Welcome to Chopping It Up.
I'm your host, Mike Halon, the senior Restaurant and Food Service analyst at Bloomberg Intelligence. Our Research and that a bi's five hundred analysts around the globe can be found exclusively on the Bloomberg terminal.
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Today we're joined by Alex Mercedo, co founder and CEO of Authentic Restaurant Brands.
Thanks for joining us, Alex.
My pleasure. Michael, good to be here with you.
Please tell me a little bit about your career journey and then how Authentic Restaurant Brands or ARB came to be.
Well. I've been involved with food and beverage since I started my career at ABNBEV. For the last fifteen years or so, i've been working mostly with restaurants, and twenty eleven I joined burg King, where I was president for about seven years of North America. After that, I became the global president of Tim Morton's for a couple of years, and then for the last four years, I've been a partner at Garnett Station Partners, with private equity group based out of New York where I work in several of
our investments. In one of these investments is Authentic Restaurant Brands, which I co founded with Alex and Matt and the Garnet Station Group about four years ago. And it's become so exciting, so big, and really so successful quickly that about a month ago I stepped into the role of CEO of Authentic Restaurant Brands. So I've been working with restaurants now for the most part of my career.
And you have a unique kind of niche here with ARB. Can you talk about how you're looking for brands but it's not necessarily the next big thing, you know, it's it's it's brands that you know, maybe aren't going to be national brands at some point.
That that's that's exactly it. So in our thought process when we put together ARB was that there is some magical brands that have very deep ties with their communities, but their regional and scope right and because of regional in scope, sometimes they get overlooked by the big groups or by you know, someone from California will never know what the good brand is to get pizza in Ohio and the good sports bar in Philadelphia and so on, and we thought that we'd build a holding company to
acquire regional brands that are extremely extremely well run, uh and then have our team of experts and veterans work with these brands, you know, to bring the latest in data science technology, you know, financial practices and so on. Because we thought, listen, these brands, even if they're very well run, because they're limited in size and regional, perhaps they don't have the latest and greatest when it comes to the latest systems to run restaurants. And sure enough,
that's what we found. And we've been very successful in partnering with these brands, keeping the management teams which are great, and just deploying more resources when it comes to you than the latest technology to find new sites, or the technology to analyze your menu architecture and find the gaps in the menu architecture, perhaps to organize your data your data management system a little bit better so that you
can find some insights on everyday sales. And that's what we've done now for three and a half years, and we're up to five brands. We just acquired Tabin the Square, which is a very successful Polish casual brand from you know, the New England area that gets US a billion in sales and around one hundred and fifty million dollars in EP of that. So it's a fairly relevant business made up of relatively small regional brands.
Yeah, the first time we spoke at the ICR conference back in January, I thought this was refreshing. You know, I kind of got tired of hearing everybody trying to track down the next.
To pole, which is not an easy thing to do, clearly.
And you know what, I think a lot of this thought comes perhaps from my experience managing very large and complex restaurant systems, mostly of which we're building the eighties and nineties. So if you look at the big national brands in the United States, you know, the vast majority of them we're building the eighties and nineties, and then a few in the two thousands and so on. It's become increasingly difficult to scale up and build national brands
in a cost effective way. Media costs are extremely expensive, it's difficult to find sites like it was easier back in the day. So our thought is, you know, let's take these brands that are national, make them better where they operate. Certainly, start building more but you know, we're not going to take a brand that's in Pennsylvania and take it all the way to Arizona. What we'll do is we'll find what the authentic restaurant brand is of Arizona and we'll try to acquire that brand and we
just you know, build it media. So we want to be national, but we're going to get there by being regional all over the country. That's kind of our mandrend where we think about going.
That's cool.
Well, expanding it in concentric circles is back.
I guess, well, it's about twenty minutes and not twenty hours a way. That's what we always tell our teams. If you can drive twenty minutes, that's okay to get the next site. Now if you have to drive twenty hours or take a two hour flight there, that might be a little bit.
You know.
We have a great example. We acquired this company called Poetropic Call. I don't know how familiar you are, but Poetropic Call is like the original you know brand in Florida. We sell grilled chicken. It's it's a mix of fast casual and drive through. And I'm in QSR because there's a big drive through component, but it's an elevated quality
of food served quickly, fresh and hot. And you know, we have around one hundred and twenty locations in Florida right and this brand has tried to expand naturally in the past without much success. And then we get asked all the time. So we bought Poetrypic, are you going to try to take it to Texas or California and Arizona again? And said, no, we're not. And people get
really surprisable. So I wonder why did you acquire it? Well, first of all, because we've thought a lot of saw a lot of opportunity to make it even better where it is. But second, if you think about it, in the state of Florida alone, we have one hundred and twenty Poetry Pic calls which have more than average, more than three and a half million dollars a box. There's nine hundred and fifty McDonald's, there's over five hundred Burgons,
and over five hundred Wendy's. We could probably double the size of Poetry Pical in the state of Florida without taking you know, many risks at a very high volume. So so that's kind of the mindset that we have you know, to be nimble. We have been able to stay under the radar until this last acquisition, but now we've become sizable enough that we're starting to tell our story and it's been it's been a lot of fun.
Can you talk about just name the other brands that are in your.
Portfolio, so we have we have five brands. The first brand that we acquired was Primanti Brothers from the western Pennsylvania region, mostly focused on Pittsburgh. Primanti Brothers has been around for more than ninety years. Is a very iconic sandwich and it's a true namestake where it is right so that's where people go to hang out and watch sports, and you know, it's really a staple of that part
of the country. We have Mambo Seafood, which is, you know, a Mexican theme family restaurant based out of Houston that we recently expanded into San Antonio. We have PJ. Wellhelm's, which is a sports bar casual dining concept for families that's based out of Philadelphia and the region. We have Portrait Pical one hundred and twenty locations in Florida, primarily grilled chicken, rice and beans. And then we recently acquired a tavern and is where which is in New England
right now? What all these brands have in common? We look, we have a very very very difficult criteria for a restaurant to become an AARB restaurant. So first of all, high volumes relative to the pure set. Second, high margins relative to the pure set. Third, we look for brands that have been around for more than twenty years. And this for us is key because we don't want the latest fad. We want, you know, brands that have survived
the test of time and the different cycles. But most of all, most important for us, we look for brands that have fans, not guests. So we have a proprietary way of measuring brand loyalty that we roll out in each one of these brands that we're measuring, But we also do by Google reviews and so on, and we take brands that people truly love and that are truly
part of their routine. We have evidence of at least three of our five brands people having tattoos that are about the brands swihear in their body, So it's kind of unique. You don't get that a lot for most restaurant concepts in the world.
Yeah, that's very cool.
I've never been to a Primanti Brothers, but I've heard that they especially have a very strong cult following there.
They do. It's it's wild, and it's tied, you know, to the Steelers and to the Pirates, and there's a whole there's a whole thing. It's you step in. You know. Our guests in that area, they have their permit, is right, because you know, we have more than forty locations, but it's like their permane is as an extension of their living effectively. So it's a really really cool relationship that a lot of our guests have with our brands.
Yeah, and they are avid sports fans. Between the Steelers and the Penguins.
Great market, it's a great market for a brand like Promants for sure.
Very cool.
So are you keeping the founders on to help run the business or is that you know, I guess.
A case on a case by case basis.
That's on a case by case basis we do because we only buy great brands, or we tied to only buy great brands that are very well run. You know. Our our mode is to keep the management team on board, so we do that all the time. Now the founder staying that really depends on you know, where the founder's mind's at. And you know, so for example, at Tavern in the Square, which we just acquired earlier this year,
the founder state he remains a CEO. He's now a partner at ARB, not only a partner at Tavern in the Square, and it's great working with him. A true entrepreneur, brilliant, full energy, great team leader for Mombo for example. You know, the founder, we still talk to him once or twice a month. We when we have questions. He's still very present. He's very proud of what he built at PJ. Wellehems, you know, not the founder, but you know the CEO.
Now we have a new CEO, which was part of the natural process, but the CEO when we bought the business, that was the CEO for decades before. He's on our board, so you know, I get to speak with him at least once a month. So we try to keep we try to keep everyone that wants to stay along for the ride along for the ride. Now it's that's on a case by case basis, and but we do we do try to keep for sure, the management team entirely when we acquire one of these brands.
Great, what's the sweet spot for a target in terms of annual ebada?
So our sweet spot has changed a little bit now that we've gotten a little bit bigger. But I'd say we look for you know, fifteen to twenty five million dollars and edit, that is probably where we would feel comfortable now. And it looks like we can acquire a brand every you know, nine to twelve months. Is I think something that we can do and when we can digest very easily. Now, one thing, Michael, that happened that we've learned that happens is we have we've built a
system that actually is self learning. So you know, our playbook from the first business was based on our previous experience. Right when we acquire the second business, we had our previous experience plus the first business. And so now that we're we're on the fifth business, it's become like a lot more intelligence. So we get to the results that we need to get much quicker and you know, with less friction. And I think this is just going to
continue to evolve. Right. So the other thing is we don't we built a corporate team at the ARB level, So I have you know, reporting to me a team that provides full support to the brands. We don't operate the brands. We don't tell them what to do. We suggest, we encourage, and we recommend based on industry best practice.
So we have a team on marketing analytics, we have a team on technology, we have a team on finance, and then we have a team that doesn't interact with current brands but looks for the next big things on business development. And then we bring to the brands, you know, solutions for problems that they don't even know they have. Right, so, let's say a brand wants to run a launch of loyalty program. We say, listen, Brands like yours have followed
this path with more success than that path. If you choose to follow this path, which we encourage, this is this is the place book we recommend. Or sometimes you say listen, we don't think you're ready to follow this path. Now you have to hire more people, you have to bring in a new system or whatever it is. So it's not like just do everything at once or the playbook. It varies depending on the stage that the brand when we acquire it.
So also i'd imagine part of your process is when you're analyzing some of these chains, is like, who needs help in these core competencies, whether it's you know, finance, marketing or whatever, it might be.
Right, Yes, so that's the mat you just touched. For us, what's the magic sauce, which is this if we can find brands that are very well run with amazing guest satisfaction scores and high margins, but still during the diligence process,
we find gold everywhere. Right. And the sense that you know, whether it's database management, you know, back of the house, technology, accounting, whatever, the perfect scenario for us is something that's already magical that we find that we know that we're going to find so much more to be able to drop drop
you know. The top line and the reason that I think we can do this perhaps better than some of our peers is in my team, my direct team, we only have restaurant veterans and you know, industry experts, so we are not, uh, we don't have a private equity mindset. We're very proficient in finance by all means, even you know, we just got John Howie uh as our CFO, who's done amazing things in his career. But John is a
restaurant guy, Like I'm a restaurant guy. Now we're partnering, you know, we're owned by their Net Station Partners, which and they're wiz you know, they're like wizards when it comes to finance. So we have the advantage of having them structure the deals and put together the deals. But for us, but we kind of see things that perhaps you know, other financial sponsors don't because we are true restaurant people, and so we look at it from a
different angle. And when we see like the opportunity to do a small tweak and the menu board or a small tweak and how they run operations or start a small tweak in operating hours, whatever it is, that's gold for us when we're evaluating to buy a company.
Yeah, that's cool man, And I could just see it, you know, when you talk about your passion for the operations.
No, there's things you might you won't believe. Like we were looking at Poetrop McCallen. It's a seventy percent drive through business, right, and then we went through to drive through ones and we noticed that they didn't have numbers on their top selling items, right, and that pretty much fifty percent of the order taking was customized, which I
mean you can keep it customized. We'd imagine that one out of every two cars, the guest has to relate to the order taker in Spanish or Spanglish or English. So it's very difficult through the order taking. So what we did was the most basic thing ever. I mean, you've ordered by number at burriy K McDonald's and Wendy's for sure in your life. So we grew up. We know what a number one is, what a number two is,
what the number three is. Guess what. They didn't have that at puy trp call, so you know, we're very shortly in. We ran our data engineers figured out on that particular on our tropic chop goals and some of our sandwiches, which were the top sellers and which combinations work the best. We ranked them, we assigned numbers to them, We tested it. We increased order accuracy by double digits, and we shaved fifteen seconds off of dive dive drive
through times on average a day. Fifteen seconds on average on one day with the amount of cars that we have, that's a mountain, right, So it's doing It's not rocket science. It's just based on our experience what we can see that perhaps some others can't.
Yeah, it's impressive.
And fifteen seconds, right, that could eliminate a car or two from the line, and it could be the difference between somebody driving past the store or pulling in and ordering.
Right, that's exactly I'll tell you another one, very simple one, not rocket science. Again, we got the Puyer Trupic call and during co COVID, you know, like most people, they had reduced their operating hours from closing down at midnight to eleven pm, right, but they had never moved it back and everyone else did. Right, So we're like, any reason why you guys didn't move back to twelve pm? And no, we just fell through the cracks. We didn't, Okay,
so let's do that. And we did ensure enough, you know, sales took off the roof and so it's it's not but again there you have to be able to look at it with those eyes, and it's you know, you're not going to get that from a spreadsheet. You're going to get that by visiting the restaurant, by understanding how they operate, and by you know, interacting with the team.
Yeah, it's awesome, that's why I tend to lean towards strong operators in the CEO CEO role of the companies I cover, although some there's some marketers that have done a phenomenal job too, especially with franchise brands, all right.
So I'd imagine there's a lot of targets out there, right.
I mean, this is such a frag minted business across the United States.
It is. So there's two things that really help us. First, it is a fragmented business. And you know, for whatever reason, you know, some of the some of the players in the market and the financial sponsors, space and all, they kind of stay away from restaurants and casual dining in particular, right, And we love that because we think that, you know, we know how to operate in the system. So there's I think we're in active conversations with you know, about
twenty brands. We're in real conversations with about five or the twenty because this is a long term game, right, And what's changed over time as you know, the founders talk to each other and people see a little bit of what we're doing is we're getting a lot of incoming and a lot of inbounds, which we didn't in the past. To be honest, when we started this it was only three and a half years ago, but we can
feel the difference. People. Some of these founders of the regional concepts, they kind of know who we are now. They know that we keep the culture, that we the businesses, that we actually add cost to the business, right, we don't remove costs of the business, not our platform. And they're all about growth and getting something that's already amazing and making it just a little bit better. And that's that's how we operate. We don't force store openings. Some
brands we don't even want to open right now. With boetropycause since we bought it, we close fifty locations. We have an open one maybe next year were an open one or two and start that path. But we don't have to follow you know, a standard you know, private equity playbook by brand that you know come in slash GNA open restaurants. No, we we can do whatever the brand needs. At this point, Tavern and Square, we're probably gonna open three or four this year out of a
base of twenty five. So that's really relevant right in the percent phases. So it's going to depend from one brand to the other cool.
So it sounds like you're saving some money on investment banking fees, which is good.
What kind of multiples are you paying?
We were able to get into these brands for very attractive multiples. M'd say, on a blended average, we're below seven times, which is kind of remarkable for the quality of the brands that we're acquiring. And you know, just if we continue to be an elite player and you know, grow the top line on the bottom line how we've been able to do in the last three and a half years, I think that we could probably look at some multiple expansion. But we're not a financial engineering impact.
We're an operating engineering company. We're not a financial engineering company. We're focused exclusively on making the businesses better. Right, the financial outcome, the multiple expansion, that's all. That's all a function of running the companies better.
Yeah, and I like that you're running them for the long term, which is how they should be run.
Who's your primary competition for these deals?
You know, I get us that question a lot. I don't think there's anyone that does it in a structured way like we do it. I think, you know, Matt Perlman and Alex loan. The founders at Garnett Station Partners. You know, they're they're so visionary and you know, and they're so thoughtful in the thought of them what they do that they they were they built the ARB team before or just as we were acquiring concerts, right, so, and that's a very bold, you know, initiative to take that.
We talked a lot of people, Oh, I've always thought about doing the regional stuff. Oh, that makes so much sense, and we all, so, why didn't you do it? Because we really didn't know how to start. And it wasn't different with us. But you know, Alex and Matty, they
build our team. They brought me in, they brought the team that reports to me, and you know, we put our money where our mouse were upfront and and that was the only way for us to really make sure that we proved out the pieces and and it's worked. From the beginning. We called the business Authentic Restaurant Brands, right, We didn't change the name. That's what we set out to do. We thought it made sense. You know how some things make a lot of sense in theory, but
in practice they don't. Fortunately for us, this, you know, the real life turned out to be very similar to what we laid out on an Excel spreadsheet and a powerboard presentation. But it's all because, you know, I think Garnett's Station partners had really you know, the commitment to build the Arab team and to build the business even before we started operating as ARB. And that's really bold, and that's turned out to be a very good decision.
Yeah, for sure.
And it's a little bit of a mote because I'm sure others would like to kind of try to mimic what you've created here.
It's it's exciting, man.
I think that's a perfect spot to wrap it up. Thanks again, Alex, and I want to thank the audience for tuning in. If you liked our discussion, please share it with your friends and co workers. Check back soon for an interview with Zach Oates, the founder and CEO of Ovation.
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