When it came to growth strategies, restaurant brands used to follow a relatively formulaic three-step process. Step one was to prove your concept worked, step two was to add more locations, and step three was to either do an IPO or have investors come in to take the concept to the next level of growth.
But lately, a new model for growth is developing – and it doesn’t really involve step two.
Private equity groups are being drawn to small restaurant chains in early lifecycle stages. In the past three years alone, private equity groups have invested money into 31 different concepts with 20 or fewer units.
So what is it about restaurants – specifically emerging fast casual brands – that has investors so excited that they’re investing in restaurant concepts that are still in their infancy?
Well, besides the fact that the growth in the restaurant industry is concentrated among fast casual chains, investors are wanting to get in on the action early. They believe that they will make major returns later thanks to the surge in restaurant IPOs occurring now that companies can go public at earlier stages and still receive large valuations.
However, while investors do want to partner with budding restaurant concepts, they also don’t want to run into any potential problems after they’ve already invested. At the end of the day, the restaurant business is hard and the ideas that work at the first few locations might not work at others.
That’s why it’s critical to prove to investors that your concept can perform – and that you can continue to increase the value of your brand – if you want their buy-in.
And you can do that by demonstrating these two things:
- Open more successful locations: A growing restaurant chain needs to prove to investors that they’re not just opening new locations, but rather that they’re consistently opening new stores with a high rate of return. When chains do that, investors know that the company has a proven site selection strategy and knows which markets to enter.
- Grow your customer base: While positive same-store sales are good for business, a more important measure is the number of new customers acquired. Growing your customer base requires investment in market expansion, strong product-to-market fit and targeted marketing to your best potential customers.
While these two steps may seem completely obvious, they’re actually much harder to accomplish than many may realize.
But they don’t need to be.
By using customer analytics, restaurant executives can develop detailed customer profiles that offer a wealth of knowledge not only in the realm of demographics/psychographics, but also where their customers live and how far customers are willing to drive to any given location.
With this customer profile, they have the ability to search trade areas all across the U.S. to find other consumers that match this profile.
And when they find trade areas with large concentrations of consumers who have the same characteristics as their best customers, they’ve discovered fertile ground for new locations.
From there, executives can examine specific sites in order to identify the ones nearest to the greatest number of potential customers.
Taken a step further, by using customer profiles, it’s possible to tailor marketing efforts and messages as well as product offerings to specific audiences instead of basing decisions on generalizations about the “average” customer.
The Bottom Line
Companies that have volatile growth patterns are not going to attract the same attention from investors as those companies that have a clear growth forecast for what’s going to happen two months to two years down the line.
So if chains are able to fulfill these recommendations, not only will the concept grow, but investors will also have confidence in the business.
If you’re interested in learning more about how to take your restaurant chain to the next level, check out our latest whitepaper: 7 Steps to Success in a Changing Restaurant Environment.