As we enter the fourth quarter of 2016, the restaurant industry has both headwinds and opportunity. Across the industry, companies have recently reported relatively weak performance, with second quarter earnings showing disappointing same-store sales and traffic trends for many of the industry’s publicly traded chains. Importantly, performance from longtime industry darlings such as Buffalo Wild Wings (Nasdaq: BWLD), Chipotle Mexican Grill Inc. (NYSE: CMG), and Yum! Brands Inc. (NYSE: YUM) began to falter in 2016. Some industry experts and equity analysts have predicted a “restaurant recession” due to declining performance and rising labor prices. Despite these mixed results and an unclear near-term outlook, restaurant sector M&A activity remains robust. Financial and strategic investors still see substantial opportunity for on-trend concepts with strong leadership, attractive unit economic models, and growth potential.
The key story in the restaurant landscape for a number of years has been the decline of traditional casual and quick service dining concepts as traffic and dollars shifted to emerging, trendy fast casual competitors. Fast casual concepts generally offer quality menu items at affordable pricing in a convenient format. Quick service chains have responded to traffic declines by introducing premium menu items and offering more promotions. In response, many casual dining concepts have sought to offset traffic declines by increasing check average. At the same time, across the country, new labor and minimum wage laws are squeezing profit margins for companies across the industry. This combination of negative traffic and increasing labor costs has contributed to the collapse of longstanding concepts such as Fox & Hound, Logan’s Roadhouse and Ovation Brands, whose leadership cited these challenges in their public statements.