Burger Chain Hopes for Fuller Plate: Umami Looks to Feed Growth with Equity Investment

Umami Burger started small. Its first restaurant was a cramped joint that didn’t have enough tables, enough parking or even a license to serve beer.

But now the chain wants to go big. It’s closed that first shop, a hole-in-the-wall location on La Brea Avenue south of Wilshire Boulevard, and just got a big chunk of money to continue its expansion, eventually going international.

Adam Fleischman, founder and chief executive of Umami Restaurant Group, told the Business Journal last week that his company accepted $20 million from Fortress Investment Group in exchange for a minority share of the business.

Saul Cooperstein, chief strategy officer for Umami, said the money will be used to fund nationwide expansion for the chain in major urban markets such as Las Vegas; New York; Washington, D.C.; Chicago; and Philadelphia.

“The Fortress investment will really allow us to focus on expansion operations instead of capital for the next few years,” he said. “We look at being able to build consistently at least 10 to 15 restaurants a year, each year, into the future.”

The 13-unit burger chain expects to almost double its footprint in 2013, starting with six restaurants currently in development in Burbank, Irvine, Oakland, Palo Alto, Miami and New York. Los Angeles International Airport will open a seventh restaurant for the chain this year at its upgraded Tom Bradley terminal. The company will also expand its fast-casual concept, U-Mini, which debuted in Westwood last fall.

Earlier this month, Umami closed its original location on La Brea when its four-year lease expired, sacrificing any sense of nostalgia for its origins in favor of opening restaurants in larger, more prominent locations.

Fleischman said the 985-square-foot restaurant, which had space to seat only 60 people and lacked a liquor license, no longer fit the company’s vision for its restaurants. He hopes diners who used to eat at the original location will go to the chain’s flagship that opened at the Grove in the Fairfax district late last summer and can seat 185.

“I’m not really tied to any particular location,” he said. “The potential is so much more exciting, the fact that maybe one day we can open in Japan and in Paris and in London.”

Second investment

The Fortress investment was the second for Umami since it was founded in 2009. In 2011, L.A. hospitality group SBE Entertainment Group LLC and investment firm Nimes Capital together invested eight figures in the restaurant group. The money, which came from companies headed by brothers Sam and David Nazarian, paid for the chain’s California expansion.

Cooperstein, who worked for eight years managing business development, strategy and acquisitions for SBE before joining Umami in late 2012, initiated the deal with Fortress last fall. He had worked with Fortress on the company’s past investments in SBE.

“Fortress is one of the relationships I built while I was at SBE,” he said. “They’re truly opportunistic lenders and they have a lot of expertise in the restaurant industry.”

Fortress, which is based in New York but has an office in Century City, employs 979 people and manages assets worth more than $50 billion, mostly in real estate holdings. The investment company helped SBE finance the acquisition of West Hollywood’s Abbey Food & Bar in 2006.

Fleischman said Fortress’ investment in Umami came just as the restaurant company was getting low on expansion funds.

“During the fourth quarter last year we saw that we were using our money quicker and that we were going to run out of money at some point around the first of the year,” he said.

Umami executives declined to disclose the percentage of the company Fortress acquired. Fleischman remains majority shareholder.

The company also declined to disclose revenue, but Fleischman said the chain’s top performing restaurant sees annual sales of about $4 million.

The restaurant company employs 635 people but expects to hire about 400 more as restaurants open before the end of the year. An executive team of 35 works out of the company’s 6,000-square-foot headquarters in the Fairfax district alongside SBE.

Cooperstein said that the way the deal was inked, Fortress won’t have a say in the details of Umami’s expansion plans.

“They have confidence in management to execute on the business plan,” he said.

Under the most ambitious scenario, Fleischman said the company could open 100 to 150 restaurants across the country in the next five years. Then, once the chain has established itself on the East Coast, it would look to expand internationally.

But while Umami’s growth plans are expansive, they’re not as aggressive as other chains that compete in the “better burger” restaurant category. Denver chain Smashburger, which was founded in 2007 and sells burgers for between $4 and $7, has more than 100 restaurants open in the United States, including one that opened last fall in Culver City. Similarly priced burger chain Five Guys in Lorton, Va., has opened more than 1,000 restaurants since 2006. Umami, known for its malt liquor tempura onion rings and signature burgers made from meats ground on site, charges between $10 and $14 for its burgers. Its Ahi burger is $15.

Competition

Darren Tristano, executive vice president at Chicago market research firm Technomic Inc., said it’s not likely Umami will ever grow as fast as its lower-price competitors.

“Umami has a unique flavor profile and they have put a lot of culinary innovation behind the branding,” he said. “But because of their narrow focus – toward affluent, upper-income consumers who consider themselves foodies–you’re not going to see them expand like a Five Guys. Umami will have fewer broad opportunities to grow within each market.”

Jerry Prendergast, a restaurant consultant in Culver City, said the chain will need the Fortress investment to grow as quickly as it plans to do without franchising, especially when it comes to landing prime real estate.

“Truthfully, it’s tough to find good locations, even in this market,” he said. “Umami doesn’t go into second-rate locations, but they’re well-funded so they can take the time to do it right.”

The partnership with SBE goes a long way to help the chain get the locations it wants, he added.

“SBE already had the machine set up,” he said. “There was already a well-established, well-funded, experienced team of people to help with development who had their tentacles in with real estate brokers all over the country.”

The company will focus its expansion efforts in New York and Miami this year and expand into other urban markets in 2014.

Fleischman said his hometown, Washington, is high on the list.

“D.C. is still prospective, so we don’t know exactly where we want to be, but I’m pretty familiar with the areas there that would work for us,” he said. “I think it’s a great city for restaurants.”

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