Restaurants adapt to 'new normal' with efficiency, innovation

The lingering recovery of the U.S. economy has caused restaurateurs to adapt to a "new normal," one in which they are now more efficient and innovative in order to increase sales and profit margins.

During the volatile past couple of years, restaurants needed to differentiate more to compete for market share. That meant improving the quality of their food and product offerings, and including value pricing.

Now, as the economy gets better and business improves, customers are going to continue to gravitate toward these "better restaurant" experiences, according to Bob Bielinski, managing director and head of the Restaurant Industry Practice for CIT Group Inc., a provider of financing to small businesses and middle market companies.

Bielinski spoke during CIT's latest "5 Minute Capital" podcast titled "2012 U.S. Restaurant Industry Outlook." The Q&A format was facilitated by CIT's Curt Ritter and covered topics such as the restaurant mergers and acquisition market, franchisee funding and fast casual growth.

Mergers and Acquisitions slows down

There shouldn't be nearly as many mergers and acquisitions in 2012 as there were in 2011, which included a number of high-profile deals such as:

?Dunkin' Donuts went public;
?California Pizza Kitchen went private;
?Arby's was sold by Wendy's;
?A&W and Long John's Silver's were sold by Yum! Brands;
?Corner Bakery changed ownership; and
?The largest franchisees in the Pizza Hut, Applebee's and Taco Bell systems were involved in M&A activity.
"2010 was a very good year for M&A in the restaurant sector, but activity accelerated in 2011," Bielinski said. "For 2012, I think you are going to see a slower pace than you have over the past two years. There will be fewer headline transactions because of the dramatic turnover that's already taken place in private equity portfolios. There simply aren't as many mature deals left in private equity portfolios."

However, he added, if this year is strong in sales and profits, it could spark the beginning of a cycle of franchisee consolidation as older operators look to retire and well-capitalized franchisees build to scale.

Franchisee funding picks up

Financing was readily available in the latter part of 2011; more than it had been in 2010 and the beginning of 2011. Bielinski predicts this trend to continue this year, including for smaller franchisees.

"Now you are seeing chains establish programs that offer tangible support to their franchisees that are looking to borrow money," he said. CIT, for example, offers small business lending to restaurant franchisees and is looking to expand its offerings in this segment.

Fast casual growth

Bielinski reiterated what many reports have already shown: The fast casual segment is where the growth is.

"Chipotle and Panera didn't pause during the downturn, and they continue to add units. But, there are new niches in fast casual beyond the well-established Mexican and bakery café concepts," he said.

For example, "top your own" pizza concepts, such as Pizza Inn's Pie Five Co., Top That! and others, are building buzz among restaurant operators.

"Fast casual pizza, where customers choose toppings and get a custom-made pizza in only a few minutes, could explode onto the scene this year," Bielinski said.