Casual dining; the proof is in the branding

UK streets are teaming with private equity-backed restaurant chains, from Duke Street's Wagamama; Cinven's PizzaExpress, Ask, Zizzi and Byron; Quilvest's Yo! Sushi; Blackstone's Café Rouge, Bella Italia and Strada; Capricorn Venture's Nando's, Gourmet Burger Kitchen and Real Greek; Isis's Pho and Rutland's Pizza Hut. Even at the most casual end of the eating out sector the asset class is dominant, with Bridgepoint's Pret A Manger, Lyceum's EAT, Risk Capital Partners' Pattisserie Valerie and YFM's Bagel Nash.

The prevailing common link between all of these chains is the strength of their brand. When it comes to consumer-facing businesses, private equity can't get enough of brand names.

Byron, a high-end burger chain currently sitting in the Gondala Holdings group (along with PizzaExpress, Ask and Zizzi) and backed by Cinven, hit the headlines recently with talk of a possible sale – and the sheer number of private equity firms lining up to buy the asset once again proves the desirability of a well-branded restaurant chain.

What is the real value of a restaurant chain’s brand?

However, despite attracting a wealth of interested buyers including RIT Capital Partners, Quilvest, TDR Capital and Searchlight Capital Partners, the bids failed to reach the £100m asking price and the deal was taken off the market. Observers note that Byron's backers might have been testing the market and point to its near 11x profit price tag – very high by current market standards – as proof of this.

David Bresnick, corporate partner at Morrison & Foerster, highlights the recent "burgernomics" trend to explain the level of private equity interest in the up-market burger chain. "We're increasingly seeing a makeover of burgers and dishes typically thought of as fast food into something more gourmet and glamorous. Branding is a key part of convincing consumers to spend £10 on a burger where they are used to paying around £2-3."

Stephen Edwards, managing partner of Core Capital, backers of restaurant chain Brasserie Blanc, points out another key attraction to the market: "If you drill down into the restaurant market, which in the UK is worth around £9-10.5bn, the branded market within that is valued at around £3-4bn. That is a sizable market with further advantages of taking market share from independents." Indeed, according to Allegra Strategies, the branded restaurant market is forecast to grow by £5.6bn to £22bn over the next five years. Allegra predicts branded market share will hit 43% by 2018.

The outlook for growth is certainly impressive but what is turning consumers away from independents and into chains? "Consumers don't like shocks or surprises, they like to know what to expect," explains Edwards. "Furthermore, brands set their own standard within the market, which ensures a consistency of delivery," he adds.

With obvious attractions for consumers as well as investors, determining the worth of an established restaurant brand is complex and not something extractable. "The value of the brand boils down to how cash generative the business is," says Edwards. "Arguably you can attach a premium to a brand but for us, we see it as being integral to the offering." Core acquired Brasserie Blanc when it only had five units in 2006. The chain now boasts 19 restaurants with more on the way. "The brand is very much linked to the type of unit and how it operates, so the value lies in how well that can be transferred," Edwards adds. In order to build scale the entire operation of each unit must be easily replicated in order to ensure brand strength in every restaurant, from the kitchen through to the table.

And what private equity likes about branded restaurants is shared by public investors. The handful of chains sitting outside of private equity portfolios can be found on the stock exchange, including The Restaurant Group, comprised of Frankie & Benny's, Chiquito, Garfunkel's, Prezzo and Greggs. This provides a clear exit opportunity for buyout houses with larger restaurant chains.

Furthermore, corporates have also picked up on the attractiveness of the market, highlighted by Tesco's purchase of 3i's and Risk Capital Partners' stake in Giraffe. "Tesco bought Giraffe because it fitted well with their family-friendly brand," believes Bresnick.

As brands act as key communicators between company and consumer, there are plenty of examples of successful businesses diversifying into new markets. Take Google, which has developed from a search engine to a range of hardware products including laptops and phones, or major sports brand Nike that now hosts a range of training and sporting events, or even industrial construction machinery business Caterpillar, which also supplies a range of women's fashion boots. We're unlikely to see Greggs launching a range of footwear or perfumes any time soon but we've already witnessed Pizza Express's range of oven pizzas and sauces lining supermarket shelves while Nando's offers table sauces, marinades, crisps and dips.

A clearly defined and well-communicated brand is key to growing a restaurant chain and taking market share from independents. Because of this, vendors may well be inclined to attach premiums to brands they have built up – the brand is arguably the most important feature of the future growth story. Unfortunately a good brand is not a guarantee. In 2008 Pizza Hut caused confusion when it announced it was changing its name to Pasta Hut, then quickly backtracked and stuck with Pizza Hut. The pizza chain subsequently recorded a loss for the following four years. If not properly maintained, any slight confusion over branding could be costly and this argument neatly counters that of how much cash a brand can potentially offer.

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• Topics
• UK / Ireland
• Consumer
• Duke Street Capital
• Cinven
• Quilvest Private Equity
• Blackstone Group
• ISIS Equity Partners
• Rutland Partners
• Bridgepoint
• Horizon Capital (formerly Lyceum Capital)
• Risk Capital Partners
• YFM Group
• TDR Capital
• 3i
• United Kingdom
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