'Kim Dongseon Burger' Also Up for Sale... Restaurant Brands Face Chilly M&A Market [Why&Next]

Increasing F&B Listings
"Strong Cash Generation"?Why Are F&B Brands Losing Their Appeal?
Will Failed Franchise Sales Lead to More Closures?

Food and beverage (F&B) brands that have recently been put up for sale in the domestic mergers and acquisitions (M&A) market are struggling to find buyers. The restaurant industry is facing a survival crisis as high inflation and a sluggish domestic economy have led to a decline in consumer spending. On top of this, new regulations aimed at strengthening franchisee rights are being considered, which is expected to further worsen the business environment for restaurants.

According to the restaurant industry on August 17, E-Land Group has begun the process of selling nine F&B brands operated by its subsidiary, E-Land Eats. These include six dining brands-Bangung, Steak Us, Teru, Teppanyaki Daguo, Asia Moon, and Huwon-as well as three cafe and dessert brands: The Cafe, Cafe Lugo, and Perkeno.

Increasing F&B Listings

Hanwha Galleria, which introduced the American hamburger brand Five Guys to Korea, has reportedly distributed teaser letters to select private equity funds (PEFs) in an effort to sell the brand.

Dessert39, a well-known dessert cafe, was put on the M&A market in the first half of last year but failed to attract a buyer and has since become a potential listing. Rich Beam, which operates Pizza Nara Chicken Gongju, has also been searching for a buyer since the end of last year. Rich Beam entered into M&A negotiations with SG PE in September last year, but the deal ultimately fell through, and the company is back on the market.

Burger King, owned by PEF operator Affinity Equity Partners, has also been unable to find a new buyer since a failed sale in 2021. Chicken franchise KFC, acquired by Orchestra PE from KG Group, is still in the process of being sold. Korea Pizza Hut, which entered rehabilitation proceedings at the end of last year, is also seeking a new owner through the stalking horse method (a process used by companies in rehabilitation to select a buyer through an open bidding process).

Myeongryundang, which operates Myeongryun Jinsa Galbi, has been working on a sale with Forest Partners, but the process is currently on hold. The company has stated that it will reassess the sale in light of external risks such as allegations of involvement in loan sharking and a tax investigation by the National Tax Service.

"Strong Cash Generation"-Why Are F&B Brands Losing Their Appeal?

In the past, restaurant franchise companies were so popular in the M&A market that they would be sold almost immediately after being listed. Franchise brands, in particular, were considered highly attractive because they generate revenue immediately upon acquisition, and franchise royalties and logistics payments involve little to no promissory notes or credit transactions, resulting in strong cash flow. Additionally, restructuring efforts such as changing food suppliers or streamlining staff often led to notable improvements in profitability.

For this reason, private equity funds often preferred to buy restaurant brands at low prices, increase their value through restructuring, and then resell them. A representative example is Unison Capital Korea (UCK), which acquired the beverage franchise Gongcha in 2014 and sold it in 2019 for a sixfold profit. Similarly, Anchor Equity Partners sold Twosome Place, in which it had invested 450 billion won, to Carlyle Group for 1 trillion won.

Gongcha Gangnam Main Store. Gongcha Korea

However, the landscape has changed significantly in recent years. The restaurant industry has been hit hard by weakened consumer sentiment caused by high inflation and high interest rates following the transition to the post-COVID-19 era. As consumers drastically cut back on spending, the restaurant sector experienced record-low sales last year.

According to the "2024 Restaurant Industry Business Index Comprehensive Report" published by the Ministry of Agriculture, Food and Rural Affairs, the restaurant industry sales index started at 79.28 in the first quarter of last year and remained flat before ending at 71.52 in the fourth quarter. A sales index below 100 indicates that more businesses saw a decline in sales compared to the same quarter of the previous year than those that saw an increase. In other words, very few businesses saw sales growth last year. In fact, retail sales last year saw their steepest decline since 2003, when the credit card crisis froze consumer spending.

The situation has not changed much this year. In the first quarter of this year, the restaurant industry business index fell further to 70.76 compared to the fourth quarter of last year. Although consumer sentiment has recovered somewhat in the second half of this year due to the distribution of livelihood support coupons, structural pressures such as rising raw material costs and labor expenses persist.

Furthermore, regulations on restaurant franchises are showing signs of being significantly strengthened, which is reducing the appeal of investment. The Democratic Party of Korea is pushing to amend the Franchise Business Act to require headquarters to share costs and prohibit management interference.

Exterior view of Norang Tongdak store. Norang Tongdak

Will Failed Franchise Sales Lead to More Closures?

Industry insiders predict that, in the long run, the number of franchises closing down could increase. If M&A deals do not materialize, companies will be forced to undergo major business restructuring.

While there are cases where deals are successfully concluded in overseas markets-such as Norang Tongdak's sale to Singaporean food service company Jollibee-the prevailing view is that both strategic investors (SIs) and private equity funds will continue to take a cautious approach.

An industry source commented, "In recent years, franchise businesses have been piling up as listings without any deals being closed. Among investors, F&B is now widely seen as a slow-growth industry, making them increasingly reluctant to invest."

Another industry insider added, "Amid growing uncertainty in the restaurant business, private equity fund managers believe it is time to focus on recovering their investments, but it is difficult to attract investor interest. Ultimately, only companies that can successfully align the price expectations of sellers and buyers, and adapt to the evolving needs of consumers, will survive as long-standing businesses and succeed in finding new owners."