By the Numbers Valuations: Restaurants and Pizza

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By the Numbers Valuations Restaurants and Pizza

• Mgt 357 Summer, 08
• Galbraith

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Importance of numbers

• Food Service is really a food factory, needs to
  be run and managed like a production process
  (CEO, Foodmaker now Jack-in-the-box)
• Comparable numbers are readily available
• National Restaurant Association,
• Specialized vendors (Pizza, etc.),
• Traditional ratio sources (RMA, Troy, DB),
• Comparable sales (PratStat, Bizcom)
• Financial Statements of publicly traded firms
  (ex. Joes eatery, JOES.OB)

2,098 (2007) stores mostly corporate
owned Expanding in NC Acquired Qdobe 353
nouveau Mexican Jack in the Box Inc.9330 Balboa
Ave.San Diego, CA
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Restaurant Categories

• Fine dining (40.00 per check)
• Casual (fastest growing segment)
• Specialty (micro-brews, steakhouses)
• Ethnic
• Eatertainment
• Family (losing market share)
• Chains (Dennys)
• Independents

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Restaurant Categories

• Home Meal Replacement (mid-price) big losses
• Kenny Rogers
• Boston Market
• Quick Service
• Off-premise (take-out)
• On-premise
• Pizza

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Restaurant Categories

• National Chains, Regional Chains, Independents
• Chains market share slowing down
• 1972 30.2
• 1978 40.2
• 1983 44.6
• 1989 46.6
• 1992 46.4
• 1996 49.3
• 1999 49.9
• 2002 49.6
• 2005 49.2
• Regional Chains are most competitive

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Key Ratios Restaurants

• Food and Beverage Cost-Sales Ratio
• Product Cost Percentage
• Labor Cost Percentage
• Prime Costs Percentage
• Occupancy Costs
• Net Profit
• Menu Contribution Margin

• Seat Turnover (turns)
• Residence Time
• Production Time (per meal)
• Same Store Analysis (for multi-restaurant firms)

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Some Ratios - Restaurants
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Pizza Statistics
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Pizza

• Limited/fast service restaurants
• 34.6 (product cost),
• 29.2 (labor cost),
• Prime cost of 63.8.
• Pizza industry average prime cost are reported
  somewhat lower,
• 60 average, with a
• 55 prime cost considered above average (source,
  PMG)

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Independent Pizza

• Independents continue to gain market share of the
  total number of pizzerias in the U.S.
• Now comprise 64.3 percent of all the pizzerias in
  the U.S., which is up from 64.2 percent in 2004.
• However, sales declined as a percentage.
• independents earned 49.22 percent of the
  industry's total sales compared to earning 50.7
  percent of the total industry sales the previous
  year.
• For 2004, independents earned an average of
  338,745 per/unit compared to 341,534 per/unit
  the previous year, for a decrease of 0.8 percent.
  

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Chain/Franchise Pizza

• Franchise locations appear to be capturing sales
  in the pizza category.
• Chains increased their share of the total
  industry sales to 50.78 percent of the 30.9
  billion dollars in pizza sales.
• Average per/unit sales for the period between
  July 2004 and July 2005 was 629,334, which is up
  3.6 percent from 607,364 per/unit the previous
  year.

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Pizza - The Big Four

• Pizza Hut's sales were up 4.5 percent while units
  were down 0.3 percent from the previous year.
• Of the chain/franchise pizza facilities, Pizza
  Hut remained the largest operations
• 17.02 of the total U.S. sales in the pizza
  segment
• 10.74 of the units.
• Per/unit sales for Pizza Hut were 701,467 for
  2005.
• Of the Big Four (Pizza Hut, Dominos, Papa Johns
  and Little Caesars)
• Pizza Huts - up 2.10 percent.
• Dominos up 3.48 percent and
• Papa Johns - up 0.14 percent
• Little Caesars - down 7.60 percent

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Pizza Trends (2007)

• Ethnic Fusion Flavors
• California Pizza Kitchen
• Latino Flavors (top 5 product)
• Healthy (lower calories, organic, etc.)
• Gluten free pizza

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Pizza Hut History

• Pizza Hut was established in 1958.
• Currently its the largest operator of pizza
  establishments in the U.S.
• In 1977 Pizza Hut was acquired by PepsiCo, Inc.
  As part of the PepsiCo, the Pizza Hut franchises
  benefited from cooperative sales of Pepsi-Cola
  brand soft drinks and Frito-Lay brand snack
  foods. In October 1997, PepsiCo spun off the
  restaurant businesses (Pizza Hut, KFC and Taco
  Bell) and Tricon was founded. On May 16, 2002,
  Tricon officially became YUM Brands, Inc. with
  the addition of two new brands, Long John
  Silver's and AW. YUM Brands, Inc. is now the
  parent company of Pizza Hut, Taco Bell, KFC, AW
  and Long John Silver's.
• YUM Brands now make up the world's largest
  restaurant group.

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Pizza Hut - Product Offerings

• Pizza Hut operates in 86 countries and
  territories throughout the world.
• Approximately 23 percent of the U.S. units and
  21 percent of the non-U.S. units are operated as
  corporate units.
• Pizza Hut features a variety of pizzas, which may
  include Pan Pizza, Thin n Crispy, Hand Tossed,
  Sicilian, Stuffed Crust, Twisted Crust, The Big
  New Yorker, The Insider, The Chicago Dish and
  4forALL.

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Valuing Restaurants

• Adjust sellers financial statement to account
  for a) personal expenses, b) managers salary, c)
  other extraordinary items
• Assess against industry standards
• Compute cashflow
• Select cashflow capitalization rate
• Determine value

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Valuing RestaurantsKey Issues

• 10 year lease, or 5 year with option
• Rent between 6 to 10 of sales
• Determine causes of large variances with industry
  standards
• Can cashflow cover debt and taxes and still make
  profit?
• Are sales increasing
• Are assets in good shape

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Valuing RestaurantsRules of Thumb

• New Restaurant should make 2 1/2 times investment
  first year.
• Value equals one times revenue (with real estate)
• Value equals 1 to 11/2 times adjusted earnings
  plus inventory and equipment
• Value equals 30 to 40 revenues (without real
  estate)