According to yesterday's WSJ (sub. req'd), there have been 75 restaurant chain IPOs in the last ten years. Overall, the sector has gained only 2% from their initial offering price, which is staggering given the evidence that IPOs generally are way underpriced. The sector's results become even more surprising, however, when you strip out the two success stories -- PF Chang China Bistro and Krispy Kreme Doughnuts. If you remove them from the data set, the sector as a whole lost 20%. On top of this data, moreover, one might note the anecdotal results from such high-profile flame-outs as Boston Chicken and Planet Hollywood. Granted, the restaurant game is a perilous one, as most restaurants fail in their first year. Restaurant IPOs, however, involve chains that are reasonably well-established and geographically diversified. The failure of any one location (or even several) should not take down the whole chain. Also, of course, the restaurant business was particularly hard hit by the combination of the recession and 9/11. Yet, it seems that restaurant IPOs were not doing all that well even before the stock market bubble burst. So I don't have a good theory for why this sector underperforms. (Ideas, anyone?) All I know for sure is that it's a sector I would avoid.
UPDATE: Jeremy Wright of Ensight offers some thoughtful comments, especially with regard to the role franchising plays in the restaurant sector.
