Posted by Rod Guinn on December 25, 2009 at 12:30am
Having just seen (again) Steve Martin’s classic sketch regarding Christmas wishes from an old Saturday Night Live, I’m tempted to follow suit, but will try to resist. Still, if I were granted just one wish this Christmas, ...I’d wish for confidence. There are hazards remaining between us and a robust recovery, including the still-unresolved issue of commercial real estate defaults across lenders’ (and investors’) portfolios. Still, most economists and analysts believe that this issue, as well as others, is already factored into the cost of debt and equity (share prices and private valuations) at this point. A little confidence -- on the part of investors, who have stalled on opportunities because of uncertainty; on the part of lenders, who (institutionally, at least) no longer trust their own judgment in identifying good opportunities; and most of all on the part of consumers, who will be hesitant until the jobs picture is clearer -- could do wonders for the restaurant industry in 2010.If I were granted more wishes, ...I’d wish for an easy way to track what’s happening across this industry. We sometimes forget just how vast the restaurant industry is. No one source provides a complete snapshot of what’s going on, and perhaps it’s impossible, but wouldn’t it be nice ...I’d wish for a clearer understanding of the “rules of engagement” among operators, lenders, and investors.Said more clearly, I’d wish that operators, in particular, understood that, for the most part, there ARE no pre-established ground rules, and each engagement between operator and lender, or operator and investor, must include agreement on the rules of engagement for that particular relationship. All parties would be happier, and relationships likely more profitable, if this were understood up front; apart from some legal boundaries regarding lenders (which might be a useful topic for a future column), it’s fair to say that financial relationships among investors, lenders, and operators are like Tolstoy’s description of unhappy families -- each is unique.I’d wish for non-fat pie that tasted like the real thing. Hey, nobody said these were easy, and I’d really like that! It’s not quite up there with economic confidence, but you can’t blame me for dreaming.I’d wish that investors, lenders, and operators recognized the deficiencies and risks of their two most common metrics. Public equity analysts, in particular, have trained both their investors and the companies they cover to focus on “comp store sales”, almost to the exclusion of all other measures. There’s no denying the value of positive comps, but there’s also no denying the things it ignores -- customer counts and promotion-driven sales, among others. Similarly, private investors and their lenders focus so strongly on EBITDA (remember -- earnings before interest, taxes, depreciation, and amortization) as a basis for valuation that they sometimes de-emphasize things like the necessity of re-investment. As I’ve suggested in the past, and will no doubt repeat ad nauseum in the future, there are many other considerations which should influence proper valuation (and therefore help to avoid over-levering operations) beyond same store sales and EBITDA.I’d wish for more creative thought among marketers. Is there nothing better to offer than discounting? Granted, in tough times, it’ll attract customers who might otherwise have chosen to stay home, but it also (1) trains those customers to be enticed by further discounts, and (2) suggests that perhaps the offerings WEREN’T appropriately priced beforehand. Neither of those results in loyal, satisfied clientele.Still, if I could only wish for one thing, it’d be confidence -- for the consumer, the operator, the lender, and the investor. Merry Christmas, Happy New Year, Peaceful Solstice, and Joy to all who celebrate.