Inside the Investment: The Appeal of Quick-Service Restaurant Franchises

Quick Service Restaurant Franchises

Investing in quick-service restaurant (“QSR”) franchises (e.g., McDonald’s, Burger King, Taco Bell, Subway, among many others) can be as enticing as the food they serve. Over the last three decades, consumer spending at QSRs has outpaced what shoppers are spending at traditional grocery stores. This is also the case when comparing spending at QSRs to spending at full-service restaurants, reflecting consumer demand for convenient and value-oriented food options.1 As a result, investments within QSR franchises have provided investors the opportunity to sustain long-term, potentially consistent cash flow and compounding growth through varying economic climates.

Helping to sustain demand, the QSR space has seen a number of recent developments, particularly in areas where technology and automation have improved efficiencies (such as order-taking and delivery). These advancements have led to higher margins and increased customer loyalty and are part of a broader strategy employed by many QSR brands seeking stable restaurant operators with a long-term orientation.2

We recently connected with Will Hoesley, a Director on Cresset Partners’ Private Equity Team, to learn more about the appeal of investing in QSRs and what investors need to know:

Will, tell us more about the opportunity that QSRs present to investors.

We believe that investing in QSRs presents a compelling opportunity for investors due to several factors. First, QSRs cater to the consistently high demand for convenient and low-cost dining options, which is appealing to a large portion of the U.S. population. In fact, “foodservice” (i.e., restaurants) has grown to a 54% market share of total U.S. food & beverage spend, compared to 45% in 1997 and 48% in 2010. Within foodservice, QSRs have maintained and strengthened their market share compared to full-service restaurants, steadily growing from 51% in 1997 to 54% in 2022.1

Similarly, QSRs have historically demonstrated resilience during economic downturns and volatility. During the Great Recession, QSR spending grew despite consumers’ pessimistic outlook.1 The affordability and convenience of the QSR experience make it an option for consumers looking to save money during challenging economic times. In economic environments experiencing high inflation, QSRs have been able adjust menu pricing to accommodate cost increases.

QSR brands are also increasingly adopting advanced technology to enhance the customer experience and streamline operations. Investments in digital ordering systems, mobile apps, and delivery platforms contribute to increased efficiency and higher revenue, particularly as the ability to offer order customization (such as choosing specific menu options or alternatives on your phone) leads to larger check sizes and higher order frequency. For example, the implementation of Taco Bell’s mobile ordering application yielded check growth of approximately 30%, and restaurants that offer online ordering generate approximately 42% more in takeout orders.3

Beyond technological improvements, QSR brands are quick to adapt to changing consumer preferences and food trends. This adaptability allows them to stay relevant and capture new market opportunities.

Why now? What is driving the QSR investment thesis that you find compelling?

We’re excited about the long-term durability of the QSR industry and believe that the 40+-year trend of low/mid-single digit sales growth (5.8% revenue CAGR from 1997-20221) will continue to drive same-store sales growth for top brands willing to invest in stores and marketing budgets, while the best operators will be able to develop new restaurants at appealing ROIs to complement organic growth.1
In addition, the QSR industry is highly fragmented with thousands of “mom-and-pop” franchise operators that will eventually require succession planning, presenting an opportunity for QSR operators with access to capital and a track record of successful M&A.

What is your outlook going forward? Where is this industry headed?

The QSR industry is undergoing several trends and shifts that we believe signal future growth and expansion:

  • Digital Transformation: The QSR industry is experiencing a significant digital transformation. Online ordering, mobile apps, and digital payment methods are becoming integral parts of the customer experience. Top QSR brands are investing in technology to enhance efficiency, streamline operations, and provide convenient digital ordering options, which leads to increased customization of orders, larger check sizes and higher order frequency.
  • Delivery and Takeout: The rise of food delivery services and the increasing demand for takeout options have reshaped the QSR landscape. Many QSRs are partnering with third-party delivery platforms or developing their in-house delivery services to meet consumer expectations for convenience. Leading brands and operators have been able to accommodate these trends and capitalize on this newer form of customer service.
  • Health and Wellness Focus: Consumer preferences for healthier eating options are influencing the QSR industry. QSRs are responding by offering more nutritious menu items, providing transparency in ingredient sourcing, and catering to dietary preferences, including plant-based and vegetarian offerings.
  • Automation and Robotics: The QSR industry is exploring the use of automation and technology to improve efficiency and reduce labor costs. This includes the implementation of self-service kiosks and automated order fulfillment at drive throughs and other technology that enhances speed and accuracy.

Who is best suited to invest in QSRs? What else should investors know?

QSRs offer a compelling opportunity for several types of investors:

  • Long-Term Investors: QSR investments may be well-suited for those with a long-term focus and are willing to hold such investments for an extended period. Success in the restaurant industry often involves building brand loyalty and weathering short-term economic fluctuations, which is why longer-term investors can be an ideal fit.
  • Income Investors: Profit and cash flow from QSR franchises tend to be highly predictable and recurring. Investors seeking the potential for a regular income stream may find QSRs appealing, especially if the chosen restaurant chains have a history of stable and growing dividends. However, investors should be mindful that this income is not guaranteed and may not be suitable for every investor based only on past performance.
  • Diversification Seekers: QSR investments may provide diversification for those looking to spread their holdings across different sectors. The restaurant industry offers exposure to a segment of consumer discretionary spending, which may not necessarily move in sync with other market segments and tends to be less impacted by economic downturns. We believe that this makes for a nice diversification play.

How does one get started in investing in QSRs?

QSRs typically favor investment partners with longer-term horizons—those who are willing to let a brand grow and further develop. QSR brands generally avoid having their franchises operated by traditional private equity firms because of their different goals for QSR investments. For example, private equity firms have a relatively short investment horizon, typically aiming for a profitable exit within a few years. This is unlike QSR brands, which typically prioritize long-term sustainability and brand-building and can find it challenging to align with a short-term timeline.

Another example of differing interests is that private equity firms may seek to implement operational changes or cost-cutting measures to enhance profitability quickly. Further, private equity investments often involve significant debt leverage, which can affect the company’s ability to invest in new innovations, marketing, or operational improvements. QSR brands are often rightfully concerned that any one of these changes by a private equity firm could compromise their core values, customer experience, or the quality of their products.

Cresset Partners takes a “patient capital” approach to investing. In other words, we believe that there are compelling opportunities to create compelling risk-adjusted returns from longer-term private investments like those in the QSR space. Cresset differs from traditional private equity firms in that there is no effective “shot clock.” Capital is typically pooled from families who have long-term investment objectives and are primarily focused on seeing the businesses in which they invest grow, mature, and compound in value over an extended time horizon.

To learn more about investment opportunities in QSR franchise businesses, please reach out to Cresset Partners.

Disclosures

Past performance is not a reliable indicator of future performance. The investment objectives may not be met. Capital gain and dividends are not guaranteed.

Minority investments in quick-service restaurants (QSRs) are considered highly speculative, illiquid, and should only be considered by investors who can bear such risk for an indefinite period of time and can afford a complete loss of investment. There is no guarantee that any income will be generated, or distributions will be made. The shares are illiquid meaning you will likely not be able to transfer or redeem shares on demand or in the quantity desired. An investment will involve significant risks due to the nature of the fund’s investments. The fund does not represent a complete investment portfolio. There can be no assurance that the investment objectives of the Fund will be achieved. The managers and portfolio structure provided herein may be subject to change.

Taco Bell and similar QSR are feeling pressure from price-conscious consumers. Taco Bells’ sales decelerated to 3% 4Q23. In addition, these QSRs are noticing sales declines in the Middle East.

Availability of Suitable Investments. The Fund may be unable to find a sufficient number of compelling opportunities to meet its investment objectives.

Limited Availability of Information. Limited Partners of a Series may not have sufficient information to evaluate to their full satisfaction the risks of investing in such Series and the manner in which the capital they have contributed to such Series has been invested.

Activities of Underlying Fund Managers and Control of Investments. Neither the General Partner nor Cresset will have control over the day-to-day operations of any manager of an Underlying Fund. Investments may differ from those preferred by the Partners or Cresset. For example, an Underlying Fund Manager might favor its other investment funds over the applicable Underlying Fund in which a Series is invested. Underlying Fund Managers will be substantially dependent on key persons who may not remain affiliated with such Underlying Fund Managers.

Minority Equity Interests. The Series may invest in minority, non-controlling interests in the portfolio companies under which Cresset and General Partners have no control of the actions taken with the investments in the company.

Conflicts of Interest. There will be conflicts of interest among the management company, it’s personnel, Cresset, the general partners and the Series investors. There is no guarantee that the investors will be pleased with the decisions made and avoided within the Series Fund.

Sources:

  1. USDA Economic Research Service (ERS) (updated 6/1/2023); L.E.K. interviews, research, and analysis
  2. Company websites; Euromonitor; Statista; Restaurant Dive; QSR Magazine; CNBC; Restaurant Business Online; NPD; FRANdata;FranConnect; PYMTNS; Franchise Performance Group; L.E.K. research and analysis
  3. S&P Capital IQ; company earnings releases and press releases; Restaurant Business Online; Euromonitor; L.E.K. research, survey, and analysis
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