Meet the Investors Funding the Fast-Casual Boom

Meet the Investors Funding the Fast-Casual Boom

Andrea Strong | Eater | December 13, 2017

In early October, Danny Meyer made a big announcement. It wasn’t about tipping, or another iteration of the Shake Shack hot chicken sandwich. This one was different. He would be entering the world of private finance, starting a $200 million investment fund, with stakes in reservation-making app Resy and the New York City-based Joe Coffee. His fund, Enlightened Hospitality Investments LP (EHI), now joins a group of newly formed investment funds cleverly eyeing (and investing in) restaurants.

It’s quite an about-face from the climate just a decade ago. “Ten years ago, investment took place much farther down in the growth cycle of a concept,” says Greg Golkin, who co-founded the Kitchen Fund in 2016 to invest in early-stage scalable restaurant concepts. “You would see private equity funds or strategics coming in when brands were at scale. If you had an early-stage restaurant concept, you had to source capital from high-net-worth friends and family, or from family offices [a more formal version of investment vehicle for high-net-worth private individuals]. There was no strategic capital in the space early on.”

What’s moved the needle for many investors — and caused the creation of new funds like EHI and the Kitchen Fund, and the frenzied interest of growth investors like L. Catterton, Roark, and Karpreilly, who had previously taken positions in Chopt, Primanti Bros., Burger Lounge, California Fish Grill — is the fast-casual revolution.

“It used to be that when you opened one restaurant, you had one restaurant until you were so busy that you could not serve one more meal,” says Basu Ratnam, founder of Inday, a healthy Indian fast-casual restaurant, one of the Kitchen Fund’s first investments. “Then you thought about number two. But now, there’s a different mentality. Now you have people opening with immediate plans to scale.”

That’s in part because “away from home eating” has skyrocketed in recent years. In 2015, for the first time ever, people in the U.S. spent more money dining out then buying groceries, according to data collected by Bloomberg.

 The high-return allure of the success stories like Shake Shack, Chipotle, and Sweetgreen has also made investors hungry to get in early on the next big idea. Entrepreneurs are listening, creating restaurant brands that promise investors growth and scalability. The fastest-growing categories are healthy fast-casual concepts like salads and grain bowls, “as well as anything that focuses on sustainability and organics,” says Anish Gandhi, managing director at the investment bank Brookwood Associates.

Gandhi is also seeing interest in Mediterranean concepts like hummus and kebabs and “multi-ethnic” concepts like Sushirrito and Velvet Taco. Velvet Taco, which debuted in 2011 and opened its second location in 2014, offers dishes like chicken tikka tacos and received a significant strategic growth investment from private-equity firm private equity firm L Catterton in 2016. It now has seven locations across the country.


Challenging Year Spurs Technology Investments

Challenging Year Spurs Technology Investments

Jonathan Maze | Jan 12, 2017 |

It’s safe to say that 2016 was a challenging year for the restaurant industry. Take it from the restaurant executives who presented to investors at the ICR Conference in Orlando, Fla., this week:

“2016 was challenging,” Papa Murphy’s CFO Mark Hutchens said.

“2016 was the most challenging in our 23-year history,” Chipotle Mexican Grill Inc. founder and CEO Steve Ells said.

“There’s no question it’s been a choppy environment, a challenging environment with customers,” Habit Restaurants Inc. CEO Russ Bendel said.

To be sure, such sentiment was expected. Same-store sales were weak all year, either because there were too many restaurants, too many cheap grocery deals or too many divisive elections.

The tone of executives seems to suggest that the year did not end strong, despite suggestions from companies like Popeyes Louisiana Kitchen Inc. and Del Frisco’s Restaurant Group Inc. that same-store sales improved after the election.

Stifel analyst Paul Westra said in a note Wednesday after the conference that same-store sales fell 2 percent in December, according to his firm’s survey. He called the tone of the conference “subdued.”

Canaccord Genuity analyst Lynne Collier, however, thought that the tone of the conference was “better than we expected,” given the sharp downturn.

Despite such concerns, restaurants are making major investments in technology to win over customers.

Companies continue to make investments in online and mobile ordering, and more are working to use technology to talk directly with consumers.

But by far the biggest move is toward delivery. Most chains talked about making moves into delivery — from vows to test delivery this year (Papa Murphy’s Inc.) to plans to operate delivery itself, rather than through third parties (Panera Bread Inc.).

Some are seeing surprising results: “There’s a lot of folks who like their food delivered after 11 at night,” Jack in the Box Inc. CEO Lenny Comma said during his company’s presentation.

On the other end of the spectrum was Kona Grill, which is also testing delivery with Amazon, UberEats and Postmates. CEO Berke Bakay said the polished-casual chain is seeing “strong results in certain markets,” despite the services high charges.

“I don’t think it cannibalizes existing sales,” Bakay said.

Whether delivery works to generate sales remains to be seen, although there are indications that companies doing delivery aggressively can generate quick sales, especially in markets where consumers are more accustomed to the service.

Technology, although costly, could make restaurants more efficient, even if it remains to be seen whether it actually improves sales.

But there’s nothing like a year of weak sales to spur action on the part of restaurant industry executives — and this week’s ICR Conference proved that.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.