This article was originally published in the Globe and Mail by Chad Finkelstein and Greg Martin.
Subway, among the largest restaurant chains in the world, recently announced that it would be sold for roughly US$9.55 billion, in spite of challenging debt financing markets and a small pool of prospective purchasers able to pull off a transaction of this size. Though arranging nearly US$10-billion of capital is never easy, the exuberance over the sale may portend future deal activity in fast-food or quick-service restaurants (QSR).
Roark Capital, a U.S. private equity firm, was the successful bidder and will control a brand representing a big play in the world of sandwiches – one they will rely on as a defensive move in a soft economy and a growing chain with lots of room to expand globally when the time is right.
By most accounts, we are continuing toward an economic downturn (softness of landing to be determined). One sector proving its resilience within an unpredictable landscape is the QSR category. There are several compelling reasons to consider QSRs as attractive investment and acquisition opportunities (including during economic downturns), and we expect to see more deals in this space in the coming months, even if they don't necessarily all pack the wallop that the sale of Subway will.
Recessions tend to tighten household budgets, prompting consumers to rethink their spending habits. In these times, the appeal of QSRs becomes even stronger. With economic uncertainty, we often seek solace in the familiar – and what is more familiar than a favourite fast-food meal? They offer a cost-effective alternative to pricier dining options, making them an appealing choice for families and individuals looking to make their dollars stretch further.
Market reports by Restaurants Canada demonstrate that QSRs historically generate the highest annual revenues of all food-service segments. Overall, QSR revenues jumped by 11.4 per cent in 2021 compared with 2020, and are the only food-service segment where sales are above 2019 (by 0.6 per cent). As a category, QSR sales have increased quarter-over-quarter since 2022, and by 35.5 per cent between the first quarters of 2021 and 2023.
One of the remarkable traits of QSRs is their consistent product and service, creating a sense of comfort and reliability for customers. This transforms QSRs into more than just places to grab a quick bite – they become anchors of stability for communities looking for an element of normalcy in turbulent times.
The last several years, following the hammering brought on by the COVID-19 pandemic, have shown how the QSR sector can adapt to changing circumstances time and again. While high-end dining has been plagued with premature hopes of busy downtown cities returning and consumers worried about rising bills, fast food has shown it can adapt. In fact, the softer real-estate market and changing store traffic counts has resulted in unique opportunities to lock in property in previously costly locations for fast-food restaurants.
QSR restaurants have shown their resilience, during the pandemic most swiftly pivoted their operations to accommodate restrictions and safety protocols. From contactless delivery and drive-thru enhancements to innovative packaging solutions and better customer engagement, QSRs showcased their capacity for innovation under intense pressure. This adaptability bodes well for investors and franchisors seeking ventures that can navigate uncertain times with ingenuity and resourcefulness.
The appeal of a brand like Subway is how it achieved a level of recognition that spans international borders. This global presence can be a powerful asset during economic downturns, and where one market is soft or challenging, another country may offer a new opportunity to focus and provide growth. Then, when the time is right and the market improves, the chance at a big IPO will be there.
We predict to see more mergers and acquisitions within the QSR space. For investors and acquirers, the QSR sector holds the prospect of long-term stability in times of upheaval and the potential for growth when the economy recovers. It is a beacon of affordability and familiarity, drawing in customers and offering them the comfort of a reliable dining experience.
While a recession's impact might force consumers to cut back on certain expenditures, their need for dining remains non-negotiable.
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