Some customers are leery of changes at Jersey Mike’s since its sale to a private-equity firm. | Photo: Shutterstock.
Planning to sell your brand to a private-equity group? Better hope your customers don’t find out.
This month, the publication Texas Monthly wrote a profile on Whataburger, “Whataburger isn’t what it used to be.” The story, which was more benign than the headline might suggest, was a look at the venerable San Antonio-based fast-food chain six years after its sale to a private-equity firm.
The story highlighted some complaints on social media from customers complaining about what they see as changes in the brand since its sale to a private-equity firm.
Of course Whataburger is different. Lots of companies change over a six-year period, especially these past six years. And this is a chain with a new owner, new management and a mandate to take the brand national, a mandate we can only assume that the family that sold the chain endorses, given that it sold the brand in part to speed that growth process.
Whataburger’s fans, however, are worried about the impact that sale is having on the company.
We see this plenty these days. A lot of consumers do not like it when their favorite restaurant chain is sold to a private-equity firm, and they’re paying close attention to that chain whenever that happens.
To wit: Jersey Mike’s was sold early this year to the private-equity firm Blackstone. Some social media users have compared sandwiches they bought from the chain before that sale to the sandwiches served now.
One user saw their latest sandwich with a lot less meat and concluded this is proof that private equity is ruining the sandwich chain.
Never mind that the owner of a franchisor system probably has more incentive to sell more meat, not less, or whether you can judge a full chain by the performance of one sandwich sold at one location during two separate visits. Also, Blackstone hasn’t owned Jersey Mike’s long enough to really ruin the chain.
@eatoutwithjason RIP to @jerseymikes 🫡 Go support your local sub shops #sandwich#review♬ A Charlie Brown Thanksgiving – Holiday Music & Sounds
Private-equity groups do what they have been designed to do: Make money. Pension funds and other institutional investors need such groups to generate returns for their members.
The restaurant industry has been a big beneficiary of such groups and need their investment to grow. Credit markets are often skeptical and difficult. Restaurants are too small and not technology enough to get all that much interest from public equity investors, so IPOs are often unavailable (and many such companies do not actually want to go public). Private-equity groups often step into that void.
It’s also not as if private-equity firms are the only owners of companies that do bad things and make compromises. We’ve covered a lot of corporate malfeasance over the years and a lot of it was at companies not owned by private-equity firms.
All that said, private-equity firms do a lot of things that are certainly worth criticism. They make cynical bets on companies and decide either to invest in their growth or drain them of cash. They sell off assets too aggressively. They rely too heavily on franchising. They load companies with enormous amounts of debt. They push overly aggressive growth. They emphasize short-term results over long-term investment. They cut workers. Their aggressive tactics often lead to bankruptcy filings. Sixteen percent of bankruptcy filings are of private equity-owned companies.
The consumer is keenly aware of such groups’ faults. Just look at responses to this question on the social media site Reddit on private equity. And of course there are plenty of headlines on private equity, like this one, this one or this one.
Social media, as it does with just about everything else, has inflamed a lot of these concerns and fears.
Consumers are so fearful of such firms’ impact on their favorite chains that they will literally take videos of their sandwiches and compare them with videos of the same sandwiches a year later.
This makes private-equity ownership itself a risk factor in the ultimate performance of a restaurant chain even without factoring in whatever that firm does with the chain.
