From Crittenden's Restaurant Insider.
Keep an eye on well-capitalized brands to push through the credit crunch without missing a beat.
Straw Hat Restaurants Inc. (SHP) plans to nearly double in size by the end of 2009 with roughly 42 units in the pipeline. The 58-unit company will add a mix of traditional Straw Hat Pizza locations, as well as its newer Straw Hat Grill and cost efficient Straw Hat Express. California sandwich brand Submarina California Subs strives to open another 20 units by year’s end. Long-term plans call for 2,500 units in the next 10 years. Look for Ker’s WingHouse to open four to six units next year, of which half will be franchise locations. McAlister’s Deli hopes to open 50 units in 2009. Look for the concept to break into Salt Lake City, Columbus, Ohio, Lexington, Ky., and Washington, D.C. Woody’s Bar-B-Q aims to open at least one unit a month for the next year or so. Plans for 2009 call for 12 to 18 units.
Could fear be what’s killing deals before they ever even reach the lender? With the DOW Jones hot and cold, many restaurant brands may want to sit this round out till things turn around. Don’t be surprised to see a few restaurant players take the opposite approach. Look for some brands to be prepared for when things get better with more locations and better real estate deals. With the current debt market negatively affecting the entire U.S. economy, it’s becoming harder to find restaurant brands that aren’t seeing the fallout. The bottom line: Financing is still out there but the restrictions have tightened and timeframes are more drawn out. An average SBA loan is now taking three to six months to get approved. SHP raised cash from a private placement stock offering and is able to lend short-term loans to franchisees. The idea is that these bridge loans will help franchisees start construction right away while waiting for an SBA loan to go through. SHP helps franchisees get open in only three months, which is especially important because it saves a vast amount of money that is spent on rent during construction.
Submarina works with Diamond Financial and U.S. Bank and helps franchisees through the process. The company is fortunate to have low buildout costs ranging between $225K and $250K and franchisees are still able to get loans with just 20% down. CEO Mimi Zeller believes Submarina is in a good place due to its access to funding but notices that some companies are tightening up and requiring more collateral. Ker’s WingHouse sees LTV ratios changing. Lenders with portfolios weighed down with restaurants are raising the bar to require more down that can be up to 50% or more of the investment. On the other hand, lenders with very few restaurant clients may still be getting deals done with only 10% to 30% down. VP of Franchising Tom Dunn notices that many regional banks, like M&I Bank, are well capitalized with an appetite for lending. Corporately, Ker’s works with Wachovia and Bank of America, and although it’s costing a little more to get deals done, the financing is still out there. McAlister’s also sees regional and local banks dominating the current lending market, while the company still uses GE Capital Franchise Finance and Irwin Franchise Capital for corporate growth. Woody’s recognizes that its 29 years of relationships with banks keeps its two national SBA lenders willing to close new deals. The company finds the credit situation to be the same for new Woody’s units.
Look for SHP to enter some new markets with units in the works for Arkansas, Florida, Texas and The Carolinas. President Jonathon Fornaci is confident that the company will pass its goal of 100 units by 2009 instead of his original projection of 2010. Once the company is up to 100 franchise units, Fornaci plans to file for an IPO. SSS are up YTD. SHP recently rolled out a pasta program along the lines of Pizza Hut but with superior quality noodles and newly created sauces. Pasta dishes run $14.99 for a huge three-and-a-half pound serving. A family size salad and/or a medium pizza can be added on for only $5 each, helping extend more value to consumers. An average SHP runs from 3,500 s.f. up to 5,000 s.f. and freestanding pads and end caps work best. Most locations do about two-thirds of its business from dine-in guests with the balance coming from takeout and delivery. Grill units fit into 4,000-s.f. to 5,000-s.f. freestanding pads but end caps can also work. Fornaci prefers lifestyle centers and locations with strong business lunch demographics and a cross between business and family/residential at dinner. Express units will range between 1,200 s.f. to 1,500 s.f. with incredibly low startup costs starting at $75K up to $100K.