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Naming Rights

To turn around flagging brands, try looking back to the future

Operating companies will come and go, but brands live on, our guest columnist says. Protect your brand’s underlying value at all costs, and when necessary, return to its roots to discover the customer connection.

A restaurant chain may not have much in the way of valuable tangible assets. The owner of a restaurant can also own the land and building in which the restaurant operates, but that is an asset separate from the operating restaurant business. 

Tables, chairs, fryers, ovens, inventory, shelving and refrigeration may have little residual or liquidation value. The underlying value of a restaurant is the cash flow generated under the name of that restaurant or chain of restaurants. 

So, what are the key factors that give a restaurant’s name value in the eyes of the consumer? I believe there are two key factors: a compelling customer-value proposition and longevity of the operating business or name. A compelling customer value proposition has many factors, including menu offerings, food quality, price, service, location, facility, etc. Some combination of these factors creates a compelling customer value, and encourages or even demands the consumer return. 

The other factor that creates value for a restaurant name is longevity. As consumers return time and time again, they associate the name with the value they receive in the restaurant. 

My time in the restaurant industry has been spent with older chains. In many cases, these chains have been burdened with too much debt as investors and lenders milk the cash cow. 

In addition, many times these chains have changed their customer value proposition to the point they no longer have the relevance they once had. You hear former customers say, “I used to go there” or “When I was a teenager, our family always went there on special occasions.” 

They go on to talk about their favorite menu items, many of which are no longer offered. In turnaround situations, it is frequently valuable to go back to the founder of the company to find out what the original underlying value proposition of the restaurant chain was. Returning to those key elements of success is valuable to improving sales and operating results.

For ‘McDreamy,’ Tully’s had value

The value of a brand name was brought home to me in a recent case that made national news when an investor group led by Patrick Dempsey (Dr. McDreamy to fans of TV’s “Grey’s Anatomy”) purchased TC Global Inc. or Tully’s Coffee in a bankruptcy auction. 

Tully’s Coffee was founded in 1992, and between 1992 and 2001, expanded to 114 company-operated stores. During this period, it financed its retail and wholesale expansion by raising over $60 million in equity securities and convertible debt, and over $17 million by selling the rights to its name overseas.

 In fiscal 2009, it sold a large portion of its assets, eliminating all senior debt and reducing its core business to retail, franchised and licensed store locations. 

During fiscal 2013, the company closed additional stores to the point where there were only 47 company-owned stores when the sale occurred. During its existence, Tully’s Coffee never generated any positive operating cash flow. 

The result of the auction was a success. Dempsey and his investment group purchased the company for $9.15 million, which was double the amount of the so-called stalking horse bid, or the initial bid from an interested buyer chosen by the bankrupt company.

Another example of the value of a brand was the 2010 bankruptcy sale of Fuddruckers, a 200-unit casual-dining chain. In the course of the bankruptcy process, Fuddruckers secured a stalking-horse bid for approximately $40 million. At the conclusion of the sale process, another strategic operator purchased the chain for more than $60 million, which was 50 percent higher than the original bid. It is obvious the ultimate buyer of Fuddruckers saw value in the brand, which was much higher than the value attributed to the company by the stalking horse bidder.

Connection to customer is an asset

Both of these examples demonstrate the value of a brand name to the overall value of a company. To the right buyer, the brand name and its connection to the customer is an asset that can increase shareholder value.

Operating companies will come and go, but brands live on. It has been proven time and again in the restaurant industry as well as with other consumer products, such as Sharper Image, Polaroid, Wonder Bread, Twinkies and Atari, which have all suffered financial distress recently.

If you are trying to develop a brand, protect the underlying value proposition to the customer at all costs and keep that proposition alive long enough to cement your relationship with the consumer. If you own an older brand, revisit your roots and examine what made the brand successful. Maintaining and improving brand value is an excellent way to increase the overall enterprise value of a chain. 

Gene Baldwin is director at Deloitte CRG, its corporate restructuring group in Dallas, providing restructuring and turnaround management advice. Reach him at 214-840-1588 or gbaldwin@deloitte.com.

 
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