This week we welcome a Notice of Appearance by Jonathan Tibus, a Managing Director at Alvarez & Marsal North America LLC in the firm’s Atlanta office. We edited the dialogue lightly for content and length. Enjoy.
PETITION: You have a lot of experience in the distressed restaurant space (e.g., Ignite Restaurant Group, Real Mex). What do you foresee in the near future in the space and what is one factor that not enough people are considering?
It’s a consolidating industry, so in the near future I just see a lot more consolidation - obviously in casual dining but spreading to fast casual after that. In the last decade, the number of dining establishments in the US has grown at twice the rate of the population, while traffic has been either eroded (no one needs to go to a sports bar to get their game anymore) or siphoned off by grocery stores, c-stores, and meal-delivery services (the restaurant versions of “blame the millennials” and the “Amazon effect”). This has led to lower unit volumes and higher fixed-cost hurdles. On top of that, there’s pressure from every single cost driver: Minimum wages are up, suppliers are consolidating and increasing prices, and compliance requirements keep expanding (ACA, ADA, PCI, NRLB “joint employer” rule, TIPA, local wage and hour rules – it’s a lot). Oil prices are inching up, too, which leads to higher corn prices, which leads to higher feed prices, which leads to higher chicken, pork, and beef prices. Also, for the MAGA! reference, steel tariffs are pushing up keg prices.
Those are the known-knowns, but they’re also collectively the one factor people in our industry often miss: True restaurant turnarounds are a grind at best – can you name one that worked? They require a long time, significant capital, a good team, and then good luck. I’m in meetings all the time where lenders or sponsors start in on “let’s do a 2-for-1 coupon!” or “let’s sub in Tilapia for Cod!” I always think “what are we doing here guys?” There’s no easy button - either commit to invest in a long-term rebuilding plan with a team that you trust, or just sell it to someone else who will. Save yourself the wasted effort in the meantime. Your old, tired store isn’t coming back to life because you put out artisanal boneless chicken wings. It’s all about hiring well, running good shifts, and taking care of your customers so they’ll want to come back.
PETITION Note: It doesn’t look like labor pressures will be letting up anytime soon, whether in terms of quality of hires or cost.
PETITION: A&M appears to be making a greater push -- in this sound economic environment -- to provide "performance improvement" work to diversify away from just pure restructuring advisory work. Is this accurate and to what degree is the approach to PI different than restructuring work?
[O]ur push into PI creates two important opportunities: First, a presence at a different place in the corporate life-cycle than restructuring. For a non-distressed restaurant, for example, we have resources in strategy, real estate, supply chain, marketing, and human resources. Targeting those areas for improvement while the client is still healthy, has engaged management, and ample liquidity means the death spiral may never begin. Second, PI work gives us the opportunity to approach companies directly, as opposed to relying on lenders, sponsors, and law firms for referrals. This will be of great importance as we continue to grow the firm. And, of course, we believe that we have a natural edge in the space given our operational heritage and restructuring DNA – we like being in the field or at the plant making changes rather than in the office making slide decks.
PETITION: You work in the Southeast. What trends do you see in that region of the country that may lead to geographically specific restructuring activity?
I definitely cut my teeth on southern-specific industries … like farming, textiles, and poultry processing, and those do seem to be back on our radar. Farm credit has been drying up as the major lenders scale back or get out and the remaining lenders hike up fees and interest. Tobacco is increasingly challenged in North Carolina as competition from other countries is pricing our farmers out of the market (again, millennials – earlier generations favored Carolina tobaccos for their flavor, consumers today don’t really care about origin). And of course, Hurricane Michael just drowned everyone’s crops, and killed a bunch of hogs and turkeys and chickens. Could be time for all the guys who geared up for the Ch. 9 wave a few years back to start studying up on Ch. 12.
PETITION: There has been a proliferation of restructuring advisory firms in recent years. How does that affect your approach to business development and do you consider industry consolidation (Alix/Zolfo) to be a long-term positive or negative for A&M?
Interesting question in that it addresses consolidation and proliferation at once, and I think one is definitely driving the other.
As a firm grows or consolidates, the professionals naturally become more narrowly and deeply focused, leading to a depth of resources that a smaller firm can’t compete against. Need a guy who knows the shipping business in Argentina? We’re going to have that. California wage and hour laws? Got it. There’s comfort in that for a lot of clients, so we highlight that whenever we can. Second, the firm starts to get a lot of controls and infrastructure to help manage the business. These are necessary at some point, but for some people this feels like bureaucracy and politics. The people I’ve known who started their own shops are energetic, ambitious guys who are just happier not dealing with that part of the business, wanted to remain generalists, and didn’t want to feel like part of a machine. I don’t see it necessary as a positive or a negative for A&M – we’re going to win when we compete for clients who value our depth, breadth, capabilities, and brand. The smaller shops can’t do every job, but they can also go deeper into the middle market to find the right roles. I do think that we – the bigger firms – have a natural advantage in the most difficult part of the business right now: hiring good people with 4-7 years of experience. At that level, we can sell candidates on our stability and breadth and also offer a brand-name for their resume while they’re building their early careers.
PETITION: What is the best book you've read that's helped guide you in your career?
I’m trying as hard as I can to answer this with “A Confederacy of Dunces,” which is my favorite book. It’s hard to call it a business book or a career book, though, so I’ll go with “The Goal” by Eliyahu Goldratt instead. For a guy with a degree in English, it was a digestible introduction to operations analysis and management, and it showed how thinking about problems analytically can actually lead to solutions. It’s rooted in manufacturing, but the lessons apply to us, too: Turnaround people have an instinct to roll out lots of initiatives at once. Thinking about system-wide capacity and constraints with our clients can help control that instinct, forcing us to do smart stuff, not just lots of stuff. As the book says, activating a resource is not the same as utilizing a resource. Plus, it has Herbie the fat cub scout as an important character, and he reminds me of a young Ignatius P. Reilly from “Confederacy”. Everyone should read both.