Why are so many restaurants going public?

Why are so many restaurants going public?

Last month, Sweetgreen, a fast-casual salad chain, became the fifth restaurant to go public in 2021, joining Krispy Kreme, Dutch Bros, First Watch, and Portillo’s.

Restaurant stocks aren’t usually the most sought after entities on the market. They are often low-margin businesses highly susceptible to changes in commodity prices, the labor market, and economic conditions.

To put this in perspective, just two companies — McDonald’s and Starbucks — account for 57% of all publicly traded restaurant market cap. In the past five years, only two restaurants went public on the New York Stock Exchange or Nasdaq.

Now, in addition to this year’s IPOs, there is already speculation that three more chains may soon be taking the plunge. So, why, after such a difficult year, do these companies believe people will want to invest?

First, consumer demand is rising, unemployment is decreasing, and people have disposable income after staying home for more than a year. Rising vaccination and booster rates are also giving diners the confidence to return to restaurants.

Also, throughout the pandemic, well-capitalized chains fared better than smaller independent restaurants. These companies are now looking to expand — and the industry and investors are increasingly bullish at the prospect.

However, labor shortages are still persistent throughout the industry, with employees calling for higher wages. And while restaurants are increasingly raising pay in response, it does make for smaller margins.

Along with struggles attracting new talent, the current labor market may also bring challenges in retaining staff. Extra capital can certainly help mitigate this risk. Portillo’s, for example, has said that it would use the proceeds from its stock offering to invest in its people.

Sweetgreen, on the other hand, is staking its future on technology. This summer, the chain acquired Spyce, a robot-powered “bowl concept” that can make 350 dishes an hour and owns an electric delivery fleet. Sweetgreen believes that with this robotic assistance in the kitchen, its staff can focus more on preparation and hospitality. Once this system is properly scaled, it could also significantly reduce overhead costs.

As an investor in the food and beverage industry, I find this trend intriguing. But I have reservations. The restaurant business remains a tough one. It’s highly competitive, saturated in some markets, and subject to unforgiving market forces. For the time being, I intend to continue to put money into restaurants, but more likely as a patron than a shareholder.

Danilo Diazgranados is an independent investor in the global food and wine, financial services, real estate, and the hospitality sectors.