A rising tide lifts all boats, the old adage goes, and as consumers move away from brown-bagging their lunches every day, that means a boon for the restaurant industry and, in turn, for those who finance restaurants and franchises.

“It’s one area that held up during the recession, even though a lot of people didn’t expect it to,” said Debra Scribner, a partner at Posternak Blankstein & Lund who specializes in financing restaurant franchises.

Take, for instance, the National Restaurant Association’s report that monthly restaurant sales exceeded monthly grocery sales for the first time on record in December 2014.

Citing U.S. Census Bureau data, the trade organization said the gap between monthly restaurant sales and grocery sales began shrinking in 2010, but perhaps the most striking shift has happened over the prior year. In June of last year, grocery store sales exceeded restaurant sales by $1.6 billion, but by April that trend had basically reversed itself, with restaurant sales exceeding grocery sales by $1.5 billion.

That $3.1 billion over that 10-month period is nearly as much as the industry did in sales over the prior four and a half years, the association said.

“The industry is very, very healthy. The meals-away-from-home segment continues to be very robust,” said Dave Farwell, Citizens Bank’s head of franchise finance. “The consumer is probably the strongest it’s been over the last 10 years.”

Citizens Bank, which recently provided a $20 million credit facility for Uno Restaurant Holdings Corp., broke out its restaurant financing business into a separate vertical about eight years ago, Farwell said.

“The industry has its own heartbeat. You really need to be attuned to consumer behaviors, what the trends are, what makes a successful restaurant company, why someone likes one restaurant company over the other, and having someone think about that and live it 24/7 helps you make better credit decisions,” he said.

Both restaurant traffic and spending are up, and that in turn drives new unit growth, Farwell said.
“This is not just sales increases because of prices,” he said. “These are more discrete visits to restaurants. Restaurateurs are feeling very confident in their business plans, and that’s resulting in the most new unit growth in the past 10 years.”

Fast-casual restaurants are stealing market share more quickly than any other segment, he said. Literature Citizens provided about its restaurant financing business cites Technomic’s 2014 Top 150 Fast Casual Restaurant Report in projecting a forecast of 10 percent annual growth in that sector through 2017.

“There’s a move towards healthy and fresh, and that fast-casual group is doing a very good job garnering that incremental market share, on both a national and regional basis,” Farwell said.

Other Sources Of Financing
But bankers aren’t alone in noticing this increasingly profitable industry with financing needs.
“A lot of private equity has woken up. … Now banks are competing with private equity to make those sorts of deals,” Scribner said. “I can’t say that there’s been a spigot of pension funds making investments, but there was one very large deal recently with a pension fund.”

Scribner is talking about a deal last year in which the Ontario Teachers Pension invested $300 million into the Flynn Restaurant Group, a large-scaled franchisor that operates hundreds of Applebee’s and Taco Bells nationwide.

That influx of private equity may be why Patrick Sullivan, Massachusetts president at People’s United Bank, said he personally hasn’t seen much demand for credit from the restaurant industry. For the most part, when People’s lends money to a restaurateur or a franchisor, it’s to a smaller franchisor – a “mom and pop” type of operation – and usually that money goes toward some real estate-related purpose, like improvements, he said.

The Bridgeport, Conn.-headquartered bank does not build out its restaurant lending into a separate silo like Citizens does, but Sullivan said that his bank still sees plenty of demand from that industry for deposit products, payroll services and cash-flow services.

“It’s clearly a trend that private equity sponsors are more and more active in the restaurant business,” Farwell said. “We don’t necessarily see them as competition because we play on different sides of the balance sheet, the equity side and the senior lender side.”

Often, he said, the bank will actually work in conjunction with a private equity firm to finance one of those purchases.

Still, Scribner expressed some concern about that trend.

“I don’t think it’s a secret that the amount that people can borrow against their earnings is becoming quite frothy. If you have so much money chasing so few credits, things tend to get out of hand,” she said. “That’s what I get nervous about, but I was nervous about it three years ago. At some point it’s going to top out, but we don’t seem to be there yet.”