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News Release Portability is a High Risk Proposition By Robert S. Hill, Principal
In terms of our principal growth concept, RA Sushi, the recently opened restaurant in Houston, Texas is off to a strong start and speaks to the portability of the concept. Benihana April 4, 2006 earnings press release
“We’ve proved our portability,” said Roberts, explaining that he felt a need to open the concept in cities far from Minneapolis in order to establish a national presence, “We would not have a national chain if we were known as a Minneapolis fish house.” Phil Roberts, Founder of Oceanaire, a high end seafood concept based in Minneapolis
“The chain's highest average unit volumes are generated by restaurants in markets outside the chain's home base of California, which indicates the portability of the concept.” Wendy’s International, Inc. Form 8-K, May 31, 2002 announcing the acquisition of Baja Fresh.
Conventional wisdom points to Portability as a necessary component of any credible growth story in the chain restaurant business. If a concept isn’t portable, it isn’t as valuable as one that is, say the analysts, investors and buyers. A new chain needs to prove portability before it can be truly successful, they say. The multiple for a portable chain is always higher than for one that is not. Good theory? Maybe. Golden rule to be followed by everyone? Maybe not. Risky proposition? Definitely. Fact. The pursuit of portability creates problems for so many young restaurant concepts that achieving the objective may not be worth the investment of time, effort and money. Questionable or, worse, failed portability can have a materially detrimental effect on value. Many new chain developers might be better off if they didn’t even try. It is true that there will be a profound effect on value and purchase price multiple with the achievement of a successful presence in multiple markets. However, the downside to that statement is very dark. If the new market strategy delivers disappointing results, one will question not only the magnitude of the chain’s long term growth potential but also the basic premise of the concept. Does it have regional or broad national appeal or is it simply a local concept with limited growth potential. This risk is magnified by another fact of life. One bad location at home is not nearly as detrimental to enterprise value as a bad location in a new market. The challenge of portability presents a dilemma for the new chain developer – am I better off leaving the portability question unanswered? Or should I pursue a multi-market development strategy knowing that the downside could be disaster? To formulate an answer, consider all the dimensions of a portable concept. The true measure of portability is when the chain produces nearly equivalent sales, unit profits and return on investment in multiple markets. If required new unit investment is higher, than so too must be unit sales and profits so as to produce equivalent return on investment. Equally as important, the chain must produce equivalent reliability of opening and day to day operating performance. The concept must react in similar fashion to competitive pressures and to the company’s marketing and promotional initiatives. And this must be achieved with the same menu, pricing, interior and exterior design as well as operating procedures. Successful portability means predictable performance within the company’s normal operating structure. The distant market’s unit performance must be achieved with roughly the same level of general and administrative support, advertising and marketing investment and supervision. Successful new market performance that requires materially more G & A support, marketing or market-specific operating procedures does not prove portability. Given the risks associated with new market development, some tactics are worth considering.
When buying or selling a concept, portability can have a material effect on price. We recently represented a very interesting, $15 average check, casual sit down chain with 12 locations, 5 outside their home base in 5 different markets. Four of those locations had operating performance below the chain’s average. In an otherwise hot market for chains of this nature, we estimate that the perception of flawed portability cost the owners as much as 25% in purchase price. During the engagement, the founders acknowledged that they went too far a field, entered too many markets and frequently lacked supervisory support on the local level. Asked why they developed the concept in the way they did, they responded that they followed the TI money. Undoubtedly, portability will be seen as a necessary objective for many new concepts. Unfortunately for many, the achievement of that objective proves to be elusive and expensive. Before owners embark on a multi-market development strategy, they should ask themselves if achieving the objective is worth the risk. And they should pause to be sure they have the resources to accomplish it.
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