Fat Brands, MTY and the limits of restaurant chain consolidation

Wetzel’s Pretzels sales thrived last year, but the results are hidden by weakness at MTY’s other brands. | Photo: Shutterstock.

This hasn’t been a great year for restaurant chain collectors.

Last month, the Canadian company MTY Food Group, coming off a difficult quarter, said that it is considering a possible sale. Its stock is down 15% so far this year, and it would probably be worse but for the sale report. 

Meanwhile, the Beverly Hills, California-based Fat Brands appears headed for a bankruptcy filing after the trustee on its securitization financing demanded full payment on its nearly $1.3 billion in loans.

It may be unfair, certainly to MTY, to lump these two companies together. Fat Brands’ major problem is excessive debt, after all, and it is facing fundamental questions about its viability. MTY is just looking for a buyer following years of weak stock performance. 

Yet both companies demonstrate a truism: You are what you eat. Or, in this case, you are what you buy. 

When companies acquire low-priced, secondary concepts, they get low-priced secondary concepts. You can cobble them together into one organization, cut costs to the bone and use whatever financial engineering is available, but it is still a collection of difficult chains, and now they’ve gone through the headaches ownership and management changes.   

And if you do get lightning in a bottle and one of those brands thrives—as Wetzel’s Pretzels does with MTY—it gets lost amid all the underperformance.

Both Fat Brands and MTY were largely built to collect franchise brands. The royalty stream generated by franchised brands can be more profitable than running restaurants and is more resistant and more predictable to boot. And they both operate a lot of concepts. Fat Brands operates 16 concepts. MTY operates an ungodly 90, many of them exclusively in Canada. But most of its sales and profits come in the U.S.

Let’s look first at Fat Brands.

Last year, the company said that its system sales from its concepts, both in the U.S. and internationally, collectively grew 3.1%. 

But last year the average Fat Brands chain’s system sales declined 6.1% in the U.S. Most Fat Brands concepts reported a decline in domestic system sales last year outside of Twin Peaks (5.4%) and Round Table Pizza (1.7%).

Three, Pretzelmaker, Ponderosa/Bonanza and Elevation Burger, saw sales decline more than 10%. 

This year has been progressively worse, with collective system sales declines of 1.8%, 3.7% and 5.5% in the first three quarters. Its overall same-store sales have fallen for eight straight quarters. Revenue at the company to date is down 4%. For a company with that much debt, that’s tough to swallow.

MTY is a bit more complex. Its U.S. chains averaged a 3% system sales decline last year. And it has some well-performing brands. Cold Stone Creamery’s sales grew 3.5%. Planet Smoothie grew 4.8%. Wetzel’s Pretzels, arguably MTY’s best acquisition, grew 8.8%. Barrio Queen grew 10.6%, according to Technomic data. 

But like Fat Brands, most of its chains have underperformed. That includes Papa Murphy’s, MTY’s biggest overall holding, whose system sales fell 4% and whose sales have struggled this year. Collectively, its system sales and revenues fell and, unsurprisingly, so did its EBITDA, or earnings before interest, taxes, depreciation and amortization, along with its net income.

This year the company’s system sales have increased so far this year, but that’s largely thanks to its Canadian and international performance. But MTY’s U.S. brands collectively declined 2% in the third quarter, led by the underperformance of Papa Murphy’s. Its overall profitability has improved. But its U.S. weakness and a general malaise on Wall Street toward restaurants have kept investors away.

While MTY certainly isn’t facing the existential crisis of Fat Brands, it still has a stock price down 14% so far this year and 34% over the past five years. The company is now looking for a buyer, but that buyer will take a hard look under the hood of the chains MTY operates and many of them are in need of repair.

Operating multi-brand concepts in theory should enable companies to pool resources while the model hides underperforming brands. But when most of the brands are underperforming, it’s the strong chains that get hidden.

Restaurant Business Editor-in-Chief Jonathan Maze is a longtime industry journalist who writes about restaurant finance, mergers and acquisitions and the economy, with a particular focus on quick-service restaurants.

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