Last week, the private equity firm High Bluff Capital Partners bought Quiznos’ parent company for an undisclosed sum. Quiznos joins the dozens of popular fast-casual chains that have been bought by private equity firms in recent years. The quickening pace of private equity buys in the food sector is bringing greater scrutiny to an opaque business model and its ramifications for companies’ workers.
A few private equity firms have emerged as major powerhouses in the food sector. JAB Holding Co., a German firm, has rolled up many coffee brands and chains. Roark Capital Group, based in Atlanta, now owns several restaurant chains. 3G Capital, a Brazilian firm that often does deals with billionaire investor Warren Buffett, owns global packaged food brands.
The rise of private-equity ownership worries some labor advocates, who say the model can disadvantage workers. “These private equity acquisitions have only one motivation, which is to squeeze as much money out of the assets acquired and the organization itself,” said Jose Oliva, co-director of the Food Chain Workers Alliance. “From that perspective, the higher the pay and benefits workers have, the more they’re perceived as liabilities.”
Private equity purchases in the restaurant sector have accelerated in recent years. In 2016, private equity firms spent $1.4 billion on such deals. In 2017, they spent over $4.5 billion. This year has already seen several major deals. In May, JAB bought Pret A Manger. In April, a private equity group bought the Mexican restaurant chain Rosa Mexicano. In January, JAB’s Keurig Green Mountain bought Dr. Pepper Snapple Group for $19 billion in the largest soft drink deal ever.
And 2017 was a hallmark year for such deals, too. Last December, Apollo Global Management bought Qdoba for $305 million. Last November, Arby’s owner Roark bought Buffalo Wild Wings for $2.9 billion, and launched a new restaurant chain, Inspire Brands. And last February, Restaurant Brands International, an outgrowth of 3G Capital and owner of Burger King and Tim Horton’s, bought Popeye’s for $1.8 billion.
Private equity deals are commonly explained through a metaphor of home ownership. Say you buy your neighbor’s house, and you make a down payment while taking on the rest of the cost of the house in a mortgage. In a private equity model, you own the house, but your neighbor has to cover the mortgage payments. If they don’t make those payments, you can sell the house and take in the profit.
This structure exposes food companies to a huge amount of risk. The companies are responsible for paying off debt that the private equity firm used to buy them, without any major revenue growth. “Private equity firms have no responsibility for all this debt that they put on the companies they own,” says Eileen Appelbaum, co-director of the Center for Economic and Policy Research.
Because private equity targets have to take on so much debt, layoffs are common. Just four months after its acquisition of Buffalo Wild Wings, Inspire Brands revealed the elimination of 132 positions at BWW’s corporate offices. Since the 2013 merger of Kraft and Heinz, which was facilitated by 3G Capital, over 10,000 workers have been laid off and seven plants shuttered. A regional supermarket chain in Indiana, Marsh Supermarkets, that had been bought by Sun Capital Partners in 2006, laid off more than 1,500 workers last year.
Appelbaum stresses that private-equity deals can result in positive financial outcomes. But the risks associated with assuming large amounts of debt are higher than many businesses would take on without the influence of a private equity firm. And once burdened with debt, companies become less able to adapt to changes in the marketplace or economy. “You don’t have resources if you have been loaded up with debt and the real estate has been sold out from under you,” she explains.
Private equity deals in the food sector go back to at least 1988, when, in what the Washington Post described as the “biggest corporate takeover battle in U.S. history,” private equity firm KKR took over Nabisco in a $24.5 billion deal. Another watershed deal came when Friendly’s was bought by private equity firm Sun Capital Partners in 2007 (it was sold to dairy giant Dean Foods in 2016).
Private equity has had negative effects in other sectors, as well. Toys “R” Us, for instance, was bought by two private equity firms and a real estate investment company in 2005. The company had $1.86 billion in debt before it was bought, and $5 billion in debt right after the deal. Its sales remained nearly the same, however, and it declared bankruptcy in March.
As a result of all this deal-making, some private equity firms have become extremely dominant in the food sector. Roark alone, by way of Arby’s and Jimmy John’s (which it acquired in 2016), controls over 26 percent of the sub sandwich market. The firm also owns Cinnabon and Seattle’s Best, Carvel, Auntie Anne’s, Moe’s, Corner Bakery, Carl’s Jr. and Hardee’s, Atkin’s, and more.
JAB continues to roll up the coffee business, and the firm now owns Au Bon Pain, Panera, Keurig Green Mountain, Caribou Coffee, Krispy Kreme, Peet’s, Einstein Bros, Stumptown, and several other coffee brands in addition to Pret A Manger. Executives from Roark and JAB were two of the top three industry leaders featured in Nation’s Restaurant News’ 2018 ranking of industry power-holders.