MTY’s Appetite for Acquisitions Is Changing the Quick-service Market

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One way to conquer the food-service market is to join forces with other leaders as seen in the headline-grabbing mergers between Tim Hortons and Burger King, Cara Operations and Prime Restaurants as well as Kraft and Heinz. Another way is to master the acquisitions game by snapping up quick-service concepts — a strategy that’s earned MTY Food Group the nickname “King of the Food Court.”

In the three decades since founder, Stanley Ma, launched his Chinese-Polynesian restaurant Le Paradis du Pacifique, MTY’s stable of quick-service eateries has grown to more than 35 brands, posting $888 million in systemwide sales in 2014, and earning its top brand, Country Style, the number 33 spot on F&H’s “Top 100 Report.” The strategy is simple in theory. “The first thing we look for is always the same thing: profitability,” begins Eric Lefebvre, CFO of the company that added 167 stores to its network in 2014 via acquisitions, including a 90-per-cent ownership position in Madisons New York Grill & Bar ($12.9 million), the franchising operations of Van Houtte Café Bistros ($950,000) as well as the assets of Café Depôt, Muffin Plus, Sushi-Man and Fabrika ($13.9 million). “We need to have a concept that is not only profitable at one moment but that will be profitable in the long run.” To ensure each potential acquisition is sustainable, the team evaluates the strength of the brand in question, its franchisee network and the quality of the real estate involved before determining how it will fit into MTY’s portfolio.

“MTY has been doing this for years — consolidating the quick-service sector,” affirms Doug Fisher, president at FHG International – Foodservice & Franchise Consultants in Toronto. “They have found a great way to grow through consolidation, but their consolidation is mostly focused on picking up tired brands and breathing new life into them.”

Case in point: when it acquired the North American assets of Manchu Wok, Wasabi Grill & Noodle and SenseAsian for $7.9 million in December, MTY executives swapped out the leadership at the Manchu Wok brand for its own. “We interviewed the entire payroll and made decisions based on what we believe is going to be best for the network, the franchisees and the rest of MTY in the long run,” Lefebvre explains. Brands that join the MTY network benefit from better negotiation power when it comes to supplier or distributor contracts, but it can take up to two years to let pre-existing contracts expire while re-assessing the supply chain. In the majority of cases, the team can lower food costs by a few percentage points.

During other acquisitions, ensuring long-term profitability can also mean pulling back. In 2013, MTY acquired the Extreme Brandz portfolio, which included Extreme Pita, Mucho Burrito and PurBlendz, but during the past year it closed 18 Extreme Pita units. “Whenever a brand grows really fast there is always a period where you have to take a step back and reassess your situation. Extreme Pita is no different. It was very rapid growth, and when you grow rapidly you make a few mistakes here and there, and sometimes you have to take a break, catch your breath, look at what you’ve done and then decide where you’re going for the future,” Lefebvre explains. “The pattern was very similar when we acquired Jugo Juice a few years ago. That was a brand that grew very rapidly. After we acquired it, we took a break,” says the CFO, alluding to store closures. “There were a number of problems that needed to be fixed and addressed, and we fixed all of those, and now Jugo Juice is one of our fastest-growing brands.”

What’s ticketed to be another fast-growing brand is MTY’s new Tosto Quickfire Pizza Pasta, a fast-casual eatery in downtown Toronto, which feeds into the popularity of the quick-fire pizza trend (premium-quality pies prepared fast on high-temperature surfaces) in the U.S. — a timely strategy given the recent news that Los Angeles-based Blaze Fast-Fire’d Pizza plans to open 60 franchised units in Canada.

Tosto Quickfire Pizza Pasta offers fast-fired pies as well as salads, pasta, antipasti and desserts made from scratch in an open kitchen. Beer and wine are also on offer. “We feel there is real potential, and there is no real dominant chain yet in Canada in that specific part of the market, so if we can be that player, then we will benefit from it,” says Lefebvre, adding that the MTY team is intent on growing the brand through franchising.

Growing through the fast-casual market is a smart move, says Fisher, pointing to the higher price point and increased retail value of the product. “The only way the restaurant industry is going to survive, is to find a way to increase profitability. We’re a marginal profit business, so we’ve got to find other ways [to profit].” According to NPD’s latest research, fast-casual fared well last year compared to other segments, posting a 15-per-cent increase in traffic, compared to quick-service (up two per cent); family/midscale (down 10 per cent); and casual-dining (down eight per cent).
Meanwhile, in an industry where consumers already expect the world, there are ongoing challenges. “The economic environment remains uncertain; from the drop in oil prices and in the Canadian dollar to the multiple bankruptcies in the retail environment, 2015 will be another challenging period,” Ma, CEO, wrote in a recent investors’ report. “To overcome the challenges … MTY will continue to focus on providing a better alternative than its competitors and on strengthening its competitive position, improving product quality, assortment and presentation. As such, our success rests on the strength of our team and of each individual franchisee.”

And, with systemwide sales projected to reach $1 billion in 2015, and a long list of potential concept procurements on the horizon, MTY is poised for continued growth. “We’re still very hungry for more acquisitions, but we need to make sure we’re disciplined and that we acquire a company for the right reason,” sums up Lefebvre. l

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