Dunkin’ Acquisition Talks Signal Restaurant Real Estate Consolidation

November 2, 2020

By Lou Hirsh, CoStar News
October 29, 2020 | 4:47 P.M

Talks that could result in the parent of Arby’s and Buffalo Wild Wings buying doughnut and ice cream seller Dunkin’ Brands Group not only signals the pandemic is driving restaurant business consolidation. It may also lead to more jointly run restaurant properties.

Talks that could result in the parent of Arby’s and Buffalo Wild Wings buying doughnut and ice cream seller Dunkin’ Brands Group not only signals the pandemic is driving restaurant business consolidation. It may also lead to more jointly run restaurant properties.

Executives at Dunkin’ Brands and potential buyer Inspire Brands, an Atlanta-based company that also owns chains such as Sonic and Jimmy John’s, said this week preliminary discussions were held but they offered no further comment to CoStar News. “There is no certainty that any agreement will be reached,” Dunkin’ Brands said in a statement.

The discussions reflect a national restaurant industry looking to adapt to the coronavirus financial fallout. Most restaurants have limited or no indoor dining and are pushing alternatives such as more to-go and delivery. Even those options haven’t stopped many companies from closing locations, which have steep overhead costs especially when a large portion of the real estate isn’t generating income. Restaurant consultants said Inspire, Dunkin’ and other chain companies could find that it makes financial sense to team up on leasing large retail spaces that become available as hard-hit independent restaurants and retailers close in the pandemic.

If a merger did happen, one scenario could find Dunkin’ and its acquirer setting up locations where several brands operate under one roof, according to restaurant development consultant Jerry Prendergast. For instance, a Jimmy John’s sandwich shop may also have dessert counters carrying Dunkin’ Donuts and Baskin-Robbins ice cream.

While Dunkin’ Brands itself has operated combination doughnut and ice cream shops, the dual-brand concept has remained relatively rare among chain restaurants, outside the numerous combo KFC-Taco Bell restaurants operated by Yum Brands and its franchisees. Multiple brands in the same space could generate complementary foot traffic, especially for snacks such as doughnuts and ice cream that are not being bought heavily for takeout or delivery these days. Multiple franchisees could share costs for footprint
buildouts and operating expenses.

“If you can put four or five brands under one roof, it’s going to save you money in setup costs and also in your supply costs,” said Prendergast, principal at Prendergast & Associates in Los Angeles. “Bigger operators in partnerships can demand better terms on rents, supplies and equipment.”
Executives of Canton, Massachusetts-based Dunkin’ took no questions during a third quarter call with analysts Thursday, in which the company reported revenue of $361.5 million for its third quarter ended Sept. 26. That marked a 5.7% sales increase year over year for the company that operates more than 19,000 franchised locations, including 12,000 Dunkin’ Donuts coffee shops and 7,000 Baskin-Robbins ice cream stores, as net income rose 1.6% to $74 million.

Expansion Efficiency
The combined-storefront trend could follow in the footsteps of the increasing behind the-scenes shift toward so-called ghost kitchens that make food for delivery only, with several concepts sharing the same production space in repurposed former retail and industrial properties.
A July report from financial services Morgan Stanley noted that a pandemic
recovery for chain restaurants in coming months could include shrinking or combining real estate space to more efficiently reach a diminished customer base. “As chains consider better brand access, questions about store footprints will likely come to the fore — namely, the number and locations of stores and multi-brand location strategies where two or more chain entities share one roof,” the report said.

The capital support and brand-variety strengths of Inspire Brands also could help Dunkin’ broaden its customer base and raise its prole in its battle with coffee king Starbucks. “I would expect growth to slow for Dunkin’ Brands, but likely their coffee will be integrated into the current Inspire Brands portfolio and served at those restaurants,”
said Darren Tristano, CEO of consulting firm FoodserviceResults in Chicago.

Combining with another brand operator could also give Dunkin’ a more feasible way to spread its flagship doughnut and coffee shop footprint in places where it has long been a relatively minor presence, especially California. Dunkin’ executives for the past two decades have talked about rounding up new franchisees for a significant push into West Coast states, where Dunkin’ shops remain relatively scarce compared with the East Coast. “I would expect growth opportunities to come through existing Inspire brand franchisees who will welcome the opportunity to continue the expansion on the West Coast and western part of the United States,” Tristano said.

Tristano said he anticipates that Dunkin’ may also move to establish more of its drive thru locations, “which seem to be more operationally efficient versus Starbucks, which has a more complicated offering with their coffee and food and is still learning to efficiently prepare food for meal occasions.”

Prendergast said national chain operators such as Dunkin’ and Inspire could be selecting from many more spaces that become available as commercial eviction moratoriums expire in California and other states in early 2021. Outside of temperate areas like Southern California and South Florida, operators unable to locate their dining outdoors once winter hits could end up closing sites in many cities nationwide if capacity restrictions remain. “When the eviction moratoriums end, it’s going to be a bloodbath, I’m sorry to say,” Prendergast said. “The first operators to be impacted are going to be those smaller independents with limited access to capital.”

We want a ‘natural’ Big Mac. Why fast-food giants are finding it tough to deliver

November 4, 2015

2015-11-04_1641Peter Frost
Copyright © 2015 Crain Communication, Inc.

Chain restaurants that want to jump on the all-natural beef, chicken or pork bandwagon better expect to wait in line.

While higher-end restaurants in Chicago and other big cities have long turned to niche natural-meat suppliers, McDonald’s, Subway, Chick-fil-A and smaller companies are competing for a limited supply of “clean-label” meats. In many cases, they’re being forced to get supplies from the other side of the globe or wait years for suppliers to catch up to the types of proteins consumers want today.

“The infrastructure just doesn’t exist today,” says Marion Gross, senior vice president of supply chain management at McDonald’s, the nation’s largest fast-food chain. “And no one can turn on a dime, especially when you do the type of volume we do.”

On a quest to improve the quality of its food and lure back customers who left long ago for competitors perceived to have higher food quality, Oak Brook-based McDonald’s is overhauling a portion of its supply chain. It plans to begin using hogs raised outside of gestation crates, eggs from cage-free chickens and chicken not containing antibiotics used to treat humans. On Oct. 19, the company said it also will begin serving sustainable beef in some areas next year.

But the systemwide changes won’t begin to take effect in the United States until 2017, and they won’t be finished until 2025, because of McDonald’s huge size.

U.S. meat suppliers, knowing they’re missing an opportunity, are investing millions of dollars to change farming practices and acquire “natural” brands to fill growing demand. But change takes time.

The primary factor driving deals “is the pursuit of growth and moving into markets where the growth is,” says Heather Jones, a BB&T analyst based in Richmond, Va. “It’s completely being driven by the consumer, and these companies realize it is way cheaper to buy than it is to build this on your own.”

Big meat producers like Austin, Minn.-based Hormel Foods, which in May agreed to buy Applegate Farms for $775 million, and Salisbury, Md.-based Perdue Farms, which bought Natural Food Holdings and its Niman Ranch brand in September for an undisclosed price, are augmenting their portfolios with branded organic and natural products primarily to compete better at retail, where consumers make decisions based on the label.

The takeovers also should help big meat processors learn from the upstarts and apply the lessons throughout their mass-market-sized operations. Randy Day, president of Perdue Foods, the food division of Perdue Farms, says the acquisition of Chipotle’s pork supplier, Niman Ranch, will help his company continue “a slow, thoughtful” expansion into antibiotic-free pork without compromising what made Niman successful in the first place.

Hardees and sister burger chain Carl’s Jr. had to look outside the U.S. to Australia to find enough steroid-free, antibiotic-free, grass-fed beef to supply its 3,000 U.S. restaurants for an unexpected hit. Its “all-natural” quarter-pound burger performed so well in limited tests that the chains are keeping it on menus indefinitely. The sandwich, which retails for $1.50 more than a conventionally sourced burger, has been the company’s best-selling new beef product over the past two years, says Brad Haley, chief marketing officer for Carl’s Jr. and Hardees, subsidiaries of CKE Restaurants of Carpinteria, Calif.
“Earlier generations were more concerned about counting calories, and this generation is more concerned about counting chemicals,” Haley says. “And this is not a surprise to our suppliers. They’re getting asked by everybody for this, but we just couldn’t get enough in the U.S. to meet our volume demands.”


Roti Mediterranean Grill, a Chicago-based fast-casual chain with 21 restaurants, likewise tapped Australian and South American cattle for dishes that will showcase the grass-fed, pasture-raised beef its customers have come to expect, CEO Carl Segal says.

“People absolutely want it,” he says. “There’s such a tight supply in the U.S. right now. Until the big producers realize there’s more and more demand for (natural meat) we’re still going to (have) tight supply, which is going to keep pricing very high. It’s frustrating.”

Market share for organic or natural chicken, beef and pork remains small. Aside from antibiotic-free chicken, which is 6.5 percent of the total chicken market by pounds, no other natural or organic meat holds more than 3.6 percent of its category, according to data from Chicago-based market research firm IRI/FreshLook.

But while analysts say it’s unlikely the majority of consumers will pay hefty premiums for grass-fed beef or chickens raised without antibiotics—supermarket prices of such products sometimes are nearly double those of factory-farmed meat—sales are outpacing conventional products by as much as a factor of six, the IRI data show. And they might have increased even faster if more supplies were available, analysts say.

“It’s going to take time for the farming and (agriculture) community to produce as much organic and antibiotic-free product as demand dictates,” says Darren Tristano, executive vice president of Technomic, a Chicago-based market research firm.

And demand is growing. Subway wants to convert to chicken raised without antibiotics next year and eliminate antibiotics from all meat within 10 years. Chick-fil-A plans to sell only chicken that is entirely free of antibiotics within four years. Earlier this year, Wal-Mart Stores asked its meat and egg suppliers to curb their use of antibiotics and provide animals with more humane living conditions. Perhaps wisely, it didn’t set a deadline.

EXCLUSIVE: First Watch to buy The Egg & I restaurants

June 10, 2015


Jpictureustine Griffin
Copyright © 2015 HeraldTribune.com — All rights reserved.

In one of the largest corporate deals in Southwest Florida’s history, First Watch Restaurants will become the nation’s largest and fastest-growing breakfast lunch and brunch cafes in the country after doubling its size by acquiring The Egg & I Restaurants.

First Watch, based in Manatee County’s University Park, will add 114 new restaurants from the acquisition of the Colorado-based chain, taking it to 267 restaurants in 26 states, with 18 more under development.

The deal also increases the reach of the First Watch chain, which has expanded aggressively in recent years through the Northeast, Midwest and even into Colorado and Arizona.

The terms of the deal were not released.

The Egg & I restaurants will not immediately be rebranded with the First Watch name, but some restaurants will change during the next two years, executives said.

“First Watch has a fresh new look and they have a certain brand recognition and strength among consumers,” said Darren Tristano, executive vice president of Technomic, a Chicago-based restaurant research firm. “People go there because they know what to expect from the brand.”

The First Watch and The Egg & I chains are similar in a lot of ways, both in the products and services they offer as restaurants, but also in their history and growth as companies.

“The Egg and I is a wonderful concept with a loyal following that has experienced tremendous growth, particularly over the past several years,” First Watch president and CEO Ken Pendrey said. “We saw this acquisition as an opportunity to immediately and significantly expand our presence in markets where we don’t currently operate.”

The Egg & I — founded in 1987 in Fort Collins, Colorado — is a chain known for its laid back dining atmosphere. Like First Watch, it does not serve alcohol, and the hours are limited from 6 a.m. until 2 p.m. most days. Most of its restaurants also offer private meeting rooms.

“The culture of both companies is very similar,” said Chris Tomasso, First Watch’s chief marketing officer. “The deal made perfect sense to us in a lot of ways. The top priority being that we would immediately and significantly expand our scope and reach.”

The Egg & I has eight restaurants in Florida, the closest to Southwest Florida in Riverview, south of Tampa

“First Watch doesn’t consider themselves competition with big chains,” said Brian Connors, of Conners Davis Hospitality, a global food and beverage consulting firm based in Fort Lauderdale. “Instead, they think of the chef-driven local concepts and mom-and-pop restaurants as competition.”

Owned by franchisees
Like First Watch, The Egg & I company has a strong recruitment of franchisee owners.

Each franchisee-owned restaurant generates nearly $1 million in sales each year, according to The Egg & I’s franchise inquiry packet. The cost to get started ranges from $120 to $160 per square foot.

The Egg & I has accumulated a number of accolades through the years, including a No. 12 on a list of the fastest-growing chains in the Technomic, and third on a list of the fastest-growing full-service restaurants.

“It was always apart of our strategy, that if the right deal came along, we would sell,” CEO Don Lamb said. “But it had to be right for our associates, our customers and our franchisee owners. First Watch is that right deal.”

First Watch has been on a growth trajectory since 2011, when the chain was acquired by Los Angeles-based private-equity firm Freeman, Spogli & Co. It was the second time in the company’s history that it sought out private equity. The first acquisition was in 2004.

Prior to the acquisition of The Egg & I, First Watch had more than 120 restaurants in 17 states, including 45 in Florida and 20 restaurants under The Good Egg name in Arizona.

“First Watch is in a space that’s trending,” Tristano said. “They are as nationally known as anyone else. They’ve looked for the right opportunities to expand and have aggressively acquired reach chains and rebranded them.”

The Southwest Florida company bought Nashville, Tennessee-based Bread & Co., late last year, which included two restaurants and all the company’s recipes, marks and intellectual property.

In January, First Watch signed its largest franchise development agreement to date: 15 restaurants in the Dallas-Fort Worth market in the next five years.

The deal will be the chain’s debut in Texas, with the first restaurant to open at the end of this year.

“Chains in this sector grow pretty quickly and there’s a lot of opportunity for continued growth,” Tristano said.
First Watch began in California in 1983, but, by 1986, the chain moved to Southwest Florida.

Pendery, the CEO, had owned restaurants in Denver and other markets with founder, John Sullivan, before. Both agreed that Florida was a smart place to start a new venture.

“And to raise a family,” Pendery said.

First Watch plans to have 300 restaurants open around the country by 2017, which does not include those under The Egg & I name.

First Watch will maintain its corporate headquarters in University Park in a Benderson Development Co.-owned office park.
The restaurant company, which moved to the space off Cooper Creek Boulevard in late 2011, already has outgrown it and is looking to expand into nearby unoccupied space in the same park.

First Watch also will maintain The Egg & I’s corporate headquarters in Denver, Colorado.

“As you grow, the challenge lies in the scale. It’s harder to keep the same quality and service when your cost is increasing,” Connors said. “You know it’s the right thing to do but it’s not always the easiest.”