The mergers and acquisitions' environment has been relatively slow so far in 2013, a trend that has caused mostly favorable borrowing conditions for restaurant operators.
Bob Bielinski, managing director of CIT Corporate Finance, Retail and Restaurants at CIT Group Inc., said capital that normally finances acquisitions is available because of this lack of large M&A transactions.
"As a result, you have a competitive lending environment," Bielinski said during CIT’s Executive Spotlight Series titled "2013 Restaurant Sector Update." He added that there is a supply/demand imbalance with "too much money chasing too few deals."
Still, while access to capital is more available for large and mid-market restaurant companies, smaller brands and franchisees may still be challenged. Bielinski expects M&A activity to pick up in 2014. Some acquisitions of note this year include Kahala Corp. (parent company of Cold Stone Creamery) being acquired by the Serruya family from Canada and Lion's Choice's acquisition by LC Corporate LLC.
Growth stories and IPOs
Unlike the slow M&A environment, Bielinski said the IPO market has been very active this year. This comes on the heels of late 2012, when two restaurant companies — including Carl’s Jr. and Hardee’s parent CKE Restaurants — cancelled their proposed offerings.
Noodles & Company recently completed an IPO and rumors have swirled that Papa Murphy’s will do so soon as well.
"It appears that the IPO market is still willing to accept restaurant companies if there is a high-quality growth story, and I would expect other growth companies to pursue this path," Bielinski said.
He predicts much of that growth to come from the fast casual segment.
"Fast casual restaurants better understand the way consumers want to approach their dining experience today. The quality of the food is higher, the dining atmosphere is newer and fresher, and the consumer is in control of the time commitment required for the meal," he said.
Many fast casual concepts have also taken advantage of the demand for customization, particularly in the pizza and frozen yogurt spaces. Pizza brands such as Pie Five, Blaze and Uncle Maddio's have signed numerous multiunit franchise agreements to expand quickly across the country.
"Fast casual pizza burst on the scene a couple of years ago, and you are now seeing a proliferation of brands and increased new unit development. The consumer appeal of designing your own pizza and having it cooked for you in a matter of minutes is very strong. Product quality will be the key to success for this category, but for brands that figure it out, there will be significant growth opportunities," Bielinski said.
Obamacare and economic indicators
Bielinski also discussed how the informal eating out category has been impacted this year from the payroll tax, higher gas prices and the delay of the income tax. Economic data improved in the spring, but consumers became more conservative during the summer.
"Sales performance in 2013 is turning out to be very similar to performance of the last few years — there's generally steady improvement but not without bumps in the road," Bielinski said.
Looking ahead, as Obamacare regulations fall into place, Bielinski said the impact is still unclear.
"Many companies have lowered their estimates of the cost of implementing ACA, but with so many issues still to be determined, the true impact of the law remains unknown," he said.
Read more about restaurant industry trends.