TORONTO — Cara Operations Ltd. has further solidified its foothold in a more upscale dining mass market, acquiring Keg Restaurants Ltd. more than two decades after setting its sights on the Canadian steakhouse chain.
Cara, which has fortified its stature as the largest full-service dining operator in Canada through a series of acquisitions over the past four years, will also change its name as it seeks to distance itself from its legacy airline catering business that was sold off in 2010, chief executive Bill Gregson said Tuesday.
“Today’s announcement is about really making our brands better,” Gregson said, announcing details of the $200 million deal alongside David Aisenstat, the Keg’s chief executive. Aisenstat is joining Cara’s board as vice-chairman and will run a division of Cara dedicated to its premium restaurants. In addition to the Keg, the portfolio includes Milestones, Bier Markt, and Landing. Cara’s corporate name change was not revealed Tuesday, but will be made public after the deal closes this spring.
“We are not looking to turn those three brands into the Keg,” said Gregson, saying the company is eager to apply Aisenstat’s knowledge and experience to the restaurants. “What we are looking to do is have those brands excel in their own niche just like the Keg excels across all niches when it comes to restaurants in Canada.”
Keg sales growth
Gregson said the Keg, which had same-restaurant sales growth of 4.8 per cent in the first nine months of 2017, has been outperforming the three Cara banners.
Purchasing the Keg has been a longstanding ambition of Cara’s, said Robert Levy, president of Toronto market research firm BrandSpark International and a former vice-president of branding at Cara.
Cara was outbid by Aisenstat when it tried to acquire the Keg in the 1990s, said Levy, who worked at Cara from 1994 to 2001. “They bought Kelseys, Montanas and Outback after they were not successful in buying the Keg the first time around.”
Since then, the restaurant market has shifted dramatically, with the quick-service restaurant sector typified by players such as McDonald’s overtaking the once-dominant market share of sit-down dining establishments.
Cara, operator of 1,259 restaurants and 16 banners including the veteran full-service dining brands Swiss Chalet, St. Hubert and East Side Mario’s, has been working to improve a business segment that continues to lag.
Traffic at full-service dining establishments in Canada fell four per cent last year, according to market research firm NPD, and sales dipped two per cent to $21-billion. Overall sales in the quick-service segment, meanwhile, climbed three per cent to $27-billion and traffic rose by two per cent.
“Cara is cherry-picking some of the top brands within the Canadian marketplace — brands with a good strong customer base, good loyalty and history of growth,” said Robert Carter, executive director of foodservice at NPD.
“Both St Hubert and The Keg have the highest customer loyalty and customer satisfaction within the full-service restaurant segment.”
Making acquisitions in the casual dining space helps Cara run the restaurants better, Gregson said, “and if you run them better, more people are going to come.”
In addition, consolidation will have grown the company’s revenue to $3.4 billion after the Keg purchase from $1.4 billion four years ago, he said, improving the company’s purchasing power, finding synergies and reducing the overall cost base of the restaurants.
“If everybody says the whole restaurant space is (under pressure), eventually, if you have a lower cost and run your restaurants better, other people will go out of business rather than you.” The company continues to look at other potential restaurant acquisitions, Gregson said.
Tuesday’s deal bodes well for Cara because the best performers within the full-service restaurant category are those who offer a more upscale menu and atmosphere than their family dining peers or pubs, Carter said. Cara shareholders liked the deal. Shares of the Toronto-based company jumped 9.8 per cent, ending the day at $27.38 in Toronto trading.
Traffic in the “premium casual” segment, typified by the Keg, the Landing, Earl’s and the Cactus Club, was up seven per cent last year and dollar sales rose eight per cent, according to NPD.
Tying its fortunes to Cara will also help further the Keg’s expansion in the United States where it has 10 of its 106 locations in four states. The Keg has more restaurants in Canada than the leading U.S. steakhouse chains do in the U.S., Aisenstat noted, despite serving a market with a tenth of the population of the U.S.
“There is massive potential there,” Gregson added. “At some point we will run out of room in Canada.”
There are no imminent plans to extend other Cara banners into the U.S., he said, though 2016 acquisition of Original Joe’s Franchise Group Inc. afforded the company a handful of Elephant and Castle locations in the U.S.
Under the terms of the deal announced Tuesday, Cara will pay Keg’s shareholders Fairfax Financial Holdings Ltd. and Aisenstat $105 million in cash and 3.8 million Cara subordinate voting shares. Cara might have to pay another $30 million down the road if it achieves certain financial milestones in the three fiscal years after the deal closes.
The Keg Royalties Income Fund, a trust based in Ontario that receives a royalty of 4 per cent of gross sales from Keg restaurants included in the royalty pool, will remain intact after the transaction closes, the companies said.
• Email: firstname.lastname@example.org | Twitter: HollieKShaw