will, is obviously our
12:28
Speaker 3: capital solution. So in the full course funds of which
12:32
Speaker 3: there is currently one about to be fully allocated, almost
12:35
Speaker 3: done completely choosing those deals which I'm excited to make
12:38
Speaker 3: some announcements soon, and our second forthcoming fund are dedicated
12:43
Speaker 3: to emerging food and restaurant brands. We typically come onto
12:46
Speaker 3: the cap table as a first major equity investor, and
12:51
Speaker 3: we are truly there as a value add investor and
12:54
Speaker 3: development partner. So we are here to inject into these
12:58
Speaker 3: businesses growth capital, and it's in a minority position on
13:02
Speaker 3: the cap table. So whether you need coaching or support
13:06
Speaker 3: in the growth of your business, or you're an established
13:10
Speaker 3: franchise or you need help picking better franchisees or training
13:13
Speaker 3: your franchisees, we have a wide range of consulting services
13:17
Speaker 3: that we actually offer and then we can always come
13:20
Speaker 3: behind as a fair and equitable investor as well for
13:24
Speaker 3: the clients who really need that.
13:26
Speaker 1: That's very cool.
13:28
Speaker 2: What size chains are coming to you for the consulting
13:31
Speaker 2: help and what are some of the topics I guess
13:33
Speaker 2: they need help with most frequently.
13:36
Speaker 3: That's a wonderful question. It's actually quite shocking what we've seen.
13:40
Speaker 3: So I think because of our deep experience in the
13:43
Speaker 3: land of franchising and the fact that I've run franchising
13:47
Speaker 3: for multi brand operations like Focus now called go to brands,
13:52
Speaker 3: it is very important to large franchisors to have us,
13:56
Speaker 3: you know, in their arsenal, if you will, and we
13:58
Speaker 3: take care of a lot of issues that you would
14:00
Speaker 3: often see in large franchise organizations with more than like
14:04
Speaker 3: three thousand units, where some franchisees need more help and
14:08
Speaker 3: support but sometimes the franchisors want to maintain that legal
14:12
Speaker 3: distance and boundary between the relationships, so those engagements tend
14:17
Speaker 3: to look a little bit more people heavy, right. It's
14:20
Speaker 3: leadership development, franchise selection tools, right, helping teach a single
14:25
Speaker 3: unit franchisee how to become a multi unit franchise owner.
14:29
Speaker 3: Helping take high potential corporate store employees and coaching them
14:34
Speaker 3: on how to become a business owner and basically become
14:38
Speaker 3: prepared to become a franchisee in the system. And those
14:41
Speaker 3: engagements can range anywhere from a three month to a
14:45
Speaker 3: three year process, depending on what kind of support they need,
14:48
Speaker 3: because it's let's be clear, it's not that the brand
14:50
Speaker 3: couldn't do this themselves. They understand it. It's a legal
14:55
Speaker 3: boundary that they don't want a cross where they are
14:57
Speaker 3: viewed as having too much control over the business. And
15:01
Speaker 3: I deeply understand and respect that as former counsel myself,
15:04
Speaker 3: so we can provide those kinds of solutions. I think
15:07
Speaker 3: the other end of the spectrum is mid size brands
15:11
Speaker 3: that are probably anywhere from one hundred to two hundred
15:15
Speaker 3: units where their growth has either stuttered, stalled, or plateaued
15:19
Speaker 3: and they're having issues either selling franchises or are looking
15:24
Speaker 3: at other alternative revenue streams. Now, I think in those
15:27
Speaker 3: situations we are also a nice bolt on for franchise selection,
15:31
Speaker 3: for management training, for leadership development. So there's always a
15:35
Speaker 3: people quotient to what we do. You see the theme here,
15:40
Speaker 3: and of course, in the early stage brands we work with,
15:43
Speaker 3: all these things are true, but they just need more
15:45
Speaker 3: heavy lifting. So we have a number of programs where
15:48
Speaker 3: we can come in and support field operations for franchisees.
15:53
Speaker 3: You know, we can do deep training for franchisees, we
15:55
Speaker 3: can help with franchise e site selection, whatever the needs are, because,
16:00
Speaker 3: let's face it, a lot of emerging franchise ors when
16:02
Speaker 3: they're south of you know, let's say twenty franchise units,
16:05
Speaker 3: it's expensive to try to provide that support with headcount
16:11
Speaker 3: and sometimes outsourcing some of those features, whether it's franchise sales, support,
16:17
Speaker 3: compliance operations, what have you, is actually more cost effective
16:22
Speaker 3: than trying to build a team out internally.
16:24
Speaker 1: Okay, good stuff, What size investments are you making?
16:29
Speaker 3: The average check right now for fun one is about
16:32
Speaker 3: two and a half to four million in range, with
16:35
Speaker 3: an average somewhere around three million, and so that's about
16:38
Speaker 3: typical for fun One. I think Fun Too we'll have
16:41
Speaker 3: a wider investment directive. We will always be committed to
16:45
Speaker 3: making investments in early and emerging food and restaurant brands
16:49
Speaker 3: that are anywhere from one to ten units, and I
16:53
Speaker 3: think that will be our core investment premise. However, you know,
16:57
Speaker 3: there are plenty of brands out there that maybe eleven
17:00
Speaker 3: company stores are fifteen and maybe they haven't even franchised yet,
17:04
Speaker 3: or maybe they're one hundred percent franchise, And those types
17:07
Speaker 3: of opportunities come across my desk often, and I love
17:10
Speaker 3: the founders and I love the brand, but they weren't
17:13
Speaker 3: just quite right of a fit for fun One. So
17:16
Speaker 3: I'm actually very excited to open fun Too, so we
17:19
Speaker 3: can let some of those prospects back into the funnel,
17:23
Speaker 3: because I think there's just as many awesome deals in
17:26
Speaker 3: that space as well.
17:27
Speaker 1: Very cool.
17:28
Speaker 2: Yeah, emerging brands, that's a fun segment of the business
17:32
Speaker 2: for sure. Let's talk about expansion in this environment. You know,
17:36
Speaker 2: how do these emerging chains do it without overextending themselves.
17:41
Speaker 3: It's a tricky environment, right, because I think the last
17:45
Speaker 3: let's say five to seven years, we've enjoyed some relatively
17:48
Speaker 3: low cost of capital. Right, Debt has been very cheap,
17:51
Speaker 3: so a lot of this growth was fueled by a
17:54
Speaker 3: very favorable lending environment, which is more than just evaporated
17:58
Speaker 3: to the extent that it even is this right now,
18:00
Speaker 3: it's you know, double digits. And further complicating the situation
18:05
Speaker 3: is that there is a very very low vacancy rate
18:09
Speaker 3: right now for commercial real estate that's appropriate for a restaurant,
18:13
Speaker 3: and when it is available, it's extremely expensive. So some
18:17
Speaker 3: of the things I've seen brands do extremely well is
18:21
Speaker 3: really start pushing into alternative formats. So they're taking what
18:25
Speaker 3: is this sort of perfect unit and trimming it down
18:28
Speaker 3: into a smaller footprint. They're looking at ways to co
18:32
Speaker 3: brand with sister brands if it's a multi unit concept,
18:35
Speaker 3: really trying to leverage the space that is available in
18:39
Speaker 3: creative and unique ways. I also am seeing a lot
18:42
Speaker 3: of what we would call omni channel development, so a
18:45
Speaker 3: lot of product lines coming out and being commercialized. We're
18:49
Speaker 3: seeing a lot of emphasis on non traditional deals, which
18:52
Speaker 3: you know, tend to be licensing deals, but nonetheless still
18:56
Speaker 3: generate revenue. So you know, I think the brands that
18:59
Speaker 3: are doing really well right now and are going to
19:01
Speaker 3: continue growth, are paying attention to the exorbitantly high occupancy
19:05
Speaker 3: costs they're in market right now and pivoting just a
19:08
Speaker 3: little bit. We'll come back to it, but they're not
19:11
Speaker 3: abandoning traditional brick and mortar by any stretching imagination. We've
19:15
Speaker 3: got a weait in some cases for the market to
19:18
Speaker 3: normalize not just with lending, but also available construction and
19:23
Speaker 3: you know, fresh real estate, so we'll see. I think
19:27
Speaker 3: this is actually fueling a lot of growth into other channels,
19:30
Speaker 3: which I love to see because that's been my investment
19:32
Speaker 3: thesis for over five years. So I'm like, welcome to
19:36
Speaker 3: the party, everyone, come on in. The water's warm. Yeah.
19:40
Speaker 1: No, that's really interesting. You know.
19:43
Speaker 2: It's interesting because what we're hearing is that some of
19:45
Speaker 2: these like publicly traded fast casual chains are just paying
19:50
Speaker 2: like crazy rents right that a lot of these smaller
19:53
Speaker 2: emerging brands just can't compete with and they keep getting
19:56
Speaker 2: priced out.
19:57
Speaker 3: I have so many thoughts on this, but what I
19:58
Speaker 3: will say is that tends to be a mandate when
20:02
Speaker 3: you are focused on the wrong KPIs for success, And
20:07
Speaker 3: you may ask yourself like, where is that KPI coming from?
20:10
Speaker 3: What is driving that goal of air quotes? Your units open,
20:14
Speaker 3: and I would submit to you that that is a
20:16
Speaker 3: typical private equity playbook. Right, So when you see these
20:20
Speaker 3: brands going units open, units open, and you're on the
20:22
Speaker 3: earnings calum that's what you're hearing. It's because that's how
20:26
Speaker 3: the multiple happens to generate any kind of return to investors,
20:30
Speaker 3: specifically as it relates to franchise units as well. Right,
20:34
Speaker 3: So you know, with the return model being what it
20:37
Speaker 3: is slightly better for franchised units over company stores for
20:41
Speaker 3: private equity, A lot of that push on growth, in
20:45
Speaker 3: my opinion, can sometimes be misdirected if you do not
20:47
Speaker 3: understand the consequences and you're only in it for the
20:50
Speaker 3: short term. If you are looking at the long term
20:52
Speaker 3: health of a brand, you can afford to take a
20:55
Speaker 3: few wammis on high rent when there is a legitimate
20:59
Speaker 3: mark play. A perfect example of this is time square. Right.
21:04
Speaker 3: You can drop a unit in times Square and easily
21:08
Speaker 3: argue that it is as valuable in marketing and brand
21:11
Speaker 3: awareness than it is for the actual sales and through
21:14
Speaker 3: put to the bottom line. But not every high rent
21:17
Speaker 3: package and every market has that kind of additional return
21:21
Speaker 3: to an investor. And so if you're focused on a
21:23
Speaker 3: short term return, which you know, not all private equity
21:27
Speaker 3: does this, but most of them hold these brands for
21:29
Speaker 3: between three to four years, that's a short time. So
21:34
Speaker 3: they're not going to let a little bit of rent
21:36
Speaker 3: inflation slow them down. They're going to keep banging out
21:39
Speaker 3: the units. Why because they want the cash flow. But
21:42
Speaker 3: if it's a franchise system in particular, they want the
21:45
Speaker 3: top line sales there to pull royalty. Right. So there's
21:50
Speaker 3: sometimes some conflicting messaging as it relates to growth and
21:54
Speaker 3: what is appropriate growth. And I would submit to you
21:57
Speaker 3: that that's what happens when the capital comes in and
22:00
Speaker 3: doesn't necessarily have the same depth of experience in actually
22:04
Speaker 3: operating a restaurant and suffering under those high occupancy costs. So, yes,
22:10
Speaker 3: that does happen. It doesn't just happen in restaurants too,
22:13
Speaker 3: by the way, it happens in other retail businesses as well,
22:16
Speaker 3: where there is a very blind faith and one kind
22:20
Speaker 3: of growth. You know, damn, the consequences go go go,
22:25
Speaker 3: And there is there are always consequences when you make
22:29
Speaker 3: those kinds of decisions with blinders on. And I do
22:32
Speaker 3: think that some brands will suffer for maintaining a ridiculously
22:37
Speaker 3: high or fast pace to their growth with respect to
22:40
Speaker 3: unit specifically, it's going to damage unit level economics, there's
22:44
Speaker 3: no question.
22:45
Speaker 2: Yeah, especially when they sacrifice on the quality of the
22:48
Speaker 2: location for sure. That's you know, favocations, the gift that
22:51
Speaker 2: keeps on giving.
22:54
Speaker 3: I couldn't have said it better myself.
22:57
Speaker 1: A right good stuff.
22:58
Speaker 2: And so you mentioned, you know, full course does a
23:01
Speaker 2: lot around CpG and licensing. So why don't you talk
23:04
Speaker 2: about some of the things that you're doing there and
23:07
Speaker 2: how that benefits a brand in addition to you know,
23:11
Speaker 2: helping them grow.
23:12
Speaker 1: The top line.
23:13
Speaker 3: Yeah. So fundamentally, if you're standing in a kitchen and
23:17
Speaker 3: you pull out a recipe book and you can identify
23:21
Speaker 3: the things that take the most ingredients, the most mixing,
23:24
Speaker 3: the most skilled labor, and they are the ones that
23:27
Speaker 3: are in the highest volumer demand. Those are all the
23:30
Speaker 3: things just step one that you should be looking for
23:34
Speaker 3: some way to more effectively streamline that and reduce labor.
23:38
Speaker 3: This is a solution that is not about bastardizing your
23:43
Speaker 3: recipe and making it cheapening it by making it in
23:47
Speaker 3: a manufacturing capacity. And sometimes when I'm talking to chefs
23:50
Speaker 3: in particular, what I say to them like, wouldn't it
23:52
Speaker 3: be great if your spice blend just showed up, pre
23:55
Speaker 3: mixed and pre measured in a packet for every single
23:57
Speaker 3: recipe And they would be like, oh my god, like
24:00
Speaker 3: mees on. Plus, I'm like exactly. So there's a number
24:03
Speaker 3: of different manufacturing tools, and that's something I want to
24:06
Speaker 3: make very clear to people. This is not about creating
24:09
Speaker 3: a widget that's going to sit in the grocery store.
24:11
Speaker 3: You go into a kitchen first and the put your
24:14
Speaker 3: operator head on and you go, how can I make
24:16
Speaker 3: this more effective? How can I make this more efficient?
24:19
Speaker 3: And that's what we're looking for. So when we say manufacture,
24:23
Speaker 3: sometimes it's a complete product, and that complete product will
24:27
Speaker 3: ship frozen to a location and then be cooked on
24:30
Speaker 3: site when appropriate. But sometimes it's just the dough. Sometimes
24:34
Speaker 3: it's the spice mix. Sometimes it's a marinad or a sauce.
24:38
Speaker 3: And when you solve for that first, you do a
24:40
Speaker 3: number of things. As the franchise or the owner of
24:43
Speaker 3: the brand, you're protecting the recipe. So there's not a
24:47
Speaker 3: lot of detail given to franchisees or other users of
24:50
Speaker 3: that product. You're creating efficiency, right, not just in labor,
24:54
Speaker 3: but in speed in the kitchen. You're creating a lot
24:58
Speaker 3: of quality control that's baked into those manufactured products, so
25:03
Speaker 3: there's less room for error. And you know, maybe someone
25:06
Speaker 3: thinks it needs more pepper. Nope, it doesn't. You follow
25:09
Speaker 3: the recipe, thanks, right. So fundamentally, the way that we
25:14
Speaker 3: approach product manufacture is operational needs first, and then we
25:19
Speaker 3: go out and look at the marketplace and we go, hmm, okay,
25:23
Speaker 3: what is missing out in the marketplace and this channel
25:26
Speaker 3: and this segment of food where we might be able
25:29
Speaker 3: to serve a purpose, whether it's to wholesale like to
25:33
Speaker 3: food service sales, or rather to direct to consumer retail
25:38
Speaker 3: through our restaurants where we're sending them home with packaged
25:41
Speaker 3: food or you know, take home meals, seasoning blends, et cetera,
25:45
Speaker 3: or maybe in a traditional retail environment. And that's where
25:48
Speaker 3: you really start to see some power, right, because then
25:51
Speaker 3: that becomes a whole other revenue stream for the business
25:55
Speaker 3: and you don't have to divulge the proprietary recipe. You
25:59
Speaker 3: don't even have to use the same exact recipe you're
26:01
Speaker 3: using in the restaurant, but it's already being manufactured to
26:05
Speaker 3: your benefit for back of house, you might as well
26:08
Speaker 3: figure out a way to leverage it in a really
26:10
Speaker 3: intelligent way. So where we see a lot of success
26:13
Speaker 3: in this is if the product is manufactured in its
26:16
Speaker 3: center of plate, we can drop food costs to like
26:18
Speaker 3: twelve percent. It's insane what that does. But also consider
26:23
Speaker 3: that if you are manufacturing product for use in the kitchen,
26:26
Speaker 3: you also see a similar reduction of cogs, but then
26:30
Speaker 3: you also are bolting on additional revenue too. So I'm
26:34
Speaker 3: sort of at a loss as to why more companies
26:36
Speaker 3: aren't doing this. But again, I'm super biased because I've
26:38
Speaker 3: been doing this for twenty years and I've already proven this.
26:42
Speaker 3: That was several brands I've worked with before, So it's
26:44
Speaker 3: to me, it's just it's a natural part of our
26:47
Speaker 3: playbook because we can also shop for brands that live
26:50
Speaker 3: in that space that would make a great restaurant, and
26:53
Speaker 3: we've indeed made at least one investment just like that.
26:57
Speaker 1: Yeah, we're going to see a lot more of it.
26:58
Speaker 2: I think they're change and forced to rethink things because
27:01
Speaker 2: of the inflation that we're seeing, and you know, I
27:03
Speaker 2: don't I don't agree with the FED that it's going
27:05
Speaker 2: back to two percent anytime soon.
27:07
Speaker 1: Too.
27:08
Speaker 2: I think there's a lot of and there's some good
27:10
Speaker 2: examples of chains that are using commissaries like Salad and
27:13
Speaker 2: Go and Kava is another one. Right, these are some
27:17
Speaker 2: which and i'd imagine their dips and sauces have helped
27:20
Speaker 2: their customer awareness scores.
27:23
Speaker 1: I'd have to assume. I don't know.
27:24
Speaker 2: I don't cover the company yet, but yeah, so I
27:27
Speaker 2: think we're going to see a lot more of this
27:28
Speaker 2: going forward, hope.
27:31
Speaker 3: So, I mean, we do a lot of work in
27:33
Speaker 3: this space for all kinds of companies. I would say
27:36
Speaker 3: typical for US is for not doing it for our
27:38
Speaker 3: emerging brands that are, you know, south of twenty units.
27:41
Speaker 3: Let's say we see this a lot in brands that
27:44
Speaker 3: are out are around about one hundred to two hundred units.
27:47
Speaker 3: And then really big brands who've never done it before.
27:50
Speaker 3: They are legacy, they've been around forever, and so you know,
27:53
Speaker 3: I'm pretty busy in that space. I still love this work.
27:56
Speaker 3: It's one of my favorite things to do. I'm the
28:00
Speaker 3: person who loves to put on the hairnet and the
28:02
Speaker 3: white coat and the shoe covers and go into the
28:04
Speaker 3: manufacturing facility. And you know, there is an art and
28:08
Speaker 3: a science to matching your product to an appropriate manufacturing solution,
28:14
Speaker 3: and not everyone is good at it. So one of
28:16
Speaker 3: the things I see a lot of is like, oh,
28:17
Speaker 3: we tried to manufacture this and it didn't work. We'll
28:20
Speaker 3: say more about that. Why didn't it work? Well, turns
28:23
Speaker 3: out they talked to one manufacturer and they were trying
28:25
Speaker 3: to make sauce with someone who does bakery, right, not
28:30
Speaker 3: the same thing, right, And there's so much to consider,
28:33
Speaker 3: like fully loaded costs delivered, how close is it to
28:37
Speaker 3: your nexus of your stores? Can they ship directly to DC's.
28:40
Speaker 3: I mean, the process itself usually takes us about three
28:44
Speaker 3: to six months to match with the manufacturer and make
28:47
Speaker 3: something that actually works after several tests, and then we
28:51
Speaker 3: start kicking into high gear. Right. But man, I like
28:55
Speaker 3: to tell people, you see the ROI on this immediately,
28:58
Speaker 3: because if you're a friend system, most people don't understand this.
29:02
Speaker 3: But proprietary products through a franchise system where it's got
29:06
Speaker 3: a special recipe and it's unique to the brand, you
29:08
Speaker 3: can actually surcharge for those through the system, and it
29:13
Speaker 3: is to most franchisores a small source of additional revenue,
29:16
Speaker 3: and rightfully so, it's their R and D and IP
29:18
Speaker 3: behind it. But it more than pays for itself, more
29:23
Speaker 3: than pays for itself.
29:24
Speaker 2: Yeah, yeah, I used to cover a little CpG back
29:27
Speaker 2: in my day. I think Lancaster Colony. They're big on
29:30
Speaker 2: the sauce side. I don't know if that's somebody that
29:33
Speaker 2: you've used before.
29:34
Speaker 3: But no comment. We don't divolde our sources.
29:38
Speaker 2: Yeah, they have that good relationship with Wendy's both being
29:41
Speaker 2: out there in Ohio. All right, So loyalty is your jam?
29:46
Speaker 2: Why are so many chains repositioning loyalty programs this year?
29:50
Speaker 3: They were such a checkbox moment the last you know,
29:54
Speaker 3: I'd say, ten years, And as we've seen them more
29:57
Speaker 3: vertically integrated to a number of points of sales systems,
30:01
Speaker 3: I think their functionality has become even more limited. And
30:04
Speaker 3: this is something I'm very vocal about. Really good loyalty
30:08
Speaker 3: programs should be very clear and why it is that
30:13
Speaker 3: you want your customer to be coming back regularly, why
30:17
Speaker 3: it is that they should be choosing you over any
30:20
Speaker 3: other restaurant, they could go to five nights a week,
30:23
Speaker 3: you know, whatever day part segment you're competing in. And
30:27
Speaker 3: I think what a lot of loyalty programs lack is
30:30
Speaker 3: that not just a feeling of exclusivity, but a genuine
30:34
Speaker 3: sense of we are grateful you're here, thank you for
30:39
Speaker 3: your business. And that comes out in the details, right,
30:44
Speaker 3: the types of rewards that you're giving, the way you message,
30:48
Speaker 3: the communication. And I think it all starts with being
30:51
Speaker 3: clear and what the brand is about. And it has
30:53
Speaker 3: to feel authentic. Someone else can't write this for you, right,
30:57
Speaker 3: And so if you're a young brand, these are from
31:00
Speaker 3: the founder, you know. These are communications that are the
31:05
Speaker 3: rough equivalent of when I own my restaurants, coming out
31:09
Speaker 3: from around the pos and after a really crushing lunch
31:13
Speaker 3: and walking the dining room and just saying thank you
31:16
Speaker 3: so much for coming in today. Here's a card I'd
31:19
Speaker 3: love for you. I'm the owner, Please come back and
31:22
Speaker 3: bring up a new friend next week. We are trying
31:24
Speaker 3: to get the word out that is what your loyalty
31:27
Speaker 3: program should feel like, and so many of them are
31:30
Speaker 3: missing a social aspect, a two way communication aspect, an
31:35
Speaker 3: appropriate scale of rewards that is exciting and feels valuable, right,
31:40
Speaker 3: Like not just cool swag, but man, I've eaten here
31:43
Speaker 3: ten times in the last month. I'm going to get
31:45
Speaker 3: a gold star for that. What does that mean to me?
31:48
Speaker 3: Means you don't just get something cool and get a
31:50
Speaker 3: shout out, but maybe you get like a cool value
31:52
Speaker 3: to your next meal, you know. And I think dollar
31:56
Speaker 3: for dollar, paying attention to that consumer right now and
31:59
Speaker 3: really fostering the loyalty and the frequency of visit is
32:02
Speaker 3: probably money better spent than trying to induce trial with
32:06
Speaker 3: new customers who are very cash strapped right now. Right.
32:10
Speaker 3: You don't want to be fighting for wallet share and
32:13
Speaker 3: inducing trial right now, in my opinion, you're fighting for
32:15
Speaker 3: frequency a visit.
32:17
Speaker 2: Yeah, for sure, It's much cheaper to get your current
32:20
Speaker 2: customers to frequent, you know, more often.
32:24
Speaker 1: All right, So, how is the M and A market
32:25
Speaker 1: in your corner of.
32:26
Speaker 3: The business seeing some interesting patterns? I will go on
32:31
Speaker 3: record as saying I don't know that I've seen this
32:34
Speaker 3: quite like this before, but here's what I'm saying. There's
32:38
Speaker 3: still a very very very much a lack of lending
32:44
Speaker 3: right so banks are not doing deals at a very
32:48
Speaker 3: high level and they're not even doing them at the
32:50
Speaker 3: lower level either. And what that has caused is a
32:55
Speaker 3: couple a couple of problems. One is that a lot
32:57
Speaker 3: of private equity is you know, and major investors at
33:01
Speaker 3: a certain size, like let's say check size is over
33:03
Speaker 3: you know, ten million, they need banks to help finance
33:07
Speaker 3: these deals. They're not writing one hundred percent equity or
33:10
Speaker 3: cash check for these deals, at least that's not their
33:12
Speaker 3: preference typically, And so there's a lot of powder kegged,
33:16
Speaker 3: you know, dry dry powder like up at that level,
33:20
Speaker 3: and they're looking for deals that can still work without leverage,
33:24
Speaker 3: which is hard to find. So the deals that we're
33:28
Speaker 3: seeing at the very top are like three hundred mil
33:30
Speaker 3: and up all the way up to nine point six billion,
33:33
Speaker 3: you know, whatever Subway was. And I think that's because
33:37
Speaker 3: those funds can afford literally afford to write that check,
33:42
Speaker 3: make the deal happen, and then bank on being able
33:44
Speaker 3: to recap and refin when interest rates are more appropriate.
33:47
Speaker 3: They can carry it on their balance sheet as part
33:50
Speaker 3: of a blended portfolio. Not as big a deal for them.
33:54
Speaker 3: They're going to make more opportunistic purchases too, because I
33:57
Speaker 3: would bet than in some of those cases, those deals
34:00
Speaker 3: are being put to market right now because they need
34:03
Speaker 3: to be at market right now for whatever reason. You know,
34:06
Speaker 3: I think mid tier, like mid level, you know anything.
34:10
Speaker 3: Let's say smaller deals or mid range deals are just
34:13
Speaker 3: sitting on the sidelines. I know many many an investment
34:16
Speaker 3: banker who's sweating right now because they just got books
34:18
Speaker 3: and books and books of deals they want to put out,
34:20
Speaker 3: but the time is not right because again, who's financing
34:22
Speaker 3: those deals? Nobody right, And so a couple things happening.
34:28
Speaker 3: One is an emergence of private credit. So we're seeing
34:30
Speaker 3: a lot of family offices and ultra high net worth
34:33
Speaker 3: individuals kind of swoop into this market because they see
34:37
Speaker 3: the long term growth of the industry. We're crossing a
34:40
Speaker 3: trillion dollars this year. We're still putting up positive growth.
34:44
Speaker 3: We grow with the population. We are fully rebounded from COVID,
34:48
Speaker 3: So despite inflationary pressures, people got to eat. Their behaviors
34:52
Speaker 3: shift in our categories, but they still have to eat.
34:55
Speaker 3: So if you are one of those investors, this is
34:58
Speaker 3: a very good time for you to get into the space,
35:01
Speaker 3: make some strategic positions as part of your longer term portfolio,
35:05
Speaker 3: and take advantage of the lack of credit that's available, right,
35:09
Speaker 3: So they're providing private instruments left, right, and sideways. It's
35:12
Speaker 3: like all the rage right now. You know. The other
35:14
Speaker 3: thing I'm seeing is some consequences down at a smaller level.
35:17
Speaker 3: So there's a lot of M and A with franchise
35:19
Speaker 3: e consolidation. Yes, we've seen this with some very large
35:22
Speaker 3: franchisees and very big systems, but we've also seen a
35:26
Speaker 3: heck of a lot of it under the radar with
35:28
Speaker 3: like units that are somewhere between like ten and thirty.
35:31
Speaker 3: They have very high overhead, they're not properly leveraged. They
35:35
Speaker 3: were banking on big growth and using debt to do that.
35:39
Speaker 3: Now they have debt, like crazy high interest rate debt
35:42
Speaker 3: on their balance sheet, and they're not growing, they're defaulting
35:45
Speaker 3: on development agreements, and so a lot of opportunistic and
35:49
Speaker 3: distressed assets down at that kind of early stage what
35:54
Speaker 3: I would call early stage multi unit franchise ese, right,
35:57
Speaker 3: So tons of consolidation down there. Tons is, if you
36:01
Speaker 3: are a well capitalized, cash flowing multignit franchise and you
36:05
Speaker 3: see an adjacent multignit franchise struggling, you're going to make
36:09
Speaker 3: that offer, You're going to go ahead and shoot your shot,
36:11
Speaker 3: because they may just roll up into your organization. So
36:15
Speaker 3: lots of interesting M and A. But I would say
36:17
Speaker 3: it's largely stratified and mostly because of the scarcity of debt.
36:23
Speaker 3: And in the middle, what is happening is a lot
36:26
Speaker 3: of investment in this space, either at equity or with
36:29
Speaker 3: private credit by ultra high net worth individuals or family offices.
36:33
Speaker 1: Interesting me.
36:34
Speaker 2: I know you're an avid reader, So what books on
36:36
Speaker 2: your nightstand at the moment.
36:39
Speaker 3: There are some good ones. I'm going to read them
36:41
Speaker 3: to you right now, so I have unreasonable hospitality still,
36:43
Speaker 3: I'm working my way through that. That's a great one.
36:46
Speaker 3: I'm really enjoying that. I am reading the I think
36:50
Speaker 3: it's Harvard Business School Women on Leadership that someone gifted me,
36:54
Speaker 3: and it has been fantastic. I'm very much enjoying that
36:56
Speaker 3: right now. And I am just I'm a working parent.
37:00
Speaker 3: I'm going to throw this one out there too, like
37:01
Speaker 3: I am reading the whole Brainchild because I need to
37:04
Speaker 3: figure out how to handle a toddler who's very opinionated.
37:06
Speaker 3: So in two languages, nonetheless, so that's kind of a
37:10
Speaker 3: mix of what I'm reading right now on the nightstand
37:13
Speaker 3: and in my office.
37:15
Speaker 1: Right.
37:15
Speaker 2: Very cool, Well, listen, thanks again for doing this. Where
37:20
Speaker 2: can our listeners go to find out more about Full Course.
37:24
Speaker 3: Yeah, you can find us at full course dot com
37:27
Speaker 3: that has all of our forms of social media on there.
37:30
Speaker 3: We are very happy to book a call with you
37:32
Speaker 3: to just talk about how we can help, whether that's
37:34
Speaker 3: in coaching some of our free courses. We could do
37:38
Speaker 3: a free course every month for example called Rising Tide,
37:41
Speaker 3: or whether you're interested in investment. We're here to help
37:44
Speaker 3: and that starts with just a conversation and we're happy
37:47
Speaker 3: to chat with you. So you can book a call
37:49
Speaker 3: directly with us on our website and you can always
37:51
Speaker 3: find me on LinkedIn. I'm on there quite a bit
37:54
Speaker 3: putting out a lot of thought leadership in this space,
37:57
Speaker 3: so you can give me a follow and full course
37:59
Speaker 3: of follow on LinkedIn.
38:01
Speaker 2: Good stuff and a big thanks to the audience for
38:03
Speaker 2: tuning in. If you liked the episode, please subscribe and
38:06
Speaker 2: leave a review. Please check back soon for a conversation
38:09
Speaker 2: with Meredith Sandland, CEO of Empowered Delivery,