Really great article in The Economist about institutional investors pressurising mature restaurant chains in the USA to downsize into smaller operating companies.
Running a restaurant chain in the mature stage of the service firm life cycle is challenging, largely because the high return on investment that was being generated during the growth stage flattens out. Also a mature restaurant brand’s market share is always being eaten into by new concepts that enter the market. So restaurant operators have two main strategic options – either they continue to grow, usually be expanding outside their home market; or they deliver new concepts themselves, either by developing them in-house or by acquiring nascent chains.
The problem with the second strategy is that investors do not like it. As the article explains, they know that a chain – like Darden Restaurants – has some mature concepts that are making only average returns, and some newer ones that are producing better returns. So they want this ‘conglomerate’ broken up into a low growth and a high growth chain.
The other interesting issue is that chains typically own considerable commercial property assets. We have seen in the hotel sector over the last twenty years, the splitting up of hotel chains into two operating companies – one that owns the physical asset, and the other that operates the hotels. Now the same idea is being proposed for restaurant chains. This is because the value of the property can rise (or fall) and hence affect the overall balance sheet of the company. Hence it is thought that the ‘property business’ needs to be managed by experts in this field, rather than left to hoteliers or restaurateurs.