Welcome to Chopping It Up. I'm your host, Mike Allen, the senior Restaurant and food service analyst at Bloomberg Intelligence. Our research and that of bi's five hundred analysts around the globe can be found exclusively on the Bloomberg terminal. If you enjoy the pod, I'd really love it if you could leave us a review on Apple or Spotify. Today we're joined by Andy Wiederhorn, the founder and chairman of Fat Brands. Fat Brands is ninety two percent franchised.
It's a multi brand restaurant company with about twenty three hundred units across sixteen chains and trades on the NASDAQ with the ticker fat Fat. Welcome to the pod, Andy.
Thanks for having me.
I'd like to start with Twin Peaks. Many of your listeners probably know that the chain was spun out in an IPO earlier this year. What percentage of the company to Fat Brands retained and what were the proceeds used for it.
Yeah, so we spun it out just at the beginning of the year, divid ending five percent of the company to the Fat shareholders and retaining a ninety five percent interest. But after management gets some options and bondholders got some options.
It's probably in the low nineties at this time.
We planned to do an equity offering at some point before the end of the year when the equity markets opened up a little bit for restaurants, and then we'll have new proceeds raised to build more restaurants, pay down debt. Those are our primary focuses today.
I read that you found your next leader of that brand, so.
We hired a dynamic new CEO named Kim Boima, who has a lot of experience thirty or forty years of experience at Texas Roadhouse, California Pizza Kitchen, and a number of other brands, a lot of bar experience from Texas Roadhouse, so he's a rock star. We're delighted to have him on board. He started maybe four weeks ago and is really settled into the position already and is focused on franchise profitability, corporate store restaurant level margin, and unit development.
We have a very big pipeline of another one hundred stores for Twin to build out over the next few years, and we're really focused on getting those stores open.
Great and Smoky Bones was included in the IPO. I think you expect to confert about half of the Smoky Bones restaurants to Twin Peaks. How much will the conversions cost compared to a new build, and what kind of auv uplift are you seeing.
It's a really interesting story, this conversion of half the Smoky Bones. There are about sixty one Smoky Bones at the time of our acquisition eighteen months ago. About half of them are convertible into Twin Peaks. The other half isn't, either because it's a trade area that's no longer attractive to Twin Peaks, or it just doesn't qualify in the lease with a landlord because of the percentage of alcohol or some other restriction. We may have a Twin Peaks
already nearby. So of those thirty ish stores that are going to convert, at least ten will be corporate, tann will be franchised, and the other ten are in between a corporate or franchise market. So we'll figure that out
along the way. We're seeing almost a doubling in sales when we convert, like we converted the first store in Lakeland, Florida, back in the fall of twenty twenty four, I was doing three point six million as a Smoky Bones and it opened up doing eight million plus as a Twin Peaks will probably settle in right around seven or eight million. Then we opened brand in Florida as well, just in the spring here in February or the end of the winter,
and we're seeing a doubling again. So we really think that Darden did a great job years ago picking the real estate for these locations when they were the original owner of Smoky Bones, and we're taking advantage of that now. We'll still end up with somewhere between twenty and twenty two, I think Smoky Bones that are freestanding, like we talked about, and we'll continue to operate those for the foreseeable future
and probably grow that brand a little bit. It's about eight or nine that will close just because it's end of lease and it doesn't make sense to convert.
Them, okay, and so in the near term the store conversions and closures are kind of weighing on your revenue and margins. When do you expect that headwind to become a tailwind?
Good question. That should end this year. We should finish the full integration of Smoky Bones into the Twin Peaks team. We'll save the business three or four million dollars of
operate expense. We also will get two or three more conversions done in the next nine months or so, so either beginning of next year or end of this year, and that will ramp up the revenue because they're doing twice as much volume as a Twin Peaks as the Smokey Bones, and when they're temporarily closed for conversion, you're not getting revenue from either brand, so that gives you a little bit of a lag. Franchisees are also starting to develop their stores and that's going to accelerate here
in the coming quarter or two. So very positive about it, very happy about it. You can't happen fast enough. From a cost perspective, it's three or four million dollars to get one of these conversion into a Twin Peaks from the Smoky Bones. But if you build a Twin Peaks from the ground up, you're going to spend two million on the land and another five or five and a half million.
To build the building.
They may do a sale lease back and pull out some of that, but it's a significant investment. So here you're spending three or four million versus seven you know, seven or eight million, you know, give or take the real estate. So it's just another approach to make it interesting. And of course, well we do these conversions, we're getting a new lease with a lot of options and things like that, so it's a it's a pretty solid way to go.
Yeah, I mean, it's a huge difference in auv it's a huge difference on investment costs. That's fantastic. How long do the conversions take?
They take about nine months now ground up build of if you buy the land build a building, it's like two and a half years by the time you do in title months and get the restaurant built, so it significantly faster. It accelerates our new unit development. It's a good opportunity for you know, the franchise e to to move quicker on some of their development opportunities. They can get some financing for it, like equipment and things like that.
So we think it'll you know, it'll really continue to lean into accelerating growth.
Okay, And what's the alcohol mix and how our customers receiving the new bar menu?
So we do about forty eight percent alcohol, which is really you know, really you know, cutting edge. It's a lot, it's a and it's a Barbelle system where you can have five dollars beers or thirty five dollars fancy tequila or whiskey, you know, whiskey shots or or on a big ice cube. So you know, there's a there's a big range there in the bar business, and there's there's we're trying to refine that a little bit and just make sure we're taking advantage of the margin with forty
eight percent alcohol. On the menu side of things, there's also a little bit of streamlining going on. We've got a very good scratch kitchen menu and you can come into the restaurant and you can eat a steak or fish, or you can have bar food and you know, you pick whether you want an entree or all kinds of appetizers.
And that's really made it a well rounded menu offering twenty five percent of the customers are female, and so you've got to have a well rounded menu to make sure you've got enough for everybody.
Salad things like that.
Of the other fifteen brands in the portfolio, which ones have the best growth profiles.
Well, about seven of them are high growth. So that's Faberger, Johnny Rockets Round Table Pizza, Fizzoli's Twin Peaks we just spoke of, and then our cookies and ice cream brand, Marble Slab Creamery and Great American Cookie. Those were all with a thousand store pipeline across all of that brands.
So in addition to the twenty three hundred restaurants open or under construction, there's another one thousand that have been paid for and signed up by the franchisees to build, and they'll build somewhere one hundred to one hundred and twenty a year going forward, and hopefully we can accelerate that even more.
So.
It's a very solid source of organic growth where we're not going out buying more brands for growth, but we're actually organically growing that at basically the zero cost.
And you're exploring the refranchising of fifty seven Fasolis units, what kind of multiple do you expect to get on them, how much do you expect to raise and how much SG and A savings will you realize?
Great question.
Yeah, So when we convert the remaining company owned Fazoli stores to franchises will be one hundred percent franchised in that system. We expect it to be a single buyer, but you never know, you know, it could raise somewhere anywhere from fifteen to twenty five million dollars depending on you know, the transaction we end up negotiating, including the royalty percentage and things like that, but that'll all go
to pay down debt. In the faciliti securitization, it'll say at least three million dollars of SG and A to FAT, So it makes us money that the amount of royalty will at least be equal to or exceed the earnings on those company owned stores. So it works, you know, plus we save the overhead. The multiple is somewhere in the four to six times rage.
Okay, and I saw that you were looking into some duel or multiple branded store types. Can you talk a little bit about that and how those are doing.
Yeah, we've been co branding for years, over a dozen years. We have Faburger and Buffaloes Express, which is a sort of a wing stop version of a chicken restaurant. So we have a number of those co branded, about one hundred of them where it's a Fatburger Buffaloes Express. And then we have some Johnny Rockets where they have hurricane wings in their restaurants. As well, and then we've done
a try brand with Hotdog on a stick. We've done a try brand with round table pizza, Fatburger and one of the other brand's chicken or wings like Hurricane or Buffaloes, and they've all been very interesting because you're just giving a broader menu appeal to your customers when they can
come in and do that. And we have finally well over one hundred of the Marble Slab ice Cream Great American Cookies units that are co branded, so you know, of course cookies and ice cream go together well, and if you're going to open one, you might as well open both and take advantage of that.
Yeah, you took the words right out of my mouth. That seems like a natural pairing for the brands that you're co branding. Are you careful about the menu size, because you know, we were reading about the dining brand's attempts to merge Applebee's and ihop, and there's some talk about the two menus kind of being too too big and too too much for employees to learn up front.
It's pretty easy for us on the co branding side because they're different brands, and so if you're doing the burger brands and you add wings, it's it's you know, it's wings and tenders things like that with.
A bunch of sauces. It's nothing complicated.
What's more complicated is if you're doing a fat burger a round table pizza, because the each have their own menus and then you you know, you add something else, whether it's dessert or you know, pretzel maker or something to it, which is pretty simple. So you really those big Try brands are really sort of two separate restaurants with one kitchen, but they're they're fully different menus. And then you know, clickies and ice cream is easy. That that is what it is. So it's not too difficult.
Nothing crazy like two casual dining, you know, restaurant menus in one that that would.
Be tough for sure. Let's talk about your franchise ease. How is access to capital and availability of quality real estate right now?
Well, it's been you know, it's been a challenge for the last couple of years as you saw inflation raise the cost of building new restaurants significantly, and you know, financing became more expensive, so franchises were dragging their feet a little bit to build stores and where we optimistically had hopes of opening between one hundred and twenty one hundred and fifty units a year. The last couple of years we've been around one hundred. Still great new store openings,
but that's all that is. Franchise is walking slower. Making sure. You know, this most recent tariff interruption sort of a non event, but definitely had franchises worried about our equipment price is going to go up yet again because there's all kinds of important equipment fryers, grills, things like that. Not so much the construction cost, but more like the important equipment. So we seem to have a calm sense of let's move forward again at full speed coming from
the franchise system. So we're hearing them all step up with their development plans, come in for plan approval, things like that at a much faster pace. So I'm optimistic that will not only get there's one hundred stores open this year, but it'll lean into a higher number in the in the hopper for next year.
It's good to hear the company reduced SG and A spending by five million a year. Where were those cuts made?
You know, there's some at the senior level where you know, we haven't been as inquisitive, so we don't need quite as much finance team experience there. And then there's just some operating efficiencies on legal department things like that, where we've you know, we've sort of been able to automate some things and it's helped us reduce cost work.
Anyone to look at that.
I think that over time and the and the merger of Smoky Bones into Twin Peaks, and then fis always converting to refranchise stores, you know, that'll that'll be upwards of a.
Ten million dollars savings on a consolidated basis.
Interesting. Yeah, I think chat GPT may be helping everybody save money on legal expenses too.
Man.
You can you can ask it to create an fd D for you know, a restaurant concept, and it comes out with some pretty interesting stuff.
Man, love that. Got to try that for sure.
Liking at all.
For sure. Speaking of lawyers, litigation expense jumped in the quarter. How much longer will that continue to be? Ahead wind to the P and L.
We think that the majority of the litigation expense goes away this year.
One way or the other.
These cases will come to an end through settlement or other means, trials, whatever, but it'll all be over this year.
Goodness utilization at the key production facility is kind of low right now, and that forty to forty five percent range. How long will it take to get to your near term goal of sixty to seventy percent and how do you plan to get there?
Yeah, we have two programs that are in the works
right now and rolling out right now. One is a test program of seven eleven where they're taking our cookies and selling them in the stores and there's an option to freshly bake them in the stores, and that has legs to it that will give us a lot of production and I think it'll go very well and the customers will really will like those freshly baked cookies in the stores with an oven that they put in and they use our fresh dough and bacon in the oven
on the spot. It's called easy Bake and it's really a great program. And then we also have a number of other chains. Chuck E Cheese is one that we're rolling out now where they're taking the Great American cookies and selling them in the restaurants. And again that's a branded product, and you know, branded products just sell better
in restaurants than unbranded products. So rather than every chain having their own cookie named you know whatever, it is, using a great American cookie, which is a recognized name that's been around for years, gives people lift and traction and helps move the product. And so you know, that's been our that's been our focus, and that will soak up quite a bit of excess capacity as it gets rolled out.
That's really interesting. What kind of lift the chains typically say.
Well, I mean it depends on your dessert mix to start with, but you know you can if you can get five percent of sales.
You're happy.
You're very happy right with you know that kind of target. So that's anywhere from two to five is what they're looking for. But it's also a good margin product, so I think it has a sort of a win win for everyone.
And do you expect to see more vertical integration in the restaurant industry? You know some of the you know, there's been articles out about lemon squeezing robots, Chick fil A and you know, salad and has been implementing you know, commissaries for a while. Do you do you see more vertical integration in this inflationary environment?
Well, you're always going to try to be efficient. You're always going to look at things that make you efficient.
But this is still a hospitality space, and guests want to interact with someone and want to see their food being made, and you know, you start to worry when you don't see anything and it's all behind a wall and it gets passed out to you. And you know, in the age of you know, making things healthier here, I think everyone wants transparency and so I mean there's always a little bit of it, and you know, some of that can help and save the margin and all
of that. But we're still in the hospitality business. We're still going to make burger shakes and fries and in front of people and pass them across the counter.
Or deliver them to their table, and you know, that's part of the experience.
What are you seeing from the US consumer across your brands because you're operating in you know, pretty much every segment of the market, you know, fast casual, criick service, casual dining, polished casual. So what are you seeing. Are you seeing any movement in terms of you know, spending by low income consumers, middle income consumers. What are you seeing from your brands.
We're very happy that we're not in fine dining these days because find dining, you know, it's really tricky in terms of consumer confidence and how much they're going to spend. And then you have inflation creep where you know, to go out to dinner and find dining restaurant the price is almost doubled over the last five years, and you that sticker shock beyond belief right in At the lower tiered brands QSR, fast casual, et cetera. You've seen people
trade down. They've traded to the left, So a fast casual might have gone to a QSR and so on. Casual dining may have traded a fast casual. We're seeing a resurgence in casual dining today. It's definitely positive. Wings brands, you know, polished casual as well coming back nicely. QSR, you know, has an issue if you can't really trade down for it. So there's all kinds of value propositions out there, and I think that at a high level in all of the categories, what operators need to be
focused on is the guest experience. What I'm going to call the value proposition, and I don't mean the value meal where you get a burger for a dollar or three dollars or whatever. I mean, if you're going to charge somebody six dollars for a cup of coffee, it better be a great experience, right, Or you're going to charge them twenty dollars for a burger, shakes and fries, it better be a great experience and a great product
and be seamless. And I think that's the value proposition today is people understand that there's inflation, there's been a price increase, but it's got to be seamless. You can't have a bad experience in charge a high price.
So on the last episode, we had been talking a little bit about the resurgence of casual dining and some of the things that came up where you like, QSR was able to raise prices for about a year and a half while while casual dining chains were largely closed and the supply, demand and balance has kind of shifted to because there's been a lot of closures in full service,
but quick service has gone on. And it's interesting too that there's a shift towards what you get for what you pay, and I guess part of that is people are still employed, right it's.
Definitely the consumer demanding that they get what they pay for. Like I've never seen before, there's very much a focus on if I'm going to pay twenty dollars for a meal, it needs to be a great experience. I need to know what I'm getting and it's got to satisfy me. And conversely, if I'm going to pay five dollars for a meal, that's great, it's a great value, it works in my budget.
It's qsr Fazolies is a perfect.
Example of that, where we have a number of items that are five dollars or less and you can it'll fill you up and you'll get through it and you know you're not emptying your wallet out just to grab a quick bite. So I think you have to be prepared to address what the consumer wants. You know, when we sell a beer for five dollars at Twin Peaks,
you know that goes along ways. You know, somebody on a budget wants to have frequency and come in often, which we have a very very high ninety six seventy seven percent black box intelligence intend to return from the guest survey. That's saying, hey, I had a great experience,
it was a great value. I want to come back and if they can come back, and the peers are five dollars, they're going to come back a lot, right, And it's we probably do cold beer better than anyone anywhere, twenty nine degree cold beer, and so it's really you know, it's an experience. It's well priced, and you can watch
any kind of sports game that's on. We have it, and I think that is our competitive advantage in that end of the spectrum where you can add value and still be in a polished environment.
Yeah, everyday, value is so important in this environment, no matter what the segment you're operating in. Improving operations has been a hot topic for the companies I cover. Is this a point of focus for any of that brands chains in twenty five or twenty six.
It absolutely is.
I mean, certainly at our company on store units, looking at the restaurant level margin, looking at efficiency is critical. Making sure that our pricing is in line with our peers and that we're competitive, but we're not leaving margin on the floor. I think that's something that you know, will continue to focus on, particularly on the alcohol side of things, where you know you've got to just be careful because there's margin you you can leave on the table if you're not careful.
Cool And how did fat brands come to be.
Well, we started with our first acquisition over twenty years ago with the Faberger brand when it had forty restaurants in California and Nevada, half franchised, half company on stores. And we grew that brand, sailed through the recession in two thousand and seven eight nine, which was which was very difficult, and then bought the Buffalo's Cafe brand in twenty eleven and kept going and growing and co branding.
Did a lot of international franchise sales during those years, big sales in the Middle East and Asia, things like that. And then we bought Ponderosa, Bonanza in the steakhouse chains All you can Eat Baffetes in twenty seventeen as part of our IPO on the Nasdaq, and at that point, you know, we've been acquiring brands ever since. Now we have a total of eighteen brands actually, and we've continued to add them to.
The portfolio when it makes sense.
We were on an acquisition spree in twenty twenty and twenty twenty one during COVID when there was a lot of stuff for sale and not a lot of buyers, so we opportunistically were at the table making transactions work out for us where we could, and the efficiencies of integrating the back office like one accounting department, one legal department, marketing by brand, but not different departments things like that,
where there were significant operational efficiencies. And Twin Peaks and Smoky Bones is a little different because it's such a heavy alcohol business forty eight percent alcohol on the Twin Peaks side, that we've left that business independent and tried to there's some shared services in some back office things that we can do, but it's really on its own today and it's positioned to be a separate public company, raised its own capital and grow and we think it's just a lightning.
Rod for growth in the Polish casual a dying space.
Yeah, it's an interesting story, man, I look forward to continuing to follow it. Thanks for doing this, Andy.
Great, thanks for having me. Great to talk to.
You, sure thing, and I want to thank the audience for tuning in. If you'd like to learn more about fat Brands and you don't have a Bloomberg terminal, visit fat brands dot com. If you liked our discussion, please share it with your friends and colleagues. Check back soon. My colleague Daniellis, Sir Torri, will be interviewing me about our second half outlook for the restaurant and food service industries