March 21, 2024 • 39 mins
The Israel-Hamas war is a bigger issue for McDonald’s and Starbucks than many other food chains due to reputational risk, deeper sales declines and greater exposure to high-impact countries like Jordan, Egypt and Morocco, Shatranj Capital Partners co-founder and general partner Brandon Guthrie tells Bloomberg Intelligence. In this episode of the Choppin’ It Up podcast, Guthrie sits down with BI’s senior restaurant and foodservice analyst Michael Halen to explain how the war has affected sales in the Middle East and how long the recovery might take. He also comments on the wealth of opportunities for private equity investors in the region, Chipotle’s partnership with Alshaya, Wendy’s UK expansion and dynamic pricing.
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Episode Transcript
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Speaker 1 (00:22):
Welcome to Chopping It Up.
Speaker 2 (00:23):
I'm your host, Mike Allen, the senior restaurant and food
Service analyst at Bloomberg Intelligence. Today we're joined by Brandon Guthrie,
general partner and co founder of CHATRNGE Capital Partners. I'm
pumped to finally get you on here. Thanks for doing this, Brandon.
Speaker 3 (00:38):
Yeah, of course, I'm excited to be here.
Speaker 2 (00:40):
So what's up man, any recent prs in the squad clean?
I saw you on LinkedIn throwing around two hundred and
seventy five pounds.
Speaker 1 (00:47):
That's a lot of weight, my friend. Yeah, that's impressive.
Speaker 3 (00:49):
That's my PR so hopefully my back and my knees
hold out. So no, recently. I think my big lift
that I was happy about as I the two hundred
club for at least in kg. So that's what four
hundred and sixty five pounds on the deadlift. So that's
for a desk jockey. That's not so bad. Definitely have
(01:10):
some room to improve, dude.
Speaker 1 (01:11):
That's awesome. Yeah, that's awesome. Yeah. I hurt my back
with doing deadlifts. I was doing.
Speaker 2 (01:18):
CrossFit for for a few years and I bought a
reverse hyper changed my life. You might even be able
to see I guess can see it, but you could
see it in the background. It's a it's a game changer.
So when did you start CrossFit?
Speaker 3 (01:31):
I started CrossFit actually during during COVID, so here in Dubai,
the lockdowns were actually really really strict, so you couldn't
leave your house for about a month. So rather than
going stir crazy, the gym close to us was doing
virtual classes, so we signed up for those, and so
I just kind of pushed out all the furniture out
(01:52):
of the living room and every morning would would beat
myself silly doing CrossFit in the living room. And then yeah,
when when lockdown ended, I was hooked, so I kept
going back. So a lot of different ways to hurt
your back during CrossFit though, so that's a good I
think that's all they do is to come up with
different ways.
Speaker 1 (02:11):
Yeah, the shoulders ended up getting me.
Speaker 2 (02:14):
I had bad shoulders from football, and then all the
gymnastics stuff and the overhead lifts just.
Speaker 1 (02:18):
Kind of did me in.
Speaker 2 (02:19):
But I loved it when I was doing it, man,
So yeah, yeah, keep it up, man, Thanks good stuff,
thank you. All right, So you have extensive experience in
international markets, whyn't you tell the audience about your career
background before CHATRANJ.
Speaker 3 (02:33):
Yeah, of course, So I spent my entire career in
essentially international consumer retail. So prior to Chatron's Capital Partners,
I was with the head of finance for Wendy's for
the Asia, Pacific, Middle East and Africa region, so based
here here in Dubai, and I was responsible for all
of our markets essentially east of Dubai. So hopefully I'm
(02:55):
taking the record for longest distance from them from you
guys for the pod cast. Definitely want to hold that
for a while. And with that, just gained a really
broad international background. Prior to prior to Wendy's and them
shipping me out here, I was with L Brands again
(03:17):
in their international division with Victoria's Secret and Bath and
body Works supporting franchisees in the Middle East, in the UK,
and before them, I was with a consumer package good
company that also focused on international, but primarily Asia. So
my entire career has been focused on international in some
format of another and really found my passion specifically in
(03:42):
F and B in the food and beverage industry. As
a lot of people do you kind of I don't
know if you necessarily seek it out, but once you
find the industry, it's just it's just too much fun
to leave. And so even with Chatrone Capital Partners when
we started the fund that ended up being a sector
focused private ACA be fund on food and beverage focused
(04:02):
here in the GCC in the Middle East. So it's
it's just a lot of it's a lot of fun
to be in this industry and to work with people. Ultimately,
food is just such an intimate thing and you can
never take yourself too serious if you're working in restaurants,
and so it's always good to remind yourself that, specifically
(04:23):
with Wendy's, right, you're serving burger and fries. It's supposed
to be fun, and so it's a good reality check
and it keeps you waking up and doing something fun
every day.
Speaker 1 (04:32):
Yeah, it's fun and humbling of course. Time. Yeah, and
you had mentioned to me in the.
Speaker 2 (04:36):
Past that a previous podcast of ours, Bob Wright had
been the one who had sent you overseas at Wendy's exactly.
Speaker 3 (04:44):
So in we were in Salt Paula at the time,
in the back of the taxi and Bob pitched this
crazy idea of me moving my family out to Dubai
in the Middle East. So we had a really long
taxi ride if you've ever been in Salt Paolo traffic,
and so Bob had a lot time to convince me
that this was a good idea. No, I wanted to
do it. I mean, I was International has been my
(05:06):
passion since since I started my career. It was always
going to be something I was going to do. And
so yeah, when the opportunity came to come out here
to Dubai, I was working with Bob, who's very much
Assault of the Earth guy, and he was the president
of International Chief Operations Officer for Wendy's at the time.
And then we made the move and that was ten
years ago, so it's been it's been a whirlwind ever since.
Speaker 1 (05:30):
Very cold.
Speaker 2 (05:31):
So why don't you tell the audience what Chatran Capital
Partners does and what inspired you to start the firm.
Speaker 3 (05:37):
Yeah, so Chatrnge Capital Partners. It's a sector focused private
equity fund. Like I mentioned just a little bit ago.
It's the sector that we focus on is food and beverage,
specifically QSR and fast casual restaurants, and then geographically we
focus on the GCC here in the Middle East, so
the GCC being Kingdom of Saudi Arabia, United Arab Memorates, Oman, Kuwait, Bahrain,
(06:02):
and Qatar, and then we also look at Turkey and
Egypt as kind of secondaries to those markets, but our
primary focus being here on the GCC, and we ended
up we just saw so much opportunity here in the region.
Iconic brands are no stranger to this part of the world,
but what is a little bit different is the ability
(06:24):
to properly grow those brands and scale them. There's a
lot of opportunity with investments happening in Saudi Arabia and
obviously here in the United Arab Emirates. And so this
was a financial vehicle that we felt that provided a
lot of liquidity into a part of the market that
was underdeveloped. You know, private equity is a specifically sector focused.
(06:46):
Private equity is relatively untapped. And then with us, we
took a little bit of a different approach. We took
it to as a operations first private equity vehicle. So
rather than kind of a bunch of private equity guys
coming together and making agnostic investments, we're actually primarily a
group of restauranteurs people that have worked in the industry.
(07:07):
Our advisors are people that have led global brands across
the world, and this was going to be we brought
our operations first kind of value creation levers to the
fund and then utilize private equity as a vehicle to
properly deploy capital quickly and efficiently, which solves some of
the problems when you're commercializing markets. So it was really
(07:29):
kind of a reverse engineering approach. We saw an opportunity
here in the region. We leveraged our experience of how
we've seen businesses grow efficiently across the world and establishing
restaurant brands and started on that journey. And that was
a year and a half ago.
Speaker 1 (07:43):
Cole, And do you have any updates on the funds
first capital race.
Speaker 3 (07:47):
We're constantly raising capital. We have about one hundred million
in pipeline ready to deploy, and so we're just finalizing
those investments and hopefully we get working on that sooner
rather than later.
Speaker 1 (08:00):
Good stuff.
Speaker 2 (08:00):
And and can you talk about maybe some of the
you know, the five thousand foot view, what what's kind
of created some of the opportunities that you're seeing there
in the GCC.
Speaker 3 (08:09):
Here in the GCC, I think like I said, there's
there's never been a You have a couple of large
players that have been here for a while, but largely
there's there's a lot of money here and there's a
lot of family groups or privately owned groups. Private equity
is a vehicle and as a as a financial instrument,
(08:32):
it hasn't been around for very long, and it's it's
really underpenetrated here in the region compared to the West.
And so what what's happened is you have people that
experience brands, that love brands, either when they're going to
school or traveling into into the US or Europe. They
they're well capitalized, and they bring those brands back to
(08:54):
the region working with franchisors and then it's a part
of a family group that it's kind of the sixth
arm of their company's expansion. It's and it's just it
ends up being not more difficult than they expected, I
guess would be a good way to say. And so
(09:16):
where in the West, there, like I said, private equity exists,
or there's this middle market where you're able to drive
some efficiencies and these groups would typically just offload them
or shut down. These brands are still very emotional and
highly regarded because they're iconic global brands, and so rather
than kind of losing face or just shutting them down,
(09:39):
typically they just hold on to them. And so similar
how you kind of have zombie companies, you kind of
end up with some zombie brands. And there's a lot
of examples here of major major brands, global brands almost
everywhere else in the world that would be successful, that
are definitely in default of the development agreements. They've been
stagnant for far too long, and you end up getting
(10:02):
frustration on both sides of the equation. Frustrations with the
franchise ease because they're they're a little bit frustrated with
the support potentially they're getting from the franchise oors that
don't understand this part of the world, and obviously frustration
with the franchise ors that see all the amazing things
that are happening here in Saudi Arabia and UAE and
all the investment that's happening and the population growth and
the strong economy, and then your restaurants aren't moving, and
(10:25):
so you end up with kind of frustration on both ends,
and that just causes a lot of a lot of friction,
and so we our goal is to be the utility
that comes in and unsticks that right, that releases that friction.
We understand the West, We understand how governance and transparency
(10:46):
and all those things need to be established for franchise
oors and for investors. But we also understand the franchise's
point of view and kind of the boots on the
ground perspective, and the restaurant industry. So I think those
two those things coupled together create a unique proposition for people.
Speaker 1 (11:02):
Yeah, for sure, it's interesting.
Speaker 2 (11:04):
So are you looking to be a franchise or a
subfranchise e or is it going to depend on the
situation and what sized deals are.
Speaker 1 (11:11):
You and your partners interested in.
Speaker 3 (11:13):
Yeah, I think at first, master franchise e is it
tends to be the opportunity that exists here. The most
most brands that exist here, if we're involved in buyout situations,
have master rights for multiple countries. They may be in
default of those rights, but they still have the rights.
So any buyout acquisition would come with the entire territory
(11:35):
most usually the GCC as a whole, maybe some additional
shoulder markets, but with a platform company like that there's
also opportunity to bring in iconic brands who have yet
to make the jump into the region and plug them
into an existing portfolio that is leveraging your supply chain
efficiencies and some of the challenges that come with establishing
(11:58):
a market from zero. You can do that much better
in a portfolio company, and then you get the transparency
and an EESG that comes with Western back private equity
compared to partnering with a local group which will run
like a local company and come with some of those
frustrations and frictions compared to what people might be used
(12:19):
to in doing business in the West.
Speaker 1 (12:22):
Do you have any deals lined up right now?
Speaker 3 (12:24):
There? We have about one hundred million I think it's
five different groups, about one hundred million, between one hundred,
one hundred and fifty million, depending on how many groups
we look at of groups that are either through diligence
or in process of diligence. So to be honest, it's
a little overwhelming. Like I said, there's a strong lack
(12:45):
of liquidity in this market, so there's actually quite a
bit of room to come in and evaluate different groups,
and so there's a lot of people who are wanting
to work with us and who want us to take
a look at their businesses, and so it's more a
matter of getting through all those groups versus having a
you know, needing to find deals, which is a good
(13:05):
problem to have, but it is a little bit overwhelming.
Speaker 1 (13:08):
Yeah, high class problem.
Speaker 3 (13:09):
Ye, I'll take it. I'll take it.
Speaker 1 (13:11):
Good. Yeah, good stuff. And you had mentioned, you know, fast,
casual and quick service. Does casual dining work in that region?
Speaker 3 (13:21):
A casual dining works, It depends on It's a really
diverse region, so I think it's a little It differs
a little bit depending on your market. So if you
look at UAE, casual dining actually works pretty well generally,
at least with the data that I see, sales sales
are up, sales are strong with casual dining. In Saudi Arabia,
(13:43):
for example, sales are down, they're trending downwards. So it
really depends you have different and when you look at
the dynamics of that. Your your infrastructure is very different
in the UAE compared to a developing infrastructure in Saudi Arabia.
Traffic patterns are very different in Saudi compared to to
other parts of the world. So I think your casual
(14:05):
dining is under pressure, and generally what I see at
least is where you have more of an ability to
leave the house not get stuck in traffic for a
long time. There's actually some interesting cost pressures that I
think are favorable to casual dining at the moment if
everything lines up like that, compared to Fast Casual or QSR.
(14:27):
But ultimately QSR and Fast Casual delivers very well. And
so here in this region, delivery has always been really,
really big. Even before delivery got big in the US,
delivery was thirty or forty percent of sales for restaurants
here in the region, and before the aggregators came in,
everybody had their own call centers and their own bikes
as part of franchise e systems. So delivery is part
(14:50):
of this region and it's just something you have.
Speaker 1 (14:53):
To work through. Yeah, all right.
Speaker 2 (14:56):
So when I analyze international strategy for the companies that
I can cover, I prefer to see franchisors target the
best market possible for their brand and then find the
best partner. So let me know if I'm off base,
because you know, I'm willing to take criticism, you know,
Am I thinking about this correctly? And as a franchise e.
(15:18):
You know, how are you identifying your targets?
Speaker 3 (15:21):
Yeah? Yeah, so I think you're one hundred percent thinking
about it correctly. Ideally, you I think where brands get
into trouble when they begin their international expansion journey is
that generally the thing that starts them on that path
is is an opportunistic point of view rather than a
(15:42):
strategic one. And so you might have a partner that
comes in or potential franchise e again with a big
check or a lot of interest, and it you just
convince the brand that this is the time you need
to go international, and so the brand decides to do that. Generally,
that's a recipe for disaster because the brand will lack
(16:03):
the support that it needs to support that franchise e.
They're not necessarily ready to take that jump. And having
a strategy, having a plan, having the infrastructure from a
people perspective, those things are really really important when you're
setting up your first international expansion plan. So there definitely
is a place where you need to be taking advantage
(16:25):
of opportunistic things that come across, Like if there's a
great potential partner who has a strong track record, well
capitalized and is wanting to expand your brand. There's cases
where you would want to look at that more heavily
and maybe leapfrog that market over another one that you
had strategically planned. But in my mind, ideally you would
(16:45):
tier out your markets and say this is the part
of the world, or these are the group of markets
that we're looking for, and this is where we think
fits best, and then you go try to find the
best partners that are in that tier one set of
markets and then partner with those and so that order
in that tier one sector might change a little bit,
but ideally you're not taking somebody from a tier three
because an opportunity came up and leapfrogging them up to
(17:08):
your tier one sector. And if you don't have a strategy,
you're not going to know that, and you just kind
of go wherever the windblows and causes quite a bit
of problems.
Speaker 2 (17:15):
Okay, cool, and so yeah, and so how are you
identifying as the master franchise, How are you identifying your targets?
How are you ranking your potential targets in the marketplace.
Speaker 3 (17:26):
So we look at I think there's two ways, and
we have the benefit at least with private with the fund,
So we're looking at potential acquisitions which we're ranking and
looking at from in terms of iconic. But then with
our experience, and I think we're in a unique position
compared to other franchisees and other other funds in the world.
With our industry experience, we also get to rank the
(17:49):
franchise oors. So we actually have a pretty good idea
of what we're looking for when we're evaluating franchise oors.
And part of that we you know, we want to
fly in and meet the team just like we would
with a franchise e when we were on the franchise
or side. We want to see what the support is,
we want to see what the international infrastructure look like.
We want to make sure that they understand the challenges
(18:11):
and opportunities that come with international and the people that
we're going to be working with. And so I think
sitting across the table from the leadership teams of the
brands that we're talking to, you get a really good
sense for brands that would be a good fit for international,
whether they've expanded or not. Sometimes even if they haven't
(18:32):
expanded yet, and they have the right leadership team and
the right mindset and positioning. It can still be a
good fit. But I think more often than not, you
see some of those red flags and you say, Okay,
this is a great brand, it's working really well in
the US. They're not ready for international expansion in our
mind and we don't necessarily want to be the first
(18:55):
ones to go through that learning curve with them. So
obviously they're welcome to expand anywhere they want and potentially
even in the same region with somebody else. But ultimately,
these are very very long term relationships, specifically with international
master franchising. Generally, the master franchise e is investing a
significant amount of their capital into developing these markets for
(19:19):
the long term, and so you really want to make
sure it's it's a good long term partnership and doing
all that due diligence upfront is really really important in
our eyes. So I think we're uniquely positioned. Not too
often I think you get groups like it that are
that are franchisees that are doing as much diligence and
interviewing of the franchise oors as we do. But ultimately
(19:40):
we come from a franchise or background. You know, we're
used to doing this with potential partners that we were
looking at expanding with as franchisees. It's only fair to
do that in reverse.
Speaker 1 (19:50):
So yeah, yeah, that's great.
Speaker 2 (19:52):
All right, So several years ago, I'm going to start
asking you about some of my question my companies. Now,
you know, they don't don't give us a much much
information as we'd like about international since I have.
Speaker 3 (20:02):
You here, that's fair.
Speaker 2 (20:04):
Several years ago, restaurant brands they tried the supercharger international
growth by pairing some big PE groups with with operators.
How how is that? You know, what do you think
about that model? How is that done over the last
handful of years?
Speaker 3 (20:19):
Yeah, yeah, I think I think the model works well.
There's actually there's obviously some some significant benefits that private
equity solves as a financial instrument for international expansions, specifically
for brands. One of those being, you know, the efficient
deployment of capital. So that really solves your scale issue
(20:40):
and your scale challenge very effectively. You know, private equity
groups are incentivized to deploy capital quickly, efficiently, and generally
by definition they're they're well capitalized, so that really solves
that issue. When you look at it as an example,
you know, I think Burger King got to entered India,
you know, the same time as Wendy's. The main difference
(21:02):
there was they entered with a joint venture with Everstone Capital,
which was a private equity group. Wendy's entered with a
franchise with a master franchise e. And so if you
look about, you know, three to five years in, you know,
Burger King had over two hundred restaurants and growing, Wendy's
was still stuck at the five restaurant mark. That's expanded
(21:23):
since they've partnered with different people and different partners post COVID,
but it still highlights the expansion potential with private equity,
you know. On another positive example, you look at what
we did, and this is something that I was involved
in and led with Wendy's, is we partnered in Japan
with a private equity group called Long Reach, led by
(21:45):
Mark Chiba and Tomoya Sujimoto, so both excellent, excellent human
beings and mentors of mine, and we worked with them
to acquire a legacy business called First Kitchen. It was
owned by Sun Torri, which is the Mega Ridge conglomerate
mostly known for whiskey, and they had created that business
First Kitchen to compete with McDonald's, and they had about
(22:06):
one hundred and sixty restaurants. McDonald's, though in Japan, has
three thousand restaurants, and so this was just an afterthought
for them and something they wanted to divest of, and
so we worked with private equity to acquire that business
and then merge the two brands, not co branded like
they're merged Wendy's First Kitchen, so one menu, some products
(22:29):
from the first Kitchen line, some products from Wendy's. So
it's a bit unique of a situation. And once we
finalized that acquisition, we were able to rapidly scale within
two or three years to seventy restaurants and growing. And
so private equity definitely serves a very very useful purpose
for brands expanding internationally and like you said, kind of
(22:50):
supercharge the growth. One of the things to watch out for,
and just generally it's a thing more involved with communication
is private equity kind of by definition has a shorter
timeline on whatever they're working with. And there's options now
as the industry kind of evolves with food and beverage
to maybe roll over into a future fund or hold
a little bit longer than they typically would, but ultimately
(23:12):
they have a shorter term vision for what their exit
is going to look like, whereas hopefully one of the
partners generally the brand has a longer term vision and
so those that communication is really important on the roles
that get played. If both brands end up having a
shorter term vision, then you start to run into challenges
(23:34):
with perspective and what each group is trying to look
for in terms of what they need for their investors
or their shareholders. And so knowing what you're working with
and why, I think is important. Knowing the exit, knowing
the long term vision is really important, but it serves
its use for sure.
Speaker 1 (23:52):
Great.
Speaker 2 (23:54):
You know, Wendy's has hit some bumps in the road
with his international expansion. I think that's part of the
reason why they brought in Kirktan to lead the business.
What do you hearn about its UK business?
Speaker 1 (24:06):
You know?
Speaker 2 (24:06):
I thought it was like interesting that that they decided
to go to the UK and operate those stores as
opposed to franchising them off the bat.
Speaker 3 (24:16):
So I have a I have a mentor of mine
as somebody I used to work for by the name
of John Payne. So he's former former young executive marketing
guru extraordinary and he was also the the MD of
Wendy's APMEA for a time, so I had the chance
before he kind of retired to really learn from him
(24:37):
and work with him closely. And he taught me a
lot about international and particularly franchise management. And he's he's British,
he's from the UK, and so there was there was me,
this relatively young American guy working with with John and
he would we constantly had us saying divided by a
common language, because there were just be times where he
(24:59):
would say, John, I understood every word that you said,
but I don't know what you're talking about. And he
would say the same thing about me. And so I
think you run into this issue of context, right, there's
so much familiarity between the two, between the two markets,
and sometimes I think that gets us into trouble, not
just for Wendy's in this example, but any brand looking
(25:21):
to make the jump into the UK, because you might
make the mistake that it's so similar to your own
market that it's kind of a copy past approach, or
it's going to be you know, something that you can
just run from the US and in reality those little
differences end up not being so little. They become even
more stark in how a market operates. And so in
(25:43):
the instance of the UK, I think there's a lot
of that. You don't want to try to run something
from the US for any brand. You know, Chick fil A,
as an example, tried to enter really got beat up
a bit on their first attempt when they were testing
out the market. They've gone back. I think they're retooling
on how that's going to work, and I've seen something
that make me think they're changing their approach, which is great.
(26:04):
But for Wendy specifically, I think if I had one
critique is and we mentioned getting to scale quickly, it's
just not moving. It's not moving fast enough with I
think they've been in the market for four or five
years now, if you exclude some of the reef kitchens
which are kind of delivery only kitchens, I count around
twenty restaurants. Really at this time, you should be at
(26:25):
seventy restaurants and plus whether that's through franchising or your
own restaurants. If you've ventured a market like that, you
really need to double down and kind of push through
that level of growth, because that's when you're going to
see the synergies that happen from you know, four while
ebit dot improvement on your supply chain and your food costs.
(26:46):
That's when you have a decent marketing ad budget to
go after consumers share of mind. And so I think
if you get to that twenty restaurant level and you
kind of freeze or you go too slow, all those
things actually work in reverse against you. Your supply start
getting angry because the restaurant counts that you promised them
and the discounts that they were giving you because of
what it was going to be start coming off. So
(27:07):
your food cost actually gets worse and you just got
a lot of headwinds that start coming your way. So
I would really like to see Wendy's push through that,
start franchising a little bit faster or opening more restaurants faster.
But that's a challenge in the UK, Like you really
need to push through that. It's like a rocket getting
out of Earth's gravity. You can't stop at twenty. You
(27:29):
can't stop otherwise it just comes back down to Earth.
Speaker 1 (27:32):
You got it.
Speaker 3 (27:33):
You got to push through. It might be a little
bit painful, but the faster it goes, the better it gets,
and you really need to get to that restaurant count
of seventy. An example in the UK that I think
they did it really well was five guys. You know,
they opened really really aggressively. You know, it doesn't it
doesn't mean that it was all sunshine and roses and
that everything was there wasn't cost pressures along the way,
(27:58):
but you know, they got to a really good scale
and I think it's and it's a good example of
of deploying and growing a market quickly to get to
to get to a size where it's going to be
feasible to continue to franchise and grow the business.
Speaker 2 (28:13):
Yeah, Chipotle is a chain that's had you know a
few dozen international stores in Europe for years, and they
finally made a switch with their strategy partnering with al Shaya.
Speaker 1 (28:27):
Any thoughts, I mean, I.
Speaker 3 (28:29):
Think I think it's the right strategy for the region
in terms of master franchising the I believe it's their
first franchise location anywhere, So a little bit of a
concern I would have is just is there the franchising
I think anybody in industry knows that franchising itself is
its own muscle and skill set, and so I know
(28:52):
a lot of different people from the industry that are
in Chipotle that have have franchise experience, but having an
organization that backs franches is something that's very different than
just having people that know what franchising is like or
having that experience. So I hope that they're building that
out and if that's going to be a strategy going forward, again,
I think it is the right strategy to master franchise
(29:13):
in a high context market like the Middle East. On
the flip side, from the boots on the ground here,
there was a little bit of a red flag when
the announcement came out that you know, they're partnering with Alshaia,
which is a big group, but no restaurant counts announced, no,
no strong commitment. It seemed very tentative for something that's
(29:34):
iconic and global as Chipotle, so it raised a few questions.
So it'll be interesting to see Alshaia as a group
one of the major groups out here in the GCC
and across MINA as a whole. But what a lot
of people don't realize is ninety five percent of their
F and B units are actually Starbucks which is under
(29:57):
quite a bit of pressure at the moment. The other
brands that Alshaya has like Raising Canes, Cheesecake Factory, shake Shack.
You know, when it comes to QSRs like like our
fast casual, like a Raising Canes, they're they're not there's
there's very few. They're they're not growing at the level
as we would want them to. I think they have
some pricing differences with how the US and the primary
(30:20):
brand prices their products. There's more Shakeshacks here than there
are Raising Canes, which is crazy to me. So definitely
over penetrated on some of the higher end of fast casual,
and there's a lot of potential for getting the brand
I think a little bit closer to the mark and
the home brand and the core concept with with groups
(30:41):
like Raising Canes and so with Chipotle, I think TBD,
let's see, let's see how it comes out. They I
think they announced their first location would be in Dubai
and Kuwait, which again Kuwait wouldn't necessarily be where I
would launch my first location. I would be looking at
UEE in Saudi Arabia transparently, but you know, quait Is
is the whole market of Alshaia. So I imagine that has a.
Speaker 1 (31:02):
Lot to do with it for sure.
Speaker 2 (31:03):
All Right, so let's get into that a little bit. Starbucks, right,
McDonald's and Starbucks were two that really spoke about four
Q sales weakness in the Middle East and other countries
with large Muslim populations like Indonesia, Malaysia, France due to
the Israel Hamas War. I guess two things you know
is this mainly is this a bigger problem for McDonald's
(31:26):
and Starbucks than it is maybe for young brands and
Dominos because of some of the press that and some
of the things that happened.
Speaker 1 (31:34):
And has there been any improvement thus far in one Q?
Speaker 3 (31:38):
Yeah, so I think yes. For the first answer is yes,
I think it is a bigger problem for Starbucks and
McDonald's compared to what I see with the with the
other brands. Everybody got impacted, and this is something a
lot of people don't realize, not just Western brands, Like
everybody got impacted by the conflict post doc over seventh.
(32:01):
So in general, you saw a big step down in
sales in some markets. You saw more of a differentiation
between Western brands or American brands and local brands, but
overall everybody still took a step down. What we've seen
to date is that gap between Western brands and local
(32:23):
brands has actually has actually come together. So those trend
lines are meeting, are just about to meet, and across
those businesses there is a recovery line where you start
to see a revision to the mean and potentially a
return to standard sales. It's still going to take some time.
I think from what I see, assuming the conflict ended today,
(32:46):
which you know, God willing it does, you'd see a
pretty rapid recovery back to standard sales, maybe even as
early as early Q three or mid Q three for
McDonald's and Starbuck specifically, though they've been impacted significantly more,
they also have a presence that's a little bit more
exposed to Egypt and Jordan and Morocco, which those are
(33:11):
higher impact markets compared to the to the GCC, so
that that we haven't been in the GCC, specifically Saudi Arabia, UAE,
we haven't been affected as as significantly as those close
those markets that are closer to the conflict. So uh,
from what I've seen, I don't think you're going to
see a recovery with McDonald's and Starbucks potentially until the
end of the year. Just because they took it, they
(33:32):
were a bigger step back. But everybody is on a
trend line that's recovering. So I think you are starting
to see a little bit of potential, you know, outrage
fatigue with the consumer. So as long as there's not
something that continues to you know, irritate or or make
the situation worse, I think you'll see a continued recovery.
Speaker 2 (33:55):
All right, So let's let's go back to Wendy's real quick,
because you had a great post on LinkedIn about dynamic pricing,
and Wendy's your thoughts.
Speaker 3 (34:05):
Not a fan of dynamic pricing for QSR, Yeah, not
a fan, And you know, in short, I just don't
think it's a great fit for specifically for QSR and
fast casual. I think it goes against the DNA of
what what our industry in those two areas really stands for.
Maybe places for fine dining, you know, where you can
(34:26):
implement that. There's some instances where it is implemented. But
I find the conversation really interesting, you know, even listening
to your to the previous guest on the podcast. I
think there's examples that a lot of people give in
the industry where it's almost a little bit of gas
lighting the consumer saying, well, you know, dynamic pricing is
already in place because happy hour and discounts, and I
(34:48):
think it's it's just a little bit disingenuous in my mind,
because when you're defining dynamic pricing, dynamic pricing is by
definition ever changing pricing. So really you're looking at a
model that's much more similar to how airlines or airbnbs
or hotels operating.
Speaker 2 (35:06):
That's surge prices, right, but that's that's those industries have
a supply demand issue that the restaurants don't.
Speaker 3 (35:14):
Right exactly right. And where you get to dynamic pricing
is where you have discounting strategies plus surge pricing, So
those things too together is what we're talking about. Where
where it's dynamic pricing, if you're just talking about happy
hour or something like that, that really is just a
discounting strategy, which is everybody's correct, that has been in
place for a long time. But consumers are smart, so
they realize that this is this is something different, and
(35:37):
as you pointed out, and as a lot of people
pointed out the difference between our industry and other industries
that are currently implementing dynamic pricing is there's not a
supply constraint component, right, so more or less you have
infinite supply with restaurants, you know, we're not. We're we
go through a lot of work to make sure we
don't run out of food and that we can that
we can serve consumers. So you don't have that supply constraint.
(36:02):
So then really what you're looking at is just you're
maximizing the demand constraint and that doesn't make sense to consumers.
And so you get to this point where you know,
to wax poetic QSRs are meant to be affordable, consistent,
and fast. And so if you're losing face and trust
with the consumer that you're not affordable or consistent anymore
(36:23):
and they've lost that trust, then you really need to
change your strategy fast. And so I really don't think
the juice is worth the squeeze in the industry. I
would recommend and promote to brands that really, rather than
trying to justify the reaction or to explain it away,
you look at the consumer reaction for what it is.
And you modify your strategies based on that. Specifically for
(36:46):
QSR and fast catual, I think there's a lot of
benefit for people to have consistency to understand what the
static price is going to be on the menu. And
you know, at the end of the day, we're a
price sensitive consumer that you know, people they're going to QSRs,
they want to know what the price is. And they've
given plenty of opportunities for everybody to raise their prices,
(37:07):
you know, that's been built in. I don't I don't
think dynamic pricing, especially now, is a good strategy.
Speaker 2 (37:13):
So especially now, is right, man? I mean we've seen
thirty forty percent price increases at some of these chains, yeah,
you know, and so yeah, and people are pissed. We
see all these articles now cropping up and people complain
about the eighteen dollars big Mac meal, the the five guys,
you know, twenty four dollars meal or twenty three dollars
(37:34):
meal or whatever it was.
Speaker 1 (37:35):
So yeah, yeah, the timing was tough for sure.
Speaker 3 (37:38):
Yeah, when when QSR pricing is starting to approach casual
dining basket size, that's a bit of a red flag.
And like I said, consumers are smart. Everybody needs to
realize consumers are smart. I think ultimately, you know, people
in the boardroom know this, but I think sometimes it
gets forgotten, and you know, you might be able to
(37:59):
pull a fast one over one or two times. But
like I said, I if I'm in the drive through
and I see my price changing all over the place,
I'll give a brand one or two shots before I
just change. And then with our industry, there's a lot
of competition, right, there's a lot of alternatives, So there's
a lot of reasons why we're different and why the
strategy should be different for QSR compared to airlines or hotels.
Speaker 2 (38:22):
So yeah, good stuff, man. I really appreciate you for
coming on. This was a great discussion.
Speaker 3 (38:29):
My pleasure.
Speaker 1 (38:30):
Where can the audience go to find more out about
Chatron Capital Parts.
Speaker 3 (38:33):
So we're very active on LinkedIn, Chatrons Capital Partners. We're
also on Chatroncapital dot Com, so lots of ways to
get in contact with us. And then me personally always
feel to reach out doctor Brandon Guthrie on LinkedIn and
then Idaho Boy meets World on Instagram, so little just formal.
Speaker 2 (38:51):
Yeah, good stuff, man, good luck, and I look forward
to you know, continuing to follow the story.
Speaker 1 (38:57):
And I wish you good luck.
Speaker 3 (38:58):
Yeah.
Speaker 1 (38:58):
Perfect, yeah.
Speaker 2 (38:59):
And I also want to thank the audience for tuning in.
If you liked the episode, please share it with your
friends and colleagues. Check back soon for a discussion with
Jeff Henry, president of the America's at gang Cha Global
Welcome to Chopping It Up.
Speaker 2 (00:23):
I'm your host, Mike Allen, the senior restaurant and food
Service analyst at Bloomberg Intelligence. Today we're joined by Brandon Guthrie,
general partner and co founder of CHATRNGE Capital Partners. I'm
pumped to finally get you on here. Thanks for doing this, Brandon.
Speaker 3 (00:38):
Yeah, of course, I'm excited to be here.
Speaker 2 (00:40):
So what's up man, any recent prs in the squad clean?
I saw you on LinkedIn throwing around two hundred and
seventy five pounds.
Speaker 1 (00:47):
That's a lot of weight, my friend. Yeah, that's impressive.
Speaker 3 (00:49):
That's my PR so hopefully my back and my knees
hold out. So no, recently. I think my big lift
that I was happy about as I the two hundred
club for at least in kg. So that's what four
hundred and sixty five pounds on the deadlift. So that's
for a desk jockey. That's not so bad. Definitely have
(01:10):
some room to improve, dude.
Speaker 1 (01:11):
That's awesome. Yeah, that's awesome. Yeah. I hurt my back
with doing deadlifts. I was doing.
Speaker 2 (01:18):
CrossFit for for a few years and I bought a
reverse hyper changed my life. You might even be able
to see I guess can see it, but you could
see it in the background. It's a it's a game changer.
So when did you start CrossFit?
Speaker 3 (01:31):
I started CrossFit actually during during COVID, so here in Dubai,
the lockdowns were actually really really strict, so you couldn't
leave your house for about a month. So rather than
going stir crazy, the gym close to us was doing
virtual classes, so we signed up for those, and so
I just kind of pushed out all the furniture out
(01:52):
of the living room and every morning would would beat
myself silly doing CrossFit in the living room. And then yeah,
when when lockdown ended, I was hooked, so I kept
going back. So a lot of different ways to hurt
your back during CrossFit though, so that's a good I
think that's all they do is to come up with
different ways.
Speaker 1 (02:11):
Yeah, the shoulders ended up getting me.
Speaker 2 (02:14):
I had bad shoulders from football, and then all the
gymnastics stuff and the overhead lifts just.
Speaker 1 (02:18):
Kind of did me in.
Speaker 2 (02:19):
But I loved it when I was doing it, man,
So yeah, yeah, keep it up, man, Thanks good stuff,
thank you. All right, So you have extensive experience in
international markets, whyn't you tell the audience about your career
background before CHATRANJ.
Speaker 3 (02:33):
Yeah, of course, So I spent my entire career in
essentially international consumer retail. So prior to Chatron's Capital Partners,
I was with the head of finance for Wendy's for
the Asia, Pacific, Middle East and Africa region, so based
here here in Dubai, and I was responsible for all
of our markets essentially east of Dubai. So hopefully I'm
(02:55):
taking the record for longest distance from them from you
guys for the pod cast. Definitely want to hold that
for a while. And with that, just gained a really
broad international background. Prior to prior to Wendy's and them
shipping me out here, I was with L Brands again
(03:17):
in their international division with Victoria's Secret and Bath and
body Works supporting franchisees in the Middle East, in the UK,
and before them, I was with a consumer package good
company that also focused on international, but primarily Asia. So
my entire career has been focused on international in some
format of another and really found my passion specifically in
(03:42):
F and B in the food and beverage industry. As
a lot of people do you kind of I don't
know if you necessarily seek it out, but once you
find the industry, it's just it's just too much fun
to leave. And so even with Chatrone Capital Partners when
we started the fund that ended up being a sector
focused private ACA be fund on food and beverage focused
(04:02):
here in the GCC in the Middle East. So it's
it's just a lot of it's a lot of fun
to be in this industry and to work with people. Ultimately,
food is just such an intimate thing and you can
never take yourself too serious if you're working in restaurants,
and so it's always good to remind yourself that, specifically
(04:23):
with Wendy's, right, you're serving burger and fries. It's supposed
to be fun, and so it's a good reality check
and it keeps you waking up and doing something fun
every day.
Speaker 1 (04:32):
Yeah, it's fun and humbling of course. Time. Yeah, and
you had mentioned to me in the.
Speaker 2 (04:36):
Past that a previous podcast of ours, Bob Wright had
been the one who had sent you overseas at Wendy's exactly.
Speaker 3 (04:44):
So in we were in Salt Paula at the time,
in the back of the taxi and Bob pitched this
crazy idea of me moving my family out to Dubai
in the Middle East. So we had a really long
taxi ride if you've ever been in Salt Paolo traffic,
and so Bob had a lot time to convince me
that this was a good idea. No, I wanted to
do it. I mean, I was International has been my
(05:06):
passion since since I started my career. It was always
going to be something I was going to do. And
so yeah, when the opportunity came to come out here
to Dubai, I was working with Bob, who's very much
Assault of the Earth guy, and he was the president
of International Chief Operations Officer for Wendy's at the time.
And then we made the move and that was ten
years ago, so it's been it's been a whirlwind ever since.
Speaker 1 (05:30):
Very cold.
Speaker 2 (05:31):
So why don't you tell the audience what Chatran Capital
Partners does and what inspired you to start the firm.
Speaker 3 (05:37):
Yeah, so Chatrnge Capital Partners. It's a sector focused private
equity fund. Like I mentioned just a little bit ago.
It's the sector that we focus on is food and beverage,
specifically QSR and fast casual restaurants, and then geographically we
focus on the GCC here in the Middle East, so
the GCC being Kingdom of Saudi Arabia, United Arab Memorates, Oman, Kuwait, Bahrain,
(06:02):
and Qatar, and then we also look at Turkey and
Egypt as kind of secondaries to those markets, but our
primary focus being here on the GCC, and we ended
up we just saw so much opportunity here in the region.
Iconic brands are no stranger to this part of the world,
but what is a little bit different is the ability
(06:24):
to properly grow those brands and scale them. There's a
lot of opportunity with investments happening in Saudi Arabia and
obviously here in the United Arab Emirates. And so this
was a financial vehicle that we felt that provided a
lot of liquidity into a part of the market that
was underdeveloped. You know, private equity is a specifically sector focused.
(06:46):
Private equity is relatively untapped. And then with us, we
took a little bit of a different approach. We took
it to as a operations first private equity vehicle. So
rather than kind of a bunch of private equity guys
coming together and making agnostic investments, we're actually primarily a
group of restauranteurs people that have worked in the industry.
(07:07):
Our advisors are people that have led global brands across
the world, and this was going to be we brought
our operations first kind of value creation levers to the
fund and then utilize private equity as a vehicle to
properly deploy capital quickly and efficiently, which solves some of
the problems when you're commercializing markets. So it was really
(07:29):
kind of a reverse engineering approach. We saw an opportunity
here in the region. We leveraged our experience of how
we've seen businesses grow efficiently across the world and establishing
restaurant brands and started on that journey. And that was
a year and a half ago.
Speaker 1 (07:43):
Cole, And do you have any updates on the funds
first capital race.
Speaker 3 (07:47):
We're constantly raising capital. We have about one hundred million
in pipeline ready to deploy, and so we're just finalizing
those investments and hopefully we get working on that sooner
rather than later.
Speaker 1 (08:00):
Good stuff.
Speaker 2 (08:00):
And and can you talk about maybe some of the
you know, the five thousand foot view, what what's kind
of created some of the opportunities that you're seeing there
in the GCC.
Speaker 3 (08:09):
Here in the GCC, I think like I said, there's
there's never been a You have a couple of large
players that have been here for a while, but largely
there's there's a lot of money here and there's a
lot of family groups or privately owned groups. Private equity
is a vehicle and as a as a financial instrument,
(08:32):
it hasn't been around for very long, and it's it's
really underpenetrated here in the region compared to the West.
And so what what's happened is you have people that
experience brands, that love brands, either when they're going to
school or traveling into into the US or Europe. They
they're well capitalized, and they bring those brands back to
(08:54):
the region working with franchisors and then it's a part
of a family group that it's kind of the sixth
arm of their company's expansion. It's and it's just it
ends up being not more difficult than they expected, I
guess would be a good way to say. And so
(09:16):
where in the West, there, like I said, private equity exists,
or there's this middle market where you're able to drive
some efficiencies and these groups would typically just offload them
or shut down. These brands are still very emotional and
highly regarded because they're iconic global brands, and so rather
than kind of losing face or just shutting them down,
(09:39):
typically they just hold on to them. And so similar
how you kind of have zombie companies, you kind of
end up with some zombie brands. And there's a lot
of examples here of major major brands, global brands almost
everywhere else in the world that would be successful, that
are definitely in default of the development agreements. They've been
stagnant for far too long, and you end up getting
(10:02):
frustration on both sides of the equation. Frustrations with the
franchise ease because they're they're a little bit frustrated with
the support potentially they're getting from the franchise oors that
don't understand this part of the world, and obviously frustration
with the franchise ors that see all the amazing things
that are happening here in Saudi Arabia and UAE and
all the investment that's happening and the population growth and
the strong economy, and then your restaurants aren't moving, and
(10:25):
so you end up with kind of frustration on both ends,
and that just causes a lot of a lot of friction,
and so we our goal is to be the utility
that comes in and unsticks that right, that releases that friction.
We understand the West, We understand how governance and transparency
(10:46):
and all those things need to be established for franchise
oors and for investors. But we also understand the franchise's
point of view and kind of the boots on the
ground perspective, and the restaurant industry. So I think those
two those things coupled together create a unique proposition for people.
Speaker 1 (11:02):
Yeah, for sure, it's interesting.
Speaker 2 (11:04):
So are you looking to be a franchise or a
subfranchise e or is it going to depend on the
situation and what sized deals are.
Speaker 1 (11:11):
You and your partners interested in.
Speaker 3 (11:13):
Yeah, I think at first, master franchise e is it
tends to be the opportunity that exists here. The most
most brands that exist here, if we're involved in buyout situations,
have master rights for multiple countries. They may be in
default of those rights, but they still have the rights.
So any buyout acquisition would come with the entire territory
(11:35):
most usually the GCC as a whole, maybe some additional
shoulder markets, but with a platform company like that there's
also opportunity to bring in iconic brands who have yet
to make the jump into the region and plug them
into an existing portfolio that is leveraging your supply chain
efficiencies and some of the challenges that come with establishing
(11:58):
a market from zero. You can do that much better
in a portfolio company, and then you get the transparency
and an EESG that comes with Western back private equity
compared to partnering with a local group which will run
like a local company and come with some of those
frustrations and frictions compared to what people might be used
(12:19):
to in doing business in the West.
Speaker 1 (12:22):
Do you have any deals lined up right now?
Speaker 3 (12:24):
There? We have about one hundred million I think it's
five different groups, about one hundred million, between one hundred,
one hundred and fifty million, depending on how many groups
we look at of groups that are either through diligence
or in process of diligence. So to be honest, it's
a little overwhelming. Like I said, there's a strong lack
(12:45):
of liquidity in this market, so there's actually quite a
bit of room to come in and evaluate different groups,
and so there's a lot of people who are wanting
to work with us and who want us to take
a look at their businesses, and so it's more a
matter of getting through all those groups versus having a
you know, needing to find deals, which is a good
(13:05):
problem to have, but it is a little bit overwhelming.
Speaker 1 (13:08):
Yeah, high class problem.
Speaker 3 (13:09):
Ye, I'll take it. I'll take it.
Speaker 1 (13:11):
Good. Yeah, good stuff. And you had mentioned, you know, fast,
casual and quick service. Does casual dining work in that region?
Speaker 3 (13:21):
A casual dining works, It depends on It's a really
diverse region, so I think it's a little It differs
a little bit depending on your market. So if you
look at UAE, casual dining actually works pretty well generally,
at least with the data that I see, sales sales
are up, sales are strong with casual dining. In Saudi Arabia,
(13:43):
for example, sales are down, they're trending downwards. So it
really depends you have different and when you look at
the dynamics of that. Your your infrastructure is very different
in the UAE compared to a developing infrastructure in Saudi Arabia.
Traffic patterns are very different in Saudi compared to to
other parts of the world. So I think your casual
(14:05):
dining is under pressure, and generally what I see at
least is where you have more of an ability to
leave the house not get stuck in traffic for a
long time. There's actually some interesting cost pressures that I
think are favorable to casual dining at the moment if
everything lines up like that, compared to Fast Casual or QSR.
(14:27):
But ultimately QSR and Fast Casual delivers very well. And
so here in this region, delivery has always been really,
really big. Even before delivery got big in the US,
delivery was thirty or forty percent of sales for restaurants
here in the region, and before the aggregators came in,
everybody had their own call centers and their own bikes
as part of franchise e systems. So delivery is part
(14:50):
of this region and it's just something you have.
Speaker 1 (14:53):
To work through. Yeah, all right.
Speaker 2 (14:56):
So when I analyze international strategy for the companies that
I can cover, I prefer to see franchisors target the
best market possible for their brand and then find the
best partner. So let me know if I'm off base,
because you know, I'm willing to take criticism, you know,
Am I thinking about this correctly? And as a franchise e.
(15:18):
You know, how are you identifying your targets?
Speaker 3 (15:21):
Yeah? Yeah, so I think you're one hundred percent thinking
about it correctly. Ideally, you I think where brands get
into trouble when they begin their international expansion journey is
that generally the thing that starts them on that path
is is an opportunistic point of view rather than a
(15:42):
strategic one. And so you might have a partner that
comes in or potential franchise e again with a big
check or a lot of interest, and it you just
convince the brand that this is the time you need
to go international, and so the brand decides to do that. Generally,
that's a recipe for disaster because the brand will lack
(16:03):
the support that it needs to support that franchise e.
They're not necessarily ready to take that jump. And having
a strategy, having a plan, having the infrastructure from a
people perspective, those things are really really important when you're
setting up your first international expansion plan. So there definitely
is a place where you need to be taking advantage
(16:25):
of opportunistic things that come across, Like if there's a
great potential partner who has a strong track record, well
capitalized and is wanting to expand your brand. There's cases
where you would want to look at that more heavily
and maybe leapfrog that market over another one that you
had strategically planned. But in my mind, ideally you would
(16:45):
tier out your markets and say this is the part
of the world, or these are the group of markets
that we're looking for, and this is where we think
fits best, and then you go try to find the
best partners that are in that tier one set of
markets and then partner with those and so that order
in that tier one sector might change a little bit,
but ideally you're not taking somebody from a tier three
because an opportunity came up and leapfrogging them up to
(17:08):
your tier one sector. And if you don't have a strategy,
you're not going to know that, and you just kind
of go wherever the windblows and causes quite a bit
of problems.
Speaker 2 (17:15):
Okay, cool, and so yeah, and so how are you
identifying as the master franchise, How are you identifying your targets?
How are you ranking your potential targets in the marketplace.
Speaker 3 (17:26):
So we look at I think there's two ways, and
we have the benefit at least with private with the fund,
So we're looking at potential acquisitions which we're ranking and
looking at from in terms of iconic. But then with
our experience, and I think we're in a unique position
compared to other franchisees and other other funds in the world.
With our industry experience, we also get to rank the
(17:49):
franchise oors. So we actually have a pretty good idea
of what we're looking for when we're evaluating franchise oors.
And part of that we you know, we want to
fly in and meet the team just like we would
with a franchise e when we were on the franchise
or side. We want to see what the support is,
we want to see what the international infrastructure look like.
We want to make sure that they understand the challenges
(18:11):
and opportunities that come with international and the people that
we're going to be working with. And so I think
sitting across the table from the leadership teams of the
brands that we're talking to, you get a really good
sense for brands that would be a good fit for international,
whether they've expanded or not. Sometimes even if they haven't
(18:32):
expanded yet, and they have the right leadership team and
the right mindset and positioning. It can still be a
good fit. But I think more often than not, you
see some of those red flags and you say, Okay,
this is a great brand, it's working really well in
the US. They're not ready for international expansion in our
mind and we don't necessarily want to be the first
(18:55):
ones to go through that learning curve with them. So
obviously they're welcome to expand anywhere they want and potentially
even in the same region with somebody else. But ultimately,
these are very very long term relationships, specifically with international
master franchising. Generally, the master franchise e is investing a
significant amount of their capital into developing these markets for
(19:19):
the long term, and so you really want to make
sure it's it's a good long term partnership and doing
all that due diligence upfront is really really important in
our eyes. So I think we're uniquely positioned. Not too
often I think you get groups like it that are
that are franchisees that are doing as much diligence and
interviewing of the franchise oors as we do. But ultimately
(19:40):
we come from a franchise or background. You know, we're
used to doing this with potential partners that we were
looking at expanding with as franchisees. It's only fair to
do that in reverse.
Speaker 1 (19:50):
So yeah, yeah, that's great.
Speaker 2 (19:52):
All right, So several years ago, I'm going to start
asking you about some of my question my companies. Now,
you know, they don't don't give us a much much
information as we'd like about international since I have.
Speaker 3 (20:02):
You here, that's fair.
Speaker 2 (20:04):
Several years ago, restaurant brands they tried the supercharger international
growth by pairing some big PE groups with with operators.
How how is that? You know, what do you think
about that model? How is that done over the last
handful of years?
Speaker 3 (20:19):
Yeah, yeah, I think I think the model works well.
There's actually there's obviously some some significant benefits that private
equity solves as a financial instrument for international expansions, specifically
for brands. One of those being, you know, the efficient
deployment of capital. So that really solves your scale issue
(20:40):
and your scale challenge very effectively. You know, private equity
groups are incentivized to deploy capital quickly, efficiently, and generally
by definition they're they're well capitalized, so that really solves
that issue. When you look at it as an example,
you know, I think Burger King got to entered India,
you know, the same time as Wendy's. The main difference
(21:02):
there was they entered with a joint venture with Everstone Capital,
which was a private equity group. Wendy's entered with a
franchise with a master franchise e. And so if you
look about, you know, three to five years in, you know,
Burger King had over two hundred restaurants and growing, Wendy's
was still stuck at the five restaurant mark. That's expanded
(21:23):
since they've partnered with different people and different partners post COVID,
but it still highlights the expansion potential with private equity,
you know. On another positive example, you look at what
we did, and this is something that I was involved
in and led with Wendy's, is we partnered in Japan
with a private equity group called Long Reach, led by
(21:45):
Mark Chiba and Tomoya Sujimoto, so both excellent, excellent human
beings and mentors of mine, and we worked with them
to acquire a legacy business called First Kitchen. It was
owned by Sun Torri, which is the Mega Ridge conglomerate
mostly known for whiskey, and they had created that business
First Kitchen to compete with McDonald's, and they had about
(22:06):
one hundred and sixty restaurants. McDonald's, though in Japan, has
three thousand restaurants, and so this was just an afterthought
for them and something they wanted to divest of, and
so we worked with private equity to acquire that business
and then merge the two brands, not co branded like
they're merged Wendy's First Kitchen, so one menu, some products
(22:29):
from the first Kitchen line, some products from Wendy's. So
it's a bit unique of a situation. And once we
finalized that acquisition, we were able to rapidly scale within
two or three years to seventy restaurants and growing. And
so private equity definitely serves a very very useful purpose
for brands expanding internationally and like you said, kind of
(22:50):
supercharge the growth. One of the things to watch out for,
and just generally it's a thing more involved with communication
is private equity kind of by definition has a shorter
timeline on whatever they're working with. And there's options now
as the industry kind of evolves with food and beverage
to maybe roll over into a future fund or hold
a little bit longer than they typically would, but ultimately
(23:12):
they have a shorter term vision for what their exit
is going to look like, whereas hopefully one of the
partners generally the brand has a longer term vision and
so those that communication is really important on the roles
that get played. If both brands end up having a
shorter term vision, then you start to run into challenges
(23:34):
with perspective and what each group is trying to look
for in terms of what they need for their investors
or their shareholders. And so knowing what you're working with
and why, I think is important. Knowing the exit, knowing
the long term vision is really important, but it serves
its use for sure.
Speaker 1 (23:52):
Great.
Speaker 2 (23:54):
You know, Wendy's has hit some bumps in the road
with his international expansion. I think that's part of the
reason why they brought in Kirktan to lead the business.
What do you hearn about its UK business?
Speaker 1 (24:06):
You know?
Speaker 2 (24:06):
I thought it was like interesting that that they decided
to go to the UK and operate those stores as
opposed to franchising them off the bat.
Speaker 3 (24:16):
So I have a I have a mentor of mine
as somebody I used to work for by the name
of John Payne. So he's former former young executive marketing
guru extraordinary and he was also the the MD of
Wendy's APMEA for a time, so I had the chance
before he kind of retired to really learn from him
(24:37):
and work with him closely. And he taught me a
lot about international and particularly franchise management. And he's he's British,
he's from the UK, and so there was there was me,
this relatively young American guy working with with John and
he would we constantly had us saying divided by a
common language, because there were just be times where he
(24:59):
would say, John, I understood every word that you said,
but I don't know what you're talking about. And he
would say the same thing about me. And so I
think you run into this issue of context, right, there's
so much familiarity between the two, between the two markets,
and sometimes I think that gets us into trouble, not
just for Wendy's in this example, but any brand looking
(25:21):
to make the jump into the UK, because you might
make the mistake that it's so similar to your own
market that it's kind of a copy past approach, or
it's going to be you know, something that you can
just run from the US and in reality those little
differences end up not being so little. They become even
more stark in how a market operates. And so in
(25:43):
the instance of the UK, I think there's a lot
of that. You don't want to try to run something
from the US for any brand. You know, Chick fil A,
as an example, tried to enter really got beat up
a bit on their first attempt when they were testing
out the market. They've gone back. I think they're retooling
on how that's going to work, and I've seen something
that make me think they're changing their approach, which is great.
(26:04):
But for Wendy specifically, I think if I had one
critique is and we mentioned getting to scale quickly, it's
just not moving. It's not moving fast enough with I
think they've been in the market for four or five
years now, if you exclude some of the reef kitchens
which are kind of delivery only kitchens, I count around
twenty restaurants. Really at this time, you should be at
(26:25):
seventy restaurants and plus whether that's through franchising or your
own restaurants. If you've ventured a market like that, you
really need to double down and kind of push through
that level of growth, because that's when you're going to
see the synergies that happen from you know, four while
ebit dot improvement on your supply chain and your food costs.
(26:46):
That's when you have a decent marketing ad budget to
go after consumers share of mind. And so I think
if you get to that twenty restaurant level and you
kind of freeze or you go too slow, all those
things actually work in reverse against you. Your supply start
getting angry because the restaurant counts that you promised them
and the discounts that they were giving you because of
what it was going to be start coming off. So
(27:07):
your food cost actually gets worse and you just got
a lot of headwinds that start coming your way. So
I would really like to see Wendy's push through that,
start franchising a little bit faster or opening more restaurants faster.
But that's a challenge in the UK, Like you really
need to push through that. It's like a rocket getting
out of Earth's gravity. You can't stop at twenty. You
(27:29):
can't stop otherwise it just comes back down to Earth.
Speaker 1 (27:32):
You got it.
Speaker 3 (27:33):
You got to push through. It might be a little
bit painful, but the faster it goes, the better it gets,
and you really need to get to that restaurant count
of seventy. An example in the UK that I think
they did it really well was five guys. You know,
they opened really really aggressively. You know, it doesn't it
doesn't mean that it was all sunshine and roses and
that everything was there wasn't cost pressures along the way,
(27:58):
but you know, they got to a really good scale
and I think it's and it's a good example of
of deploying and growing a market quickly to get to
to get to a size where it's going to be
feasible to continue to franchise and grow the business.
Speaker 2 (28:13):
Yeah, Chipotle is a chain that's had you know a
few dozen international stores in Europe for years, and they
finally made a switch with their strategy partnering with al Shaya.
Speaker 1 (28:27):
Any thoughts, I mean, I.
Speaker 3 (28:29):
Think I think it's the right strategy for the region
in terms of master franchising the I believe it's their
first franchise location anywhere, So a little bit of a
concern I would have is just is there the franchising
I think anybody in industry knows that franchising itself is
its own muscle and skill set, and so I know
(28:52):
a lot of different people from the industry that are
in Chipotle that have have franchise experience, but having an
organization that backs franches is something that's very different than
just having people that know what franchising is like or
having that experience. So I hope that they're building that
out and if that's going to be a strategy going forward, again,
I think it is the right strategy to master franchise
(29:13):
in a high context market like the Middle East. On
the flip side, from the boots on the ground here,
there was a little bit of a red flag when
the announcement came out that you know, they're partnering with Alshaia,
which is a big group, but no restaurant counts announced, no,
no strong commitment. It seemed very tentative for something that's
(29:34):
iconic and global as Chipotle, so it raised a few questions.
So it'll be interesting to see Alshaia as a group
one of the major groups out here in the GCC
and across MINA as a whole. But what a lot
of people don't realize is ninety five percent of their
F and B units are actually Starbucks which is under
(29:57):
quite a bit of pressure at the moment. The other
brands that Alshaya has like Raising Canes, Cheesecake Factory, shake Shack.
You know, when it comes to QSRs like like our
fast casual, like a Raising Canes, they're they're not there's
there's very few. They're they're not growing at the level
as we would want them to. I think they have
some pricing differences with how the US and the primary
(30:20):
brand prices their products. There's more Shakeshacks here than there
are Raising Canes, which is crazy to me. So definitely
over penetrated on some of the higher end of fast casual,
and there's a lot of potential for getting the brand
I think a little bit closer to the mark and
the home brand and the core concept with with groups
(30:41):
like Raising Canes and so with Chipotle, I think TBD,
let's see, let's see how it comes out. They I
think they announced their first location would be in Dubai
and Kuwait, which again Kuwait wouldn't necessarily be where I
would launch my first location. I would be looking at
UEE in Saudi Arabia transparently, but you know, quait Is
is the whole market of Alshaia. So I imagine that has a.
Speaker 1 (31:02):
Lot to do with it for sure.
Speaker 2 (31:03):
All Right, so let's get into that a little bit. Starbucks, right,
McDonald's and Starbucks were two that really spoke about four
Q sales weakness in the Middle East and other countries
with large Muslim populations like Indonesia, Malaysia, France due to
the Israel Hamas War. I guess two things you know
is this mainly is this a bigger problem for McDonald's
(31:26):
and Starbucks than it is maybe for young brands and
Dominos because of some of the press that and some
of the things that happened.
Speaker 1 (31:34):
And has there been any improvement thus far in one Q?
Speaker 3 (31:38):
Yeah, so I think yes. For the first answer is yes,
I think it is a bigger problem for Starbucks and
McDonald's compared to what I see with the with the
other brands. Everybody got impacted, and this is something a
lot of people don't realize, not just Western brands, Like
everybody got impacted by the conflict post doc over seventh.
(32:01):
So in general, you saw a big step down in
sales in some markets. You saw more of a differentiation
between Western brands or American brands and local brands, but
overall everybody still took a step down. What we've seen
to date is that gap between Western brands and local
(32:23):
brands has actually has actually come together. So those trend
lines are meeting, are just about to meet, and across
those businesses there is a recovery line where you start
to see a revision to the mean and potentially a
return to standard sales. It's still going to take some time.
I think from what I see, assuming the conflict ended today,
(32:46):
which you know, God willing it does, you'd see a
pretty rapid recovery back to standard sales, maybe even as
early as early Q three or mid Q three for
McDonald's and Starbuck specifically, though they've been impacted significantly more,
they also have a presence that's a little bit more
exposed to Egypt and Jordan and Morocco, which those are
(33:11):
higher impact markets compared to the to the GCC, so
that that we haven't been in the GCC, specifically Saudi Arabia, UAE,
we haven't been affected as as significantly as those close
those markets that are closer to the conflict. So uh,
from what I've seen, I don't think you're going to
see a recovery with McDonald's and Starbucks potentially until the
end of the year. Just because they took it, they
(33:32):
were a bigger step back. But everybody is on a
trend line that's recovering. So I think you are starting
to see a little bit of potential, you know, outrage
fatigue with the consumer. So as long as there's not
something that continues to you know, irritate or or make
the situation worse, I think you'll see a continued recovery.
Speaker 2 (33:55):
All right, So let's let's go back to Wendy's real quick,
because you had a great post on LinkedIn about dynamic pricing,
and Wendy's your thoughts.
Speaker 3 (34:05):
Not a fan of dynamic pricing for QSR, Yeah, not
a fan, And you know, in short, I just don't
think it's a great fit for specifically for QSR and
fast casual. I think it goes against the DNA of
what what our industry in those two areas really stands for.
Maybe places for fine dining, you know, where you can
(34:26):
implement that. There's some instances where it is implemented. But
I find the conversation really interesting, you know, even listening
to your to the previous guest on the podcast. I
think there's examples that a lot of people give in
the industry where it's almost a little bit of gas
lighting the consumer saying, well, you know, dynamic pricing is
already in place because happy hour and discounts, and I
(34:48):
think it's it's just a little bit disingenuous in my mind,
because when you're defining dynamic pricing, dynamic pricing is by
definition ever changing pricing. So really you're looking at a
model that's much more similar to how airlines or airbnbs
or hotels operating.
Speaker 2 (35:06):
That's surge prices, right, but that's that's those industries have
a supply demand issue that the restaurants don't.
Speaker 3 (35:14):
Right exactly right. And where you get to dynamic pricing
is where you have discounting strategies plus surge pricing, So
those things too together is what we're talking about. Where
where it's dynamic pricing, if you're just talking about happy
hour or something like that, that really is just a
discounting strategy, which is everybody's correct, that has been in
place for a long time. But consumers are smart, so
they realize that this is this is something different, and
(35:37):
as you pointed out, and as a lot of people
pointed out the difference between our industry and other industries
that are currently implementing dynamic pricing is there's not a
supply constraint component, right, so more or less you have
infinite supply with restaurants, you know, we're not. We're we
go through a lot of work to make sure we
don't run out of food and that we can that
we can serve consumers. So you don't have that supply constraint.
(36:02):
So then really what you're looking at is just you're
maximizing the demand constraint and that doesn't make sense to consumers.
And so you get to this point where you know,
to wax poetic QSRs are meant to be affordable, consistent,
and fast. And so if you're losing face and trust
with the consumer that you're not affordable or consistent anymore
(36:23):
and they've lost that trust, then you really need to
change your strategy fast. And so I really don't think
the juice is worth the squeeze in the industry. I
would recommend and promote to brands that really, rather than
trying to justify the reaction or to explain it away,
you look at the consumer reaction for what it is.
And you modify your strategies based on that. Specifically for
(36:46):
QSR and fast catual, I think there's a lot of
benefit for people to have consistency to understand what the
static price is going to be on the menu. And
you know, at the end of the day, we're a
price sensitive consumer that you know, people they're going to QSRs,
they want to know what the price is. And they've
given plenty of opportunities for everybody to raise their prices,
(37:07):
you know, that's been built in. I don't I don't
think dynamic pricing, especially now, is a good strategy.
Speaker 2 (37:13):
So especially now, is right, man? I mean we've seen
thirty forty percent price increases at some of these chains, yeah,
you know, and so yeah, and people are pissed. We
see all these articles now cropping up and people complain
about the eighteen dollars big Mac meal, the the five guys,
you know, twenty four dollars meal or twenty three dollars
(37:34):
meal or whatever it was.
Speaker 1 (37:35):
So yeah, yeah, the timing was tough for sure.
Speaker 3 (37:38):
Yeah, when when QSR pricing is starting to approach casual
dining basket size, that's a bit of a red flag.
And like I said, consumers are smart. Everybody needs to
realize consumers are smart. I think ultimately, you know, people
in the boardroom know this, but I think sometimes it
gets forgotten, and you know, you might be able to
(37:59):
pull a fast one over one or two times. But
like I said, I if I'm in the drive through
and I see my price changing all over the place,
I'll give a brand one or two shots before I
just change. And then with our industry, there's a lot
of competition, right, there's a lot of alternatives, So there's
a lot of reasons why we're different and why the
strategy should be different for QSR compared to airlines or hotels.
Speaker 2 (38:22):
So yeah, good stuff, man. I really appreciate you for
coming on. This was a great discussion.
Speaker 3 (38:29):
My pleasure.
Speaker 1 (38:30):
Where can the audience go to find more out about
Chatron Capital Parts.
Speaker 3 (38:33):
So we're very active on LinkedIn, Chatrons Capital Partners. We're
also on Chatroncapital dot Com, so lots of ways to
get in contact with us. And then me personally always
feel to reach out doctor Brandon Guthrie on LinkedIn and
then Idaho Boy meets World on Instagram, so little just formal.
Speaker 2 (38:51):
Yeah, good stuff, man, good luck, and I look forward
to you know, continuing to follow the story.
Speaker 1 (38:57):
And I wish you good luck.
Speaker 3 (38:58):
Yeah.
Speaker 1 (38:58):
Perfect, yeah.
Speaker 2 (38:59):
And I also want to thank the audience for tuning in.
If you liked the episode, please share it with your
friends and colleagues. Check back soon for a discussion with
Jeff Henry, president of the America's at gang Cha Global
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