Guzman y Gomez rivals hold off on IPOs, await further rate cuts

Craveable Brands, Grill’d and El Jannah are among the quick service restaurants that may consider a listing on the ASX in the future. Picture: Jake Nowakowski

Quick-service restaurant chains are eyeing the success of Guzman y Gomez’s initial public offering, but industry sources indicate they are holding off on similar moves until further interest rate cuts materialise.

It comes as three of the Australian industry’s dominant players presented at the Morgan Stanley Australia investment summit in Sydney this week, outlining the industry challenges and opportunities.

Among those presenting were Karen Bozic, chief executive of Oporto Chicken owner Craveable Brands, Grill’d founder and managing director Simon Crowe, and Brett Houldin, who is the chief executive of the upcoming Lebanese fast-food chain El Jannah.

They operate in what has been an increasingly competitive industry in which the Mexican food chain Guzman y Gomez is chasing growth after it launched an initial public offering on the Australian Securities Exchange.

Guzman y Gomez embarked on a small IPO at $335m with shares sold at $22 and they are now worth $29.54 – and the company has a $2.96bn market value a year later.

Industry sources say this success has created a desire among its rivals to follow suit as a way to fund growth.

However, at the summit the panel described how market conditions were flat to negative for businesses operating in the sector, as consumers wanted cheaper prices at a time when costs were rising.

Ms Bozic said the hope was that a few more interest rate cuts would encourage more consumers back to the market.

The industry had also grown increasingly competitive; US fast food giant Wendy’s entered the market this year.

Craveable Brands has tried a market listing in the past but backed away from the plan, yet some analysts think it is now a mature business and an IPO would be a tough sell.

Asian private equity fund PAG purchased Craveable Brands, which owns Chicken Treat, Red Rooster and Chargrill Charlie’s as well as Oporto, in 2019.

The Carlyle Group last year was in talks to buy the business, expected to be worth about $1bn, but a deal never eventuated.

A listing could be a positive move for Grill’d, which currently has about 175 restaurants and has ambitions to grow to between 300 and 500, but analysts said it would need to demonstrate it had a point of difference in the market.

Of the three presenting, analysts believe that El Jannah, with 42 outlets, had the best investor appeal for an IPO because it was still in the growth phase, and a greater amount of earnings potential was ahead of it.

Grill’d had increased prices by 15 per cent over five years, Mr Crowe said, comparing that to a 25 per cent increase for the McDonald’s Angus burger in that time.

Grill’d did not compete with McDonald’s, but the gap was getting closer, he said.

And he warned of the dangers of discounting and chasing store growth at the expense of quality, citing examples of groups in the UK which had done so and “never came out of it”.

Boost Juice and Betty’s Burgers owner Retail Zoo, which is one of Adamantem Capital’s investments, could also be a float prospect.

Boost Juice was a solid market performer and a stable business, but Betty’s Burgers’ efforts to grow into a successful and growing burger chain had been met with challenging market conditions, market sources say.

Restaurant chains were resilient but there had been widespread closures of cafes and individual restaurant businesses amid the weaker economic conditions that came with rising costs, they said.

Grill’d, El Jannah and Craveable Brands all operate with a franchise model, which meant that maintaining high quality and consistent standards needed particular focus.

Eating into market share had been value deals offered by pubs, whereby meals were adding up to be cheaper.

Research firm IBISWorld said that of Australia’s fast-food burger shops, McDonald’s had 49.6 per cent of the market share, ahead of Hungry Jack’s owner Competitive Foods with 21 per cent and Grill’d with 4.3 per cent in an industry that had low barriers to entry.