Cara missing out on rising appetite for breakfast
Restaurant owner slides amid lack of new deal, tepid demand for casual dining
Cara Operations Ltd. has made its mark as a mid-market restaurant consolidator in recent years, scooping up a number of casual dining chains for a good price, but consumer appetite for the sitdown segment remains modest at best.
Cara, owner of Swiss Chalet, Milestones and Montana’s, saw its shares slide 4.6 per cent Monday at one point after the company released third-quarter results in line with industry expectations. Analysts attributed the drop to Cara’s lack of a new deal: It had been speculated that Cara might acquire Quebec-based rival Imvescor Restaurant Group Inc., which owns the chains Baton Rouge and Scores. Imvescor confirmed two weeks ago that it had received interest from a third party.
But acquiring yet another casual dining business might not be the wisest move for Cara, given the direction of consumer trends.
Sales and traffic in the full-service dining segment have been sliding for almost a decade and have yet to bounce back from prerecession levels.
In the meantime, sales at quickservice restaurant chains such as McDonald’s now account for 52 per cent of Canada’s $52-billion food service market and have grown at a rate of three per cent this year, according to market research firm NPD Group.
Sales at full-service restaurants have declined two per cent this year, NPD says, and now account for about 40 per cent of the market overall. Cara’s sales at restaurants open for more than a year were flat for the first three quarters of the year compared with the same period a year ago.
The fastest-growing meal segment is in ready-prepared meals at grocers and other retailers, NPD says, with an eight-per-cent market share and sales growing at a rate of 20 per cent a year.
“Since 2008, the full-service restaurant business has been declining in terms of dollars and traffic — that’s a drop of hundreds of millions of (customer) visits,” said Robert Carter, executive director of food service at market research firm NPD Group, adding 2017’s industry performance has mirrored the gains and losses of 2015 and 2016. And while Cara owns Harvey’s and New York Fries, the restaurant company remains heavily skewed to the full-service restaurant segment.
“It’s a challenging marketplace,” Carter said. “Cara has had opportunities to consolidate at the back of the house to become more profitable, and that is working for them. Moving forward, (quickservice restaurants) present some opportunities for them. When we look at the areas of growth in the marketplace, the fastest-growing area is breakfast, and Cara has virtually no presence in that category.”
If Cara were to acquire Imvescor, it would make a gain in that segment through the budding Ben & Florentine chain, which sells smoothies, egg dishes and sandwiches in Quebec, Ontario and Manitoba.
Analyst Mark Petrie at CIBC said minimal unit growth at Cara, lower renovation targets and pending minimum wage inflation are among the company’s key challenges. It will be difficult for Cara to generate earnings growth without an acquisition, the analyst said Tuesday, given the continued stagnant organic performance of its core operations.
While acquiring Imvescor Group would increase Cara’s franchising levels, Petrie believes the company is already over-indexed in the casual dining category. Cara announced last month that it had acquired Pickle Barrel, a full-service restaurant chain with 12 outlets in the Toronto area.
“The recent Pickle Barrel deal likely came at an attractive price (an estimated six times operating earnings) but we view increased exposure to malls, company-run stores and casual dining as negative aspects of the deal,” Petrie said in a note to clients on Tuesday.