NEW COVERAGE – “UP AND COMER” – EGGS UP GRILL – LEARN WHY SOUTHEASTERN REGIONAL FRANCHISED CHAIN WILL GROW BY OVER 60% IN NEXT TWO YEARS
UP & COMER – EGGS UP GRILL
FORWARD: We have no current business relationship with Eggs Up Grill, but we enjoy the store level experience, the opportunity to learn from, and the ability to report on emerging young restaurant chains. Our readers, based on page view counts, apparently value these articles as well. We are always interested in current “Best Practices”, and, just as with our other Up & Comers, we present the Eggs Up Grill in that context.
EGGS UP GRILL – BACKGROUND
Spartanburg, SC based Eggs Up Grill was originally founded in Pawley’s Island, South Carolina, in 1997. It was acquired in the spring of 2018, with 24 restaurants in the system, by WJ Partners. CEO, Ricky Richardson, with TGI Fridays from 1996-2016, most recently as President and COO, joined in the summer of 2018. The system, now 47 units (with 35 additional development commitments), with only one company operated location (opened as a training center and innovation kitchen in 2019) grew by 6 in ’18, 6 in’19 and 9 in ‘20, with 1 opened and 11 more scheduled to open in 2021 and 18-20 more in 2022. The regional concentration is apparent with 34 restaurants in South Carolina (and 7 additional under development commitments), 6 in GA (+6 committed), 5 in NC (+7 committed), 2 in FL (+6 committed), 6 committed in VA and 1 committed in TN. The Brand intends to continue to focus across the southeast US in order to maintain quality support and leverage growing brand awareness.
Locations are typically in secondary and tertiary markets, neighborhood stores, usually grocery anchored, using retail centers as the local draw. They are typically 2400-3500 sq.ft., ideally an end cap with a patio, seating 80-100 indoors and 12-24 on the patio. Eggs Up Grill opens at 6am and closes at 2pm, obviously concentrating on breakfast and lunch, with 20-25 team members. A few pictures of the comfortable, functional, interior, are provided below, as well as a brief discussion regarding the qualitative attractions of the Eggs Up brand.
It is noteworthy that 40% of the roughly 30 new stores that will be built in ’21-’22 are by existing franchisees. They are therefore voting with their pocketbook as to their satisfaction with the brand.
UNIT LEVEL ECONOMICS
According to the 2020 Franchise Disclosure Document (FDD): The initial cost of a Grill is from $491k to $678k ($584K average), including the up front franchisee fee and opening expenses. The ongoing royalty is 5% of sales, plus 1% for a Brand Promotion Fund and 1% for local marketing. An important element of this equation is that the active manager must own at least 25% of the operation, and must be approved by the franchisor.
The 36 franchise restaurants that were operating for all of 2020 had average gross sales of $681k in the Covid-19 year, down from $905k in 2019. Last year’s FDD provides a more complete picture of 2019, showing average volumes of the newest location versus older stores. The units open four years or more averaged $933K vs. $897K for all units open only one year or more. The demonstrated sales progress as stores mature indicates an immaterial “honeymoon” effect. Furthermore, as described in the FDD, there is one “outlier, approved by the predecessor owner, that is located at a site that does not meet the current site criteria. It is not at all visible from the street and sits in a strip shopping center behind a competitor’s restaurant. If that restaurant were excluded from the data, the stores open four years or more would have averaged $973k.”
Year to year average sales comparisons of 2020 vs. 2019, were +2.3% in Jan-Feb ’20 (pre-pandemic), -61.7% in March through May, -20.5% in June through September, and -10.2% from October through December. Sales were only down -2.6% in January through February, 2021. Most importantly, subsequent to the latest FDD disclosure, management indicates to us that 2021 same store sales, compared to 2019, are +4.2% in March and +12.4% in April, so the sales recovery is complete.
In terms of operating costs, for the five months in 2020, Jan, Feb, Oct, Nov, Dec, when all franchised stores were open but still with distorted operating expenses, average COGS was 24.2%, Team Member Wages was 26.5% and the Base Rent was 8.8%. The 2019 FDD shows average COGS of 22.7%, Team Member Wages of 28.0% and Base Rent of 7.5%. The comparison of five months (distorted) in ’20 vs. a normal 2019, nets out to similar “prime costs” (COGS plus Labor) of about 50% of sales with a Base Rent of 7.5% of 2019 sales. The much lower than industry average COGS, by about ten full points (1000 basis points) is the key ingredient in allowing franchisees to generate an attractive return on investment.
Based on the numbers above, we estimate that revenues in the first year can conservatively be expected to generate approximately $900k, building to about $1M by the fourth year. Based on the 50% total prime costs and the reasonable rent, we believe a well run location can generate a store level EBITDA of about 15% in the first year and 18% by year four, which would represent $135K at $900K of revenues and $180K at $1M, with a cash on cash return of 23% in year one building to 31% by the fourth year.
We believe the appeal of EGGS UP is not only the attractive cash on cash return, but the lifestyle afforded the franchisee, including the pride of ownership of this wholesome concept, as further described below. We also believe that, since Ricky Richardson and his team are relatively young in terms of tenure at Eggs Up, especially considering the Pandemic interruption for the last fifteen months, the Company is still on the steep portion of their learning curve so sales progress could accelerate, operating margins to follow. Based on current development commitments from franchisees, they apparently believe this as well.
THE QUALITATIVE APPEAL OF OPERATING AN EGGS UP GRILL LOCATION
The numbers, as described above, are adequately attractive but far from the whole story. Eggs Up Grill is uniquely positioned to be an important part of its local community, leading to sustained sales growth year over year. Franchisees of Eggs Up Grill are provided marketing resources and tools that help the local franchisee become actively involved in their community, helping to grow awareness, appreciation and increasing transactions. The relatively low required marketing contributions enable franchisees to make their own decisions on how best to market and grow their business in their trade area.
The single shift operation (6 am – 2 pm) provides a range of benefits as well. Not only do these hours provide the franchisee a unique quality of life for the restaurant industry, but also offers appeal to the employee base. This appeal (schedule certainty, afternoon and evenings free) leads to high quality team members and higher retention than the industry average. Our personal experience visiting stores (“incognito”) has supported the theory.
THE MANAGEMENT TEAM AND THE EXPANSION STRATEGY
Led by Ricky Richardson, the Brand team brings extensive restaurant and franchising experience to Eggs Up Grill. With successful backgrounds in large, rapid growth concepts (TGI Fridays, Qdoba, Five Guys, etc.) the team has developed a suite of tools to help attract and support franchisees in their businesses, respecting that the Brand’s success is dependent on the success of their franchisees.
This perspective drives not only the current system but heavily influences the expansion strategy. The focus remains on expansion throughout the southeast US, to produce efficient franchisee support (development, distribution, operations and marketing) and leverage the growing regional brand awareness. This regional focus also provides favorable economics in terms of real estate, labor and other operating costs.
While It’s not a “lights out” concept, Eggs Up Grill offers good quality, basic products at a fair price delivered in a comfortable environment by a uniquely friendly team. “Culture” is an overworked term; you have it or you don’t, and Eggs Up qualifies. Targeted to the broad swath of “middle America” there should be ample room for significant growth. At the same time, the southeastern regional concentration, growing steadily outward from the core region should minimize missteps and allow for course correction when necessary. The qualitative appeal of the Brand is crucial, as described above.
From a numbers’ standpoint, perhaps the simplest testimony to the staying power and the potential of Eggs Up Grill is that franchisee commitments over just the next two years should increase the system by over 60% and 40% of that expansion is coming from existing franchisees. We all know how challenging the restaurant industry has become, but a sound strategy, combined with the necessary daily “blocking and tackling“ can still succeed.