To learn more about the current state of restaurant investing, Modern Restaurant Management (MRM) magazine spoke with Uday Ahuja, Chief Investment Officer at RSE Ventures, who played a key role in investing and identifying/growing scalable consumer brands restaurant concepts including Momofuku, Milk Bar, Fuku, Bluestone Lane, and Magnolia Bakery. During the pandemic he helped advise Milk Bar CEO Christina Tosi’s shift from retail to ecomm—resulting in the launch of Milk Bar’s rapidly expanding collection of CPG products. He also worked closely with Dave Chang and Marguerite Mariscal on Momofuku’s extension into CPG.
What makes a brand scalable?
There are multiple different ways brands can achieve scale. In our experience, having an omnichannel presence certainly helps, but there’s no “one size fits all” strategy. Whether that is omnichannel in nature (e.g., direct-to-consumer/CPG) or strictly brick and mortar, I think investors are generally looking for repeatable concepts with consistent performance across a broad swath of markets, as well as locations and units.
You first need to have a deep understanding of your category, as well as the key drivers that make your business stick, before assessing which growth strategy is the right fit.
At RSE, for example, we have been actively looking at more CPG brands than ever before. A CPG product can be a great way to bring something special from one concept nationwide in an efficient, economical manner. While this can help brands achieve scale in a relatively short duration of time, it’s not something that can (or should) be forced. The addressable market ultimately needs to be large enough for these products; otherwise, you’ll likely end up with something niche, at best, which won’t serve the overall goal of scalability.
At the end of the day, I think it is ultimately rooted in the fundamentals of your brand. You first need to have a deep understanding of your category, as well as the key drivers that make your business stick, before assessing which growth strategy is the right fit.
How are consumers changing and what do they want/expect from restaurants?
The macroeconomic environment has fluctuated dramatically in recent months amid looming inflation and growing concerns of a possible recession. I think consumers will continue seeking more ‘bang for their buck’ and generally looking for ways to maximize value (whether dining out or shopping for groceries), given these persisting inflationary/other financial pressures.
In terms of how this translates across the restaurant industry, I think there will be an increased focus from consumers looking for those value deals. For pizza shops, as an example, this may include the ability to ‘bundle’ a coke with your slice of pepperoni.
How is today’s financial climate affecting restaurant investment?
Up until about six-to-twelve months ago, there was this ‘growth at all costs’ mentality – not just within the F&B/consumer space, but across a wide range of sectors – given capital was so readily available. Now that capital has dried up for many businesses across the board, there is an intense focus on profitability and unit economics. If restaurant leaders can’t demonstrate they have a sustainable business with solid fundamentals and foundations, they will likely have a hard time attracting investors.
What’s the investment forecast?
Today’s uncertain environment poses challenges, but I think we will see an uptick in activity in late 2023 and early 2024 as the economy settles out. Right now, there’s a lot of conflicting data and signals in the market, so investors are in a bit of a "wait and see" period.
if you’re an investor who is looking to deploy capital today, there’s still a lot of opportunity; many great brands out there are merely surviving but need that additional capital to really thrive.
Once we have more economic clarity, I think that’s when the capital will start flowing because investors who are currently sitting on sidelines will be able to underwrite their business plans for various investments with more confidence. That said, if you’re an investor who is looking to deploy capital today, there’s still a lot of opportunity; many great brands out there are merely surviving but need that additional capital to really thrive.
What are the best things brands can do to attract investors?
One of the most important factors investors are looking for, especially in today’s environment, is a brand’s ability to scale. In evaluating potential restaurant investments, we are mainly looking for traction beyond the first few units, proof of concept, and repeatability of financial performance.
Environment aside, there is also no substitution for networking. Talking to as many investors as possible – even if you’re not looking to raise capital – will give you a better understanding of what they are looking for. This will allow you to keep that orientation in the back of your mind as you look to build your business down the line. It’s also helpful to connect with other founders and entrepreneurs across the industry who have been in your shoes before, as they will have a better sense of key levers investors are looking for as validation that your concept or strategy is working.
How important is the omnichannel for brand success?
A key aspect of our investment criteria includes the ability to diversify revenue streams. It was certainly helpful to have this philosophy before 2020, and it only became more important and apparent throughout the COVID-19 crisis. One of our brands Milk Bar, for example, was able to gain great traction during the pandemic through its direct-to-consumer channel and grocery line (which it launched in April 2020). This allowed the business to expand and thrive, as opposed to continuing to play defense like most other brands across the industry.
Having multiple channels can help diversify the risk in your business, so to the extent brands can demonstrate potential beyond pure-play retail (especially through product extensions/other channels of distribution), it could make the concept more attractive to investors.
How do you anticipate consumer behavior will shift moving forward and what are the best ways for brands to create value for guests and increase revenue?
As consumers continue searching for value in today’s economic environment, I think it ultimately comes down to a brand’s ability to meet customers wherever they are – whether that’s through DTC, CPG products, third-party partnerships, etc. Technology can also be a great tool to improve the overall guest experience (not to mention, most restaurant tech concepts are inherently very scalable).
When working with our restaurant investments, we think carefully about the experience we are trying to create, and then consider if/how we can leverage technology to enhance that experience. With some, there is more of a focus on software and back of house systems to synthesize data and feedback from guests. For others, we are looking to increase widespread use of apps to improve brand connectivity – with the goal of becoming more sophisticated in terms of how we reward existing customers, while attracting new ones.