January 2024
When it comes to investment opportunities, restaurants are generally not the first thing that comes to mind for those looking to put capital to work. Suffering from high failure rates, razor thin margins, fierce competition, evolving consumer preferences, and labor issues, the restaurant industry is widely perceived to be one to avoid. While these generalizations indeed ring true for a large segment of the sector, they are far from universal.
In reality, restaurants that exhibit certain qualities, especially when pooled into a fund, can in fact provide investors with predictable cashflows and compelling growth potential.
Among the key features one should consider when evaluating restaurants from an investment perspective are: the experience of the management team, positioning with respect to industry trends, access to qualified operators and established brands, cash flow reliability, and risk mitigation.
Restaurant Funds for Growth and Competitive Edge
Investing in a restaurant fund, in contrast to investing in an individual restaurant, offers the obvious advantage of diversification. Funds have the ability to create portfolios of eateries with a variety of locations, concepts, and price points. This reduces the impact of any single restaurant's performance on the overall fund. A reputable restaurant fund managed by experienced professionals will also benefit from industry knowledge that can generate competitive advantages and value creation. The restaurant industry is constantly evolving due to emerging food trends, innovative concepts, and changing consumer preferences. By carefully selecting restaurants that align with current market demands, funds can tap into the growing popularity of certain trends including: health-conscious dining, farm-to-table experiences, ethnic cuisines, or other unique concepts that resonate with consumers. Such strategic investments can lead to substantial returns and long-term growth potential.
Unlocking Success and Efficiency
Another key advantage of investing in a restaurant fund is the ability to access established brands and qualified operators. Successful restaurant chains have a proven track record, brand recognition, and economies of scale that individual restaurants lack. The operations team is essential, and a strong one can deliver high-quality customer experiences consistently across its locations. This includes not only excellent food and beverages but also attentive service, welcoming ambiance, and attention to detail. Positive reviews and customer satisfaction are additional indicators of a brand's ability to meet and consistently exceed customer expectations. Operating costs such as salaries, marketing, inventories, and maintenance, which typically make up around 80% to 90% of total revenue at profitable establishments, are generally underestimated by newcomers to the business.
Profitability Against the Odds
While the restaurant industry is known for its thin profit margins, a well-managed fund can nonetheless generates consistent cash flow and distributions for its investors.
Strategies such as revenue-sharing agreements, partnerships, and targeted marketing efforts can further enhance profitability. Thorough market research, financial analysis, and operational assessments are essential before selecting restaurants for investment. One important element of a market analysis is demographics; the adage “demographics is destiny” in the restaurant business continues to ring true, and the most successful restaurant investors deeply analyze how a style of restaurant may fit in a given area.
At OTG Asset Management, we are proud to announce our partnership with Acurio International and the launch of our new AR Expansion Fund. We’re excited to share with you in future blogs how we’re enabling investors to participate in the growth of a proven operating model in US markets with an appetite for Peruvian cuisine.
