Bain's Skylark

Skylark turns into a bird of prey

The Bain-backed family diner has super-size plans to cope with rising costs in Japan.

Skylark, backed by private equity firm Bain Capital, is flexing its purchasing power, acquiring competitors and cutting costs to cope with the falling number of people dining out in Japan.

The family-friendly restaurant chain, fresh from its $611 million IPO in Tokyo, is swooping on small family-owned restaurants struggling with succession planning.

“There is consolidation going on and we plan to participate in that,” said Skylark’s chairman Ralph Alvarez in an interview with FinanceAsia.

Founded in 1962 Skylark is already Japan’s biggest diner by number of restaurants and it hopes to leverage its bulk purchasing power to lower costs and undercut competitors. “We’re very bullish on what we can do in the market place even with some of the headwinds we’ll have to manage through,” said Alvarez, a former president of McDonald’s Corp.

Skylark’s power play comes as restaurant owners have been sideswiped by fallout from the Japanese government’s package of policies known as Abenomics; such as staff wage inflation, costlier imported ingredients due to the weaker yen and a sales tax hike in April curbing dining out.

Skylark also plans to boost sales and profits by opening 45 more stores this year, 50 in 2015 and 70 in 2016. There will be a net increase in store count given expected closures are roughly 25 stores per year. Japan has the highest per capita spending on food service in the world according to market research firm Euromonitor.

Skylark has already scouted out 1,000 possible restaurant sites to add to its existing 3,000.

“Our cash flow generation is strong enough to take care of new stores, pay dividends and pay down debt,” said Alvarez, adding that the Musashino, Tokyo-headquartered company intends to pay off ¥10 billion of debt a year on its relatively expensive loans and pay out 40% of net adjusted income after tax as a dividend this year.

Source: MHLW, Macquarie Research
Japan's shrinking  families

“It’s been a successful investment. There has been a lot of improvement in the company and profitability in the company since we bought it,” said David Gross-Loh, a managing director at Bain in an interview with FinanceAsia.

Bain made ¥19.2 billion on the sale, not taking into account the company paid down debt and paid Bain fees, and the private equity firm had a 39% return on investment, according to people familiar with the matter.

To be sure, Skylark doesn’t want to overstretch itself. “We don’t want to accelerate the growth beyond the pace of good real estate showing up,” said Alvarez.

That’s something Skylark has learnt from experience.

Under previous owners, UK private equity firm CVC Capital Partners and Japanese brokerage Nomura, Skylark embarked on a rapid expansion plan that ended abruptly in defaults on loan repayments.

The right ingredients
Investors greeted Skylark’s $611 million Tokyo IPO with caution as many of them questioned how a family restaurant would fare when the number of people per household is shrinking so fast in Japan and a second sales tax rise is slated for next year.

From its peak in 1998, Japanese spending on food consumption has fallen by 17% according to the Foodervice Industry Research Institute.

The shares closed at ¥1,014 on Tuesday, below the ¥1,200 IPO price. Bain and its bankers priced the offer at the low end of the book building range and reduced the size of the sale.
Casual dining is also fiercely competitive, with brands such as Saizeriya, McDonald’s Holdings Co Japan, Doutor flanking most streets. The omnipresent Japanese convenience are also eating into diners’ market share.

The falling yen has also hit competitors: Tokyo-based Zensho, the operator of the Sukiya beef bowl restaurant chain, revised down its earnings forecast for the fiscal year ending March 2015 from a projected net profit of ¥4.1 billion to a net loss of ¥1.3 billion.

“They [investors] were concerned about what the impact of Abenomics is on a retail business in Japan, specifically where you import a fair amount of your food,” said Alvarez.

Alvarez said Skylark is using its scale as leverage to negotiate better prices from suppliers and diversifying supply to hedge against adverse currency movements and lack of availability. Skylark used to buy pork from just Mexico and the US now it also imports from Spain. Its beef doesn’t just come from the US anymore, now it uses Canadian, Australian and Mexican beef as well.

“My ten years managing in Latin America made me an expert in dealing with inflation and currency changes,” said Alvarez who was born in Cuba and at one point was president of McDonald’s Mexico.

Source: Macquarie research
Japanese spending on Food consumption in trillions of yen

Skylark plans to boost sagging revenues in the mature Japanese market by catering to gradually growing segments of the population, such as retirees. One in four Japanese are now 65 years of age or older – the highest ration in the world. 

“The senior population has money and the propensity to eat out increases as they get older – they do watch their yen but we have a price advantage versus our competition,” said Alvarez.  

Skylark’s three-year targets include revenue growth of 2.5% to 3%, adjusted EBITDA growth of 8% to 10%, return on equity in the high teens and a payout ratio of 40%.

From lame duck…
Skylark’s aggressiveness is all the more notable given just seven years ago its rapid expansion plan imploded.

CVC and Nomura took Skylark private in 2006 and then engaged in a high-profile tug-of-war with founding family member and president Kiwamu Yokokawa to bring spending under control. CVC sold out at a loss in 2009 after three consecutive years of Skylark’s accounts being in the red.

Skylark's Ralph Alvarez

Skylark’s current chief executive Makoto Tani got the top job in 2008 and started shuttering unprofitable restaurants, sold some brands and converted some stores into more popular brands such as value-diner Gusto, Chinese eatery Bamiyan and Jonathan’s.

Boston-headquartered Bain began negotiations to buy Skylark with company management and Nomura in late 2010 but the discussions were postponed after the 2011 earthquake and tsunami, as well as an outbreak of dysentery at one of Skylark’s restaurant chains.

Bain acquired Skylark in October 2011 for about ¥160 billion, including debt the purchase price was ¥250 billion yen or seven times 2010 EBITDA.

“The basic foundation of the company, and the brand is really strong so despite the earthquake and the food incident the company weathered them well,” said Gross-Loh.

Bain drew upon experience from its other investments in the food industry, such as Burger King, Domino’s Pizza and Dunkin’ Brands, to help Skylark improve its business processes. These companies were up 5.35%, 26% and 45% six months post IPO respectively, according to Dealogic analysis.

To bring down waiting times and maximise cashflow it rebalanced labour between the kitchen and customer-facing staff as well as adjusted seating configuration. ‘The bread and butter of a restaurant business,” said Gross-Loh.

Bain's Gross-Loh

Skylark also strengthened management. It brought in Alvarez last year as well as executives from Starbucks and Uniqlo. Some senior managers are locked in for another three to five years, according to analysts.

“I made sure that we added to the team in the areas of finance, marketing and supply chain logistics,” said Alvarez.

The company now uses a lot more analytics and consumer data to inform its menu choices, prices, where to build locations.

“I spend about two weeks a month in Japan and I try to be in a restaurant every other day” said Alvarez explaining that data can be interpreted in many ways but being in the restaurant means: “You get immediate feedback.” 

“After going private, Skylark has stabilised its EBITDA in the context of a very difficult Japanese consumer environment, and has set ambitious targets for the three years to FY12/16”, wrote Toby Williams, an analyst at Macquarie in a report to investors.

Bain sold roughly one third of its stake in Skylark but remains the largest shareholder. “We believe there is still a lot of upside left, and we want to see the positive effect of all these operational changes we’ve made,” said Gross-Loh.

Source: company data and Macquarie research
Skylark's earnings bounce back


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